Recession Vs. Depression

     We have all heard about depressions of the past and recessions of the not-so-past. But what's the difference between a recession and a depression? How can you protect yourself from both of these economic crashes? Let's define the two and see what you can do to combat them.

     So what is a Recession? A recession is when there’s a significant economic decline in a designated region or area. For an economic period to be considered a recession, it's anywhere between six months to a few years of consecutive economic decline. Which results in unemployment increasing and the region/country’s Gross Domestic Product decreasing. The most notable recession people think of is what followed after the housing market collapsed. The unemployment rate had nearly doubled in 2009 and the annual American GDP growth had decreased by 2.5%. Alright now that we’ve defined and designated a recession let's get into depression.

     What is a Depression? It’s an extended period of severe and prolonged economic downturn. It’s a more extreme recession that generally lasts longer than a few years and results in a 10% or more decrease in Gross Domestic Product. When people usually think of economic depressions they think of The Great Depression which occurred from 1929 to 1933 but had lasting effects leading to the '40s. Many historians still argue whether or not the stock market crash was the cause of The Great Depression. This period resulted in a global Gross Domestic Product decrease of 26.7% and a global unemployment rate in 1933 of 24.9%.

So what you need to understand between the two is a depression is a variant of a recession, only on a larger scale with more catastrophic results. Recessions are not that uncommon. Since World war II the United States has had 12 recessions. This means the United States has a recession on average every 6.25 years. But the United States has only been through 1 depression that being The Great Depression.

     So the better question is how can you best defend against recessions? To start you need to live under your means.  If you make $50,000 a year you are only going to spend $25,000-$35,000. The best way to protect yourself is to have amazing job security but for some, that may be difficult. Having other low-risk-consistent income that can support your lifestyle through a recession would be detrimental to staying off the streets. Secured municipal bonds would be extraordinary, dividend ETFs, dividend REITs, and various other consistent-low-risk investments. The easiest investments to get would be anything with dividends. unfortunately, some dividend payouts may decrease if the economy starts to suffer. This is why bonds are much more favorable during these times. Bonds do have a lower yield to stock and ETFs. Bonds give a yield of 2%-5% which is still a good amount of income to have. Let's say your secured bond defaults, you’ll be fine since the issuer will pay out the value of the bond. If you didn't get either type of security before a recession came and you need money for bills or whatnot. You can draw from retirement accounts. Although everyone would advise against doing so. This may be the only time I would suggest saving money instead of investing money but I would still recommend buying bonds over saving money.

     A Depression is just an angrier more aggressive recession. The chances of having an economic depression are very low. The chance of a recession happening soon is extremely possible. My advice is simple, build up multiple incomes from multiple markets so that way you don't get swamped by a recession.