What Really Happens During a Recession?

Everywhere on the media we get news about the financial crisis and recession. It’s not a single country problem but most of the developed world is in a recession now. The situation has also been called “The Great Recession”.

Some people are also using the term ‘depression’ but that is not what economists would use, not yet.

Difference Between Recession and Depression

What then is the difference between a recession and a depression? Dictionary.com defines recession as “a period of an economic contraction, sometimes limited in scope or duration.” Economists usually define a depression as a decline in real GDP of more than 10% over three or four years. A very old joke tells us “a recession is when your neighbour loses his job, a depression is when you lose yours”.

Events in a Recession

  • Production decreases – People buy less and companies produce less because they can’t sell.
  • Stocks fall – As companies make less profits confidence in the company’s ability to grow and make profits comes down. This lowers share prices.
  • Politicians and company directors start denying – Any early signs of recession are promptly denied as usual market fluctuations or blamed on previous government policies.
  • More people are unemployed – Companies earn less and cut costs by firing people. Labour is usually the largest expense of a company and thus the greatest savings comes from cutting labour costs.
  • People start spending less – People are scared of losing their jobs or incomes and start saving so that they can live off savings if they lose their incomes.
  • Interest rates fall – Governments and Central Banks lower interest rates to make money cheaper so that it is easier for companies to borrow and increase their productivity.
  • Governments adopt expansionary policies – Taxes are cut and public sector spending is raised to boost confidence and increase spending power of consumers.
  • Confidence in the financial institutions suffers – Governments put astronomical sums of taxpayer money to save financial institutions like banks and pension funds to maintain confidence in the financial system.
  • Gloom mongers are in full swing – The same politicians and directors who denied early signs of recession start competing to paint blacker than black pictures of the state of the economy so that taxpayer money can be used to bail out ailing companies or industries and politicians would be seen as saviours.
  • Stricter laws about financial instruments – Governments or central authorities try to introduce stricter methods of controlling financial instruments and systems. Some high profile scapegoats are found. After some time innovative operators succeed in going around control mechanisms resulting in new misuses.
  • Many companies go bankrupt – Companies, which are not agile enough to react to the crisis or able to pressure the governments into bailing them out go bankrupt. Usually the taxpayer is left with the costs of the bankruptcies.
  • Care industry grows – Demand for services grow due to unemployment, early retirement, health problems and mental health issues.
  • Cosmetic industry booms – People defer making large purchases like homes, cars and foreign vacations but buy relatively lower cost cosmetic products to feel good quickly.
  • Reading, communal activities and spending time with family and friends increases – With less money being spent on entertainment, hobbies, travel and devices, activities, which require less money become more popular.
  • Less babies are born in affluent countries – Measured by lower number of searches for baby related products, Heather Hopkins of Hitwise claims that less babies are being made now due to the recession.
  • Developing economies suffer more – If developing economies have to borrow to invest in new kinds of production, their debt burden increases. The developing world already spends $13 on debt repayment for every $1 it receives in grants.

How to Become a Billionaire

What does it take to become a billionaire? Are there any rags to riches stories there or did they inherit their wealth? Are there any similarities in the way people get rich so that a pattern could be detected and then replicated by others?

Do you want to be a billionaire?

You wouldn’t be the only person in the world to be wishing this. Billionaires (the dollar billionaires) are seen to be possessing everything one can dream of.

What does it take to become a billionaire? Do they have special skills or characteristics, which others lack? Are there any rags to riches stories there or did they inherit their wealth? Are there any similarities in the way people get rich so that a pattern could be detected and then replicated by others?

Did these billionaires attend the elite Ivy League universities or were they school dropouts? Let us investigate the lives of the richest billionaires today.

Billionaires Born in Wealthy Families

Warren Buffet with President Obama.
Warren Buffet with President Obama.

Warren Buffet as the world’s richest man carries on his father’s trade of stockbroker. He got a masters degree from Columbia Business School and took a Dale Carnegie course in Public Speaking.

Carlos Slim Helu
Carlos Slim Helu

Carlos Slim Helu at No.2 is the son of wealthy Lebanese immigrants in Mexico. His father gave all the five siblings a bank savings book, so that they could deposit their usual weekly allowances. Their father regularly supervised their savings books, analyzing their expenses, purchases, and activities. Parental guidance taught Carlos about savings and investing.

Apple’s Steve Jobs on left and Microsoft’s Bill Gates on right.

Formerly No.1 for thirteen consecutive years, No.3 on the 2008 list is Bill Gates, a dropout from Harvard University. He comes from a wealthy and influential family, which supported him to start his venture with friends that eventually became Microsoft. Both his parents were very influential and helped him significantly in his career.

Rags-to-Riches Billionaires

Ingvar Kamprad

At No.7 of the Forbes list is the Swede Ingvar Kamprad of IKEA fame. He is the first in the list with a father or mother who wasn’t wealthy. He started his business by selling matches from his bicycle to neighbours near the farm in Sweden where he was born. Despite having a fortune of 31 billion US $ Kamprad still lives frugally and visits IKEA stores for the cheap meals (they are very good, cheap, and tasty). He learnt to cope with dyslexia, been exposed as a member in a pro-Nazi organization in the 1940s and alcoholism early in his career.

Sheldon Adelson

At No.12 is Sheldon Adelson, with his $26 billion is the son of a Boston cabdriver. His mother’s family was Jewish immigrants from Lithuania and father’s from Ukraine. When he was 12, he borrowed $200 from an uncle to sell newspapers at street corners. He dropped out of college to pursue fifty different businesses, where he lost much in venture capitals and real estate. Sheldon made his fortune by creating the computer industry’s premier show, Comdex, mid-1980s. He rented space for 15 cents a square foot and leased it to exhibitors for $40 a square foot. He finally struck it rich in the Hotel business in Las Vegas.

Roman Abramovich

No. 15 on the list is Roman Abramovich of Russia with $23.5 billion. He lost both parents at age 4 and was raised by poor grandparents. He amassed his fortune when Soviet Union was falling to eventually take over the Russian oil giant Sibneft. Totally opposite in style to Kamprad, he owns the Chelsea football club in UK, planes, luxury yachts, helicopters, and a home that reportedly cost $100 million.

There are others on this list of billionaires that broke many rules articles, books, and courses teach about how to get rich. But they spotted opportunities, took great risks and capitalized on opportunities.

Richard Desmond

Richard Desmond lived with his divorced mother in a garage apartment. Quitting school at age 14 he become a drummer and worked in a coat-check room. Richard started his first magazine at age 22 and now owns dozens of newspapers and magazines worth $2 billion.

Micky Jagtiani

A man worth $2.5 billion, Micky Jagtiani from India dropped out of accounting school in London and took up driving taxis and cleaning hotel rooms to support himself. He also drank a bottle of whiskey a day. In one year every member of his family died. At the young age of 21 he moved to Bahrain with $6,000 of family’s savings. There, he started selling baby products. His chain is now one of the most profitable retail groups in the Middle East.

Li Ka-Shing

The richest man in Asia or $26.5 billion owner Li Ka-Shing came to Hong Kong from China in 1940. He was forced to quit school at fifteen to work in a plastic factory after his father died. Then he started manufacturing plastic flowers with borrowed money. This business grew into Cheung Kong Industries, a conglomerate with stakes in telecom, property and supermarkets.

Kirk Kerkorian with a fortune of $16 billion, is the son of Armenian immigrants. He dropped out of school in the eighth grade to take up boxing. Kerkorian then started flying across the Atlantic in World War II. His company MGM Mirage owns more than half the hotel rooms on the Las Vegas Strip.