Those of you who watch or read the news have probably heard all about the credit crunch and how that's spiralling our economy into recession. Some news programs are actually being quite sensational about it and preaching doom and gloom.

My long-time readers will remember that I used to be a market analyst and that I kinda view watching the economy as a hobby these days. And I love to share my analysis with you.



Well today I say unto you: What recession?

You see, the classic textbook definition of a recession is two consecutive quarters of negative growth.

The US economy grew 0.6% in the first quarter of 2008.
The US economy grew 0.58% in the last quarter of 2007.

That's small growth. But it is NOT negative growth. Therefore, the economy is not recessing.

Furthermore consumer spending -- which makes up two-thirds of our economy -- GREW 1% this quarter. This number also grew 2.3% in the last quarter of 2007. These numbers are compared to the same quarter in the previous year. Therefor our Christmas spending in 2007 was actually HIGHER than Christmas spending in 2006, BEFORE the credit crisis.

What we've got here is a slowdown. And guess what! Our economy was inflated. It needs to slow down.

So what's going on here? Three things. First of all, there is the "Credit Crunch". A bunch of banks wanted to make some money so they invested in high-risk loans. Banks are not charities. Banks are in the business of making money. So they took a risk and it bit them on the ass. Remember the junk bond scandal of the 1980s? Similar thing.

As a result of this loss, banks have to make their money back. How do they do that? They make loans. But here's the problem: we've been experiencing inflation (also not a sign of recession), so the Fed has cut the Fed Funds Rate. This is the rate at which banks lend money to each other. So the amount of money banks can make from each other -- their biggest money-maker -- is signficantly restricted by the rapidly dropping interest rate.

Add to the low rate the fact that the credit crunch has led to many people defaulting on their loans. This means that there are not a lot of people who are good loan risks. Banks are terrified of lending money to people who will default. They can't take the risk right now. So they aren't lending a lot of money right now.

Of course the problem is that the only way they can help themselves is to make loans. And they're not making loans. Just today, the Bank of England has criticized them for this: http://news.bbc.co.uk/2/hi/business/7375881.stm

Okay. So that's the first thing that caused this economic slow-down.

The second thing is the price of oil. The price of oil has risen hugely over the past two years. The fact that this rise simply corrects a long-term lack of growth notwithstanding. If gas prices had increased with inflation since the 1970s as they should have, gas would be about the same price it is today. But because of oil industry factors too complex to discuss here, it happened all at once and sudden changes in prices like that make us crazy.

So oil costs more. And that means getting to work costs more. And shipping costs more. Businesses need to pay more to get their goods to market. You need to pay more to get things to your house.

Do we buy less? I don't think we do. We want life to go on as it always has. So our spending stays the same. And because we're spending more to get things because of the price of oil, we're actually stimulating economic growth! Isn't that tricky?

So this second factor in the recession may actually be a force for positive growth.

A third sector that is hurting the economy is the price of food. Whether it's for political reasons in third world countries or weather conditions and short harvests or farmers turning crops into ethanol, not food, it doesn't matter. Food prices are up. Again, while this hurts the pocketbook, it is good for the economy. Yes, we may have to give up other things in order to buy food. But we will. And as long as we keep buying food, it will equalize.

So two out of the three reasons for the recession are actually issues that could end the recession. Not bad.

Further proof that we're not in a recession: A report by ADP Employer Services showed that private sector employers added 10,000 jobs in April, slightly higher than expected. Hear that? HIGHER. More jobs were added than expected. You don't add jobs in a recession.

The best thing you can do for this economy is to spend. Don't spend outside your means. But keep buying things as usual. If you have a good enough credit rating to get a mortgage from our scared-of-their-own-shadows banks, do it. There are huge bargains on the housing markets as people who bought foolishly are losing their houses. If you can get a mortgage, it will be at a record low rate right now and you can get houses for extremely low prices. Lookie here: http://news.bbc.co.uk/2/hi/business/7373641.stm

Buy low. Sell high. Keep the economy ticking along. Spend in a logical manner. Don't put your money in low-interest funds. Be smart. Buy good things. Don't stretch yourself too thin. Be cautious but don't be afraid. There's nothing to be afraid of.

My message to you: Don't let this sensationalistic grandstanding and panic-mongering scare you. Just go about your business. Do what you need to do to take care of yourself, your family, your business. Don't listen to the newsreporters. They LOVE panic. Just ignore them. They're idiots.

Listen to me. We're all going to be fine.

There's no recession here. Move along...