MCPWannabe explains our current economy and IT

MCPWannabe

Uh oh.. Time for McpWannabe's MBA to finally make use of itself.

So gentleman, here is the normal process of a recession, simplified but true..

1. Economy goes through a rigorous expansion phase due to money and spending within the economy.
2. Banks began lending and lending until they reach a point to where lending is no longer safe. In other words, banks have reached a limit to where there cash reserves are reaching very low levels.
3. In response to cash reserves reaching very low levels, banks suddenly tighten lending by raising standards for loan approval, e.g. credit scores, net income, etc. This has the effect of reducing the money that is flowing into the economy.
4. The first sectors hit by lack of lending are always the same: auto (car loans), housing (house loans), manufacturing (because they have to constantly buy expensive equipment). These sectors will first layoff their people reducing overall national product and increasing the stress for welfare and unemployment benefits on the government.
5. In turn, once the federal and state governments start making cuts (the federal and state government are the nations largest employers), a huge slew of businesses began to suffer causing more and more layoffs.
6. For the first time, we see a huge decline in consumer spending and that is when the retail sector as well as many others began to feel it.
7. The situation generally stays like this until banks have had the time to increase their reserves (the amount of money coming in is more then the amount of money lended) through things like recouping some of their costs on foreclosures or selling assets through bancruptcy or just through companies that are paying off their loans.
8. At the right level (in terms of overall savings), lending starts again and things take off.

This is the business cycle in essence, it usually last for about 7 years and then we have a contraction period for one year.


But wait.. What happened here? Well, due to some bad legislation, we didn't experience the recession in 2001 like we should have. Banks kept on lending until they completely ran out of reserves. Banks didn't even have enough money to keep the electric on!!!! Thus, we are in the situation that we are in now.

Banks didn't even have enough money to operate. Thus, the federal government has had to come in and hopes they can prevent us from going into a depression. In truth, even the federal government doesn't have the money to withstand a full collapse of the financial system. But in buying time and with the right moves, they believe that they can give banks the time to recoup their losses (through things like foreclosures and selling assets for bancruptcy).

The smart money is that they will prevent a global depression, but a severe recession is likely.

What's that mean for us.. in IT.. give me another post and I'll explain..

MCPWannabe

Okay, so I just gave a simplified but fairly accurate view of the dynamics of a contraction or recession. Generally, banks tighten lendings and less money finds it's way in the economy causing a whirlwind effect.

But what's that mean for us..

Jobs will decline, but there is a caveat to all of this. In 2001, the IT sector entered into a minor recession and then came out of it. Since that time, the IT sector has not fully come out into an expansion.

What happens during a recession is this: 1. Jobs Decline. 2. Many people give up on the field and begin to search for other fields. 3. When the jobs decline to artifically low levels, a sudden demand occurs. 4. Because of a shortage of people, salaries escalate and jobs become easy.

In other words, yes, things will get nasty by all economic indicators. but if you can stick it out and increase your skills, you will be set to make some very nice money on the next economic boom.

I can already tell anyone that the evidence is extremely strong that the darlings of our next stock market expansion will be tech stocks.

So, stay focused and don't give up. Things will get a little worse here. But then, many of you new incomers will get to see what an IT expansion is really like. For those of us who remember what things were like in 1998, we can tell you that is was nice!