The cycle goes on

poppy flower

People debate what started this recession. I do not really know. But we know that all contractions follow over expansions, and vice versa. The cycle goes on. As we have had two decades of great time, this contraction might run a little deeper and longer.

Let's say a group of Joes who worked hard and saved a million dollars in their retirement portfolios. Now they see their portfolios shrink to only half million. So everyone panics and wants to save money now, including those who still have money to spend, which is fine. We are all humans. It is hard to save when everyone is spending and to spend when everyone else is saving. We need to save money sooner or later so why not do it with the flow.

However, with the government pumping all the fresh money into the economy now, eventually (the unknown part is when), the Joes will see their portfolios back to one million on average (some will have more and some less). The money, though, will be worth much less since it has gotten diluted by freshly printed money. However, people will not notice this part right away. They will all be happy to see that their portfolios back to break even or grow somewhat. So, they will start to spend money again, including those who do not really have extra cash to spend. And expansion will start again.

If you have kept the money you have saved in cash, it is great in the contraction period, as the destruction force during contractions would not be able to touch it. We all know that during the contraction, values of all things are going down except cash. But we must worry a little bit about the cash we have saved. Cash is the hardest thing to hold for long. In addition, when expansion starts, the cash needs to be put into things (real estates, stocks etc.) again. During the expansion, values of all things are going up, but cash value can only go down.

As I said before, the unknown part is when, that is why everyone is so obsessed in finding the bottom. It might be too hard to find the bottom. If you pay attention, you might see the beginning of the expansion. It will still be fine to convert your cash into things at the beginning of the expansion.

The worst would be to wait until expansion is almost at end; then convert your cash into things. As at the end of an expansion, things will be the most expensive. Some people, then, have to convert things back into cash during contraction because you really need the cash to live. We see this happen to some of the best people.

Do not believe the general concession, that if you are an average Joe hard at work, you do not need to understand the economy. You do need to understand somewhat in a simplistic way. Just worrying about not losing your job is not enough.

Keep this in mind; you may be able to earn money with the cash you are saving.

Just remember, the universe is benevolent. It is made for you and me to succeed in life.