Sometimes our U.S. economy is strong, employment is high, and the people are happy and successful. But other times, our economy goes through a rough patch, often called a “recession.” But what causes the economy to struggle and is there anyway to avoid it?
Here is the transcript of our conversation:
Connor: Hey, Brittany.
Brittney: Hey Connor
Connor: So a few years ago we had something called The Great Recession. that was actually, I was going for the voice in those trailers, in a world where the Great Recession. And so people say this all the time, the Great Recession, or we’re going through a recession. That’s a weird word. It’s a weird word. I feel like for a lot of adults, most adults probably let alone kids. And so what exactly is this recession idea that we’re talking about? What is that? When we’re talking about an economy, obviously an economy is basically just a whole bunch of people buying and selling and trading. It’s the market. And in the market, you have people who are trading, who have jobs, who are serving one another. Now, what happens when there’s a recession? There’s depression, which is a separate word, and we can talk about that in more detail another time.
But this idea of a recession, I think maybe it’s helpful to think of it, the word recede. Think of a guy who’s going bald. We say that he has a receding hairline. That means that it’s going backward or it’s decreasing, or the ocean, it’s receding. The water’s being pulled away from the sand. So if I was to Google the word recede, it’s gonna have a definition of just moving back or retreating. yeah. So the recession is, that’s the way to think about recession in an economy where basically you have all these people all the time buying and selling and trading, negotiating and goods and services and money, and everything is just always moving around. But let me maybe introduce or keep talking about the idea this way, Brittany. So there’s this idea of a bank run. There have been movies about it, there have been historical examples like
Brittany: A bank or a robbery,
Connor: A bank run, when a lot of people are worried that the bank is no longer gonna have their money. Right? Yes. there’s that gonna show the adults are probably gonna roll their eyes that I can’t remember this movie, Black and white movie. The guy saves the local bank because he’s
Brittany: Oh Wait, this isn’t the Christmas one, is it?
Connor: Yeah. Yeah, it’s a Christmas one.
Brittany: It’s A wonderful life.
Connor: Thank you. It’s a one around this. It’s a movie that everyone over the age of 50 knows. I never
Brittany: Think it, but I know the whole plot
Connor: And so in that plot, he’s gotta save the local bank. Why? Because, There’s a recession there, there’s a depression, there are problems with the economy, and people are nervous that the money that they have deposited in the bank for safekeeping will not be there. And so all of a sudden, a ton of people flock to the bank. Well, the problem with the banks is that they don’t really actually keep your money there for you. They loan it out to other people. And so I might say, Oh, here’s $10,000, or here are 500 bucks. They’ll say, Okay, thanks. And then they’ll use that oftentimes to be able to loan the money out to other people. And so when you go up to the bank, or if everyone showed up to the bank and said, Give us our money, then the bank is like, Uh oh, right? We don’t have all your money. What are we gonna do? And so banks don’t like it when people lose confidence, when they lose faith in the bank, in the bank’s ability to give them their money back, because then it creates this panic and then people can be worried and the bank can actually fail if they no longer have the money. Now in America, there’s something called the F D I C, which is the Federal Deposit Insurance Commission. I think that’s really,
Brittany: I Live right down the street from the big building where that lives actually.
Connor: Well, there you go. Interesting. And now that is a government program where it’s like insurance so that they’ll protect any bank so that a bank will say, Oh, you can deposit all your money even if we fail, even if we go under, there’s a bank run. We don’t have everyone’s money. The F D I C will give you your money. And so it creates a little bit of a safety program for people to have confidence in their bank. Why am I saying all this? Well, in a recession, what happens is that people get nervous. They worry that they won’t be able to have as much money tomorrow. Maybe they’re gonna lose their job. They’re seeing that there are a lot of problems in the economy. And so they get a little bit nervous. Maybe they’re not gonna spend as much money on Amazon. Maybe they’re not gonna go out to their favorite restaurant or go to Starbucks or whatever.
And pretty soon in the whole economy, as a lot of people start making these decisions, as that kind of ripples through society, when people are seeing on the news that there are problems with the economy and unemployment numbers are going up, meaning a lot of people are losing their jobs, when people start seeing a lot of these messages, they start to lose confidence. They start to get worried. And so they start to change their habits. So maybe let me ask you, Brittany, why is that so important? When we think about the economy, how is it that people’s kind of emotions and what they see in the news are affecting their actual behavior? We talk about human actions. So what is that and how are we influenced by faith or confidence or what’s happening in the news in terms of why we act?
Brittany: I’m glad you said human action because the economy, as we’ve talked about before, is just humans. It’s just us. So the economy, for the economy to work and keep going, as we know it goes every day, people have to be using it. They have to have trust that it’s going to work. They have to have trust that they’re gonna get up tomorrow and their dollars still going to be worth the same amount that it is today. And they can buy two apples with a dollar today. They can buy two apples for a dollar a week from now. Now, when they start worrying about that, when we see maybe banks, like you said, not being able to give money or things, unemployment numbers skyrocketing, which we saw recently during Covid, people start getting scared and they wanna hold onto their money. They don’t wanna spend it as much because again, they’re worried. They’re looking out for their best interests. You’re looking out for your family, I’m sure I’m looking out for myself. And so when that happens, they’re going to be less likely to go out and maybe go on vacation, as you said, or spend their money on something else. But when that happens, the whole economy gets a little bit smaller. It all kind of shrinks a little bit. And it’s crazy because it also shows how powerful the individual is because again, we are the economy.
Connor: That’s exactly right. And it creates this ripple effect or domino effect. For example, when let’s say the CEO of a big corporation gets really nervous about the economy, he’s worried that his business is gonna lose money because maybe they’re in an industry that’s gonna be hit pretty hard. So now this CEO gets nervous about the upcoming recession that everyone’s saying is about to happen or starts to happen. What does he do? Well, maybe he doesn’t hire as many people, or maybe he lays off a bunch of people. So let’s use that as an example. Let’s say he says, We’re not gonna make very much money this year, so we actually need to lay off 10% of our workforce just to stay profitable. And that’s a reasonable thing. He has to look out for the overall health of his company. So suddenly he lays off 10% of people.
Well, now that 10% of people, now they’re on unemployment insurance or they’re having to dip into their savings. They’re no longer going out to the movies and they’re not maybe canceling their Netflix. And all of a sudden those people start to have all these extra decisions that they make in their lives because their economic circumstances are different. So let’s just use a silly example. Let’s say many companies lay off a bunch of people, or they lose clients, and they go out of business. So all these people are out of work. People are losing their jobs. Well, so let’s then say all those people now have to tighten the belt, their belts. They have to look at their budgets and say, Okay, what things can’t we afford? And of course, I’m talking about what should actually happen rather than bailouts where the government’s like, Oh, don’t worry.
We’ll take care of you. We’ll make sure taxpayers pay for everything. In the real world, people would have to make these decisions on their own and say, Okay, what are we paying for that maybe we shouldn’t right now so that we can conserve what we’ve saved? Of course, most people don’t save very much money, so that’s also a problem. But in this silly example, you’ve got all these people who’ve lost jobs. So then they say, Right, Netflix, we don’t need Netflix. That’s kind of a luxury expense. So then all these people cancel their Netflix subscription. Well, then Netflix loses a bunch of money, so then they can no longer buy these three TV shows or movies they were gonna do, which means those actors don’t get paid just, It’s like, yeah, it’s right. It just creates this domino effect. And so that’s how the bank runs happen that I mentioned.
Someone sees that someone else is panicking. Maybe their uncle is like, Oh, I can’t come to the family dinner. I’m going to the bank. I’m really worried. Well, all of a sudden it’s like contagious, right? It’s like a pandemic of fear almost, where people get really nervous and then that changes their behavior, and then it just kind of ripples through society. So that’s not to say that, in fact, let me actually maybe take us to the next thing, Brittany. I want you to teach me about the boom and the bust cycle. What do we mean by that? Because a recession is not just about people’s emotions and faith, there are some actual underlying problems that cause these recessions. It’s not just what people feel and like, Oh, hey, once you calm down, then everything will be fine and the economy will get back to normal. There are actual systemic problems. There are structural problems with the economy. So when we talk about the boom and bust cycle and economics, what does that mean?
Brittany: Yeah. Well, I wanna say one thing before we get into that. And that is that there are different schools of economics. So there are different economists who have different theories on why recessions happen. Now, you and I tend to be more friendly to the Austrian School of Economics. If I had to guess, I won’t put words in your mouth.
Connor: You guess correctly.
Brittany: And They heard the school, that, in my opinion, tends to be correct most of the time. So Austrian business cycle refers to the Austrian School of Economics, and the Austrian business cycle basically says that there are booms and there is buss. So let’s think of it like a balloon. If you blow up a balloon too much, what is going to happen?
Connor: It’s gonna pop.
Brittany: It’s gonna pop right in your face it’s gonna be terrible. So that’s kind of what happens with the economy. So the Federal Reserve, which we’ve talked about not only in other episodes that we’ve talked about it in The Tuttle wins and the Creature from Jekyll Island. So we’ve talked about how they can print money and they make things maybe look artificially good, or it’s kind of like a fake, it’s an illusion. It’s not as good as you think, So a lot of times before recessions, the Federal Reserve will lower interest rates. So that sounds really confusing. So what that basically means is they make it easier for people to get credit. And credit is when you borrow money that you don’t have physically in the bank. So a company basically says, I’m gonna give you this money and I’m gonna have good faith that you’re going to pay it back.
Well, when they give it to you at lower interest rates, that’s, I’m trying to think of the best way to describe this, but it’s basically saying the economy’s doing a little bit better than it actually is. And so more people borrow money, and that means that more people are even able to get access to money that maybe shouldn’t be borrowing the money, cuz maybe they won’t pay it back, or maybe they haven’t paid it back in the past. Well, so all this money flowing through which we’ve talked about, the federals are printing. That’s kind of them blowing up the balloon right, now. Eventually, this can’t last cuz it’s not real. It’s the illusion that things are real. So what happens? It pops. And when that happens, everything has to kind of readjust. So what I mean by that is let’s say things are going great, people are taking out money, people are spending money, and as you said, Netflix has to hire more people because they’re doing more shows.
So when that bubble bursts, when that balloon pops, that’s when we see unemployment, right? Because then people have to say, Oh, okay, maybe we were a little bit too optimistic about things, how we thought things were. So now we’re gonna have to scale back. Now we’re gonna have to lay people off. People are gonna lose their jobs. Maybe you’re not gonna buy Netflix anymore. Maybe I’m gonna stop buying another service. So everything kind of implodes and then we have to figure out what to do. The problem is what do governments usually do in this situation, Connor?
Connor: They leave us alone so that we can make wise decisions and govern ourselves. Prudently having personal responsibility and caring for one another voluntarily. Exactly right. No, no 180-degree opposite of that.
Brittany: You mess with it. They keep messing with it. And that’s what gets me because it’s one of those things that have you ever had, you’ve probably told your kids, stop picking at it. It’ll go, it’ll get better if they fall down and hurt themselves. That’s what the government does. So we say maybe just leave the economy alone. Maybe everything will get back to normal, but instead, they keep pumping more money. You said the word bailout. So a lot of times when there are companies that, let’s use Netflix again. Let’s say Netflix isn’t able to survive because they just can’t afford it anymore. Well, imagine the government giving our tax dollars to Netflix saying, You know what? We like you. We think that you’re a valuable company. So even though you are suffering right now, we’re gonna go ahead and give you taxpayer dollars and we’re gonna keep you afloat. That’s basically what happens with a bailout.
Connor: It’s kind of funny Our latest book at the time of this podcast episode is The Tuttle Twins and the Messed Up Market, our 11th book in the series. And I wrote that late last year, 2019, and before all the Covid stuff and the economic craziness and more stimulus, people getting direct checks from the federal government and all this kind of stuff. And you read in that book and it is so spot on when in fact, we sent an email out to our list a month or two ago talking about how this book is almost weirdly prophetic in a way. It’s talking about bailouts and stimulus and interest rates, which you were talking about, and risk and the market getting messed up and the problems that cause. And so people who have read that book, The Tuttle Twins in the Messed Up Market understand a lot of this.
In fact, that book is based on a book we’ve mentioned, at least the title, if not actually mentioning that. It’s a book, Human Action. This is a book written by Ludwig von Mises, a very well-known economist in this. You point out the Austrian school of, or I call it the correct school of the right economics, exactly. Human action. It’s all about how people make decisions based on incentives. We’ve talked about that. And the things that are happening around them lead people to make different decisions. Before we conclude, Brittany, I wanna spend a minute talking about something that you mentioned, but I wanna spend a little bit more time talking about it. And that is interest rates and the way I like to because it plays in so directly when we talk about a recession, when the government and the Federal Reserve, which is kind of a creation of government when they’re managing the interest rate arbitrarily.
And what that means is rather than many people deciding, it’s just a group of people saying, We’re making this decision on our own when really it should just be up to individual banks and people to decide on their own what it should be. It should be left to the free market to decide rather than the Federal Reserve. But they’ll come and they’ll say, Well, we think the interest rate should be 1% or super low. And that means, when the interest rate is low, it means it’s very inexpensive to get a loan from the bank because you’re not gonna have to pay them back very much. Let’s say I get a loan of a thousand dollars to use an example, and if there’s a very low-interest rate, maybe I’m only gonna have to pay them, let’s say $50 in interest. Well, that’s amazing. I can get a thousand dollars today and I can pay it back way later, and I’m only gonna have to pay basically a $50 fee.
That’s the interest in my example. Why wouldn’t I get all the loans that I can? Because then I can go maybe try to buy some businesses, I can start Connor’s Lemonade stand. I can try and do all these things and I can spend that money like crazy. Well, when the money’s that easy to get, I’m probably not gonna use it in the wisest of ways because it’s easy to get. And so that’s gonna lead to some problems. Whereas if the interest rates were higher, let’s say Connor didn’t have very, a good history or a credit record, maybe I never paid my credit card back. And so they can look at it and be like, Eh, he’s not very trustworthy. Or maybe I’ve had failed businesses. If I’m a risky person or I have no history or whatever, a bank might wanna say, Well, Connor, we’re willing to give you a thousand dollars loan, but you’re kind of risky.
We don’t know a lot about you, or you don’t have a good track record, so we’ll give you the thousand dollars, but you’re gonna have to pay a much higher interest rate if you want to get our money. And so then I have to make a decision, say Oh, is it worth it for me to get that thousand dollars if I’m gonna have to pay them back 400 extra dollars later, that’s gonna create a situation where I might say, Eh, it’s not worth it. And then all of a sudden the bank has not given money out to a person who’s a little riskier. But when the government comes around and says, Give money to everyone, it doesn’t matter if they’re risky or not, we’re gonna have a low-interest rate, easy money for everyone. All of a sudden you get people who are getting these loans who shouldn’t be getting those loans, and they make bad decisions.
And then that leads to broader problems in the economy, which creates the recessions that we’re talking about. And so as with many things, Brittany, the government is to blame when they come in and in the boom and bust cycle, right? It’s the government trying to manipulate the economy. We talk about this in the messed up market. When you’ve got these people in government making these decisions in the economy with the interest rates and so forth, it creates this ripple effect of all these other problems that we then have to deal with and suffer through. So a great topic and very relevant. I think for our day. Certainly right now that we’re seeing around us we’re gonna put in fact something fun. Brittany, for the show notes page. I think this one would be The Hayek, and I was hoping
Brittany: You say this. I listened to that before we record it, and I was like, That needs to go with the show notes. That’s a
Connor: Fun wrap. Absolutely. This is a super fun rap that the adults will be able to follow a little bit easier. It’s got some pretty geeky economic stuff in there. You’ll totally be able to pick out some of it, but it’s a great lesson on its own to just read along the lyrics and go do some research on, Okay, wait, he mentioned this and they mentioned that. What is that? And you can learn all kinds of fun economic stuff just from watching those videos and doing some Googling and reading Wikipedia. So we’ll link to those videos. I think there’s three of ’em now, right? They’ve done two or three of ’em
Brittany: I’ve never seen the third, but I think you’re right.
Connor: Yeah, I think they came out with that a few months ago. So check out tuttletwins.com/podcast. Scroll down, find the episode, look up the show notes, and send it with a friend. Make sure you are subscribed. Brittany, thanks for joining me and we’ll see you next time.
Brittany: Talk to you next time