Newsletter: January, 2009

Ups and Downs

You’ve probably heard the news–the economy isn’t doing so well. Companies are laying off workers, banks aren’t lending money, home prices are falling. What’s going on? It’s a recession–and it’s not the first time. The economy goes through a cycle of booms and busts pretty regularly. In this issue of The Vault, we give you some background on why things went sour–and even why recessions aren’t all bad.


Fast Fact

Do you know what the word “recession” really means? Find the answer toward the bottom of this issue!


The Business Cycle

When times are good, people have money to spend. They buy things, which creates more jobs, and more spending, and so on–so let the good times roll! But when people lose confidence, they spend less, so companies have to cut back; they create fewer jobs, and people feel even worse about the future–reinforcing the downward spiral.


What Caused the Downturn? 

It’s pretty complicated, but experts agree that today’s troubles are based on one simple thing: banks made billions of dollars in home loans to people who could not afford them. Then, the banks created investment schemes based on those bad loans. When the home buyers couldn’t make their payments, the investment schemes failed–and a lot of very big banks failed along with them.

Winners and Losers
Nearly everyone suffers in a recession, but some companies definitely do better than others. Companies that like Procter & Gamble and McDonald’s that sell food do okay–you have to eat! Wal-Mart has reported good earnings compared to its competitors because it focuses so strongly on low prices. Surprisingly, the toy industry is also recession-resistant–at least according to the Toy Industry Association. Looks like parents will always want to make their kids happy, even if the parents themselves are not! Another kind of store that thrives when money is tight? Secondhand stores like the Salvation Army and Goodwill, where bargain-hungry shoppers look for deals on everything from books to clothes to appliances.
Save For a Rainy Day

One big lesson? Stick to your savings plan, especially when times are good! People (and companies, too) tend to think boom times will last forever–but they never do. By saving when you’re flush, you’ll have the reserves you need when things get tight.

The Silver Lining

Recessions are painful–no doubt about it. But they can have good effects, too. Housing prices are dropping to more affordable levels–painful for people who over-spent on housing, but leading to more affordable housing in the future. There’s less competition for good employees, so it’s easier to start new companies or expand strong ones. Plus, for every downturn in history, there’s been an upswing waiting at the end! 

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Ask John Paul


Q: I hear people talking about “consumer confidence” on the news. What does that mean, and why does it matter?


A:  Think of it this way. If you’re worried about having enough money, you might be less willing to spend $2 on your weekly ice cream cone. A lot of other people might feel the same way. The ice cream store goes out of business. It can’t pay back its debts. Other businesses suffer: dairies, refrigerator trucks, and more. It becomes harder to get a job. The economy as a whole suffers. Your prediction about not having enough money has come true!


John Paul Pigéon is a 12-year-old financial guru from Fort Worth, Texas who helps kids learn about money and business. Visit his Web site at Send your question to It may be selected for our next newsletter!


Link to This Month’s Fast Fact

A recession is defined as “two quarters of negative economic growth.” The funny thing is, economists almost never know that a recession is happening until long after it has already started. To learn lots more, click on this link:


Info to Go

Learn more about “recession-proof” companies:


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