Global Recession for Dummies

The most popular topic of discussion list has been topped by global recession for the last few weeks in every known social circles. We have been bombarded with technical terms like recession, sub prime crisis, Repo Rate, CRR, which sounds very confusing and threatening. To add to the confusion, share market crashes world over, highly fluctuating currency rates, unending downsizing reports, mammoth banks closing shop, countries begging for funding, crude oil rates plummeting (that sounds good in last three months the price has come down from 148$ to 52 $ today). So where did things go wrong, why did one fine morning things started going out of control and as far as i know this is just the tip of an ice berg which will last for another year or two. So with my simple understanding let me put the crisis into simple points in the order of occurrence

• Markets are steady and strong, banks are doing fine, people are happy.



• Banks decide it is OK to lend money to any one who applies (high risk customers) so people started buying properties, credit card funded extravaganza, big cars etc.



• This excess liquidity (money) started funding a shopping extravaganza, people went on shopping sprees buying over priced unnecessary products.



• This promoted manufacturing in Asian economies like China, India, Japan etc. New manufacturers entered the race targeting the newly created demand.



• The US banks have a provision for refinancing a property loan as and when the property prices increase, so the high risk customers started re financing property to pay installments on home loans and credit cards to stay away from trouble.



• This is when the basic market forces came into action, when anything is supplied to market more than the requirement, its demand falls and hence property prices started falling, thereby halting the refinancing frenzy.



• High risk customers started defaulting installments and banks started showing losses in their books, when the bank recalls the property to settle the loan it fetches far less prices than the loan amount.



• Banks starts to panic and approaches the all seeing insurance giants for assistance, they analyze that the crisis is too big to handle with their cash reserves, so they start to fall apart.



• More and more people starts defaulting installments, and this makes the situation worse.



• The honeymoon is over people start to realize that they don't have all
  that money to spend on unnecessary things and hence demand falls.



• When the demand falls, production gets cut down, people start loosing jobs
  this will create havoc in the manufacturing hubs.



• Now when the bank is already in a crisis they stop or reduce drastically the
  issuance of loans and credit cards.



• If loans are not issued people cant buy necessities like vehicles and homes again.



• When vehicle and home sales go down, steel consumption goes down, hence steel output is also slashed.



• This in turn effects the crude oil prices which keeps going down even after the production cuts.

This creates a scene of economic tsunami which starts effecting everything on its way. But the good part is any body who has liquid cash or easily cash able assets (gold, silver etc.) this is the time to invest when you can buy cheap really cheap and a piece of advice if you do invest don't watch the markets for another 1 year it might fluctuate more and more.