Definition of the week

Definition of the week:

A recession is a prolonged period of time when a nation's economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

* People buying less stuff
* Decrease in factory production
* Growing unemployment
* Slump in personal income
* An unhealthy stock market

By the conventional definition, this slow-down has to continue for at least six months to be considered a recession.

Detailed Explanation:

What goes up...

In a growing economy, consumer demand is increasing, overall, more than it is decreasing. Since there is increasing demand, producers want to increase supply. To do this, producers have to increase their consumption of other goods and services, including labor. This means there is greater demand for labor, so the labor pool, on the whole, can raise the price of their product (in other words, people can get paid more for their work).

Working people with higher incomes have more money to spend on other products, which increases demand even more. If demand is high enough, the price of some things goes up. For example, if there are more travelers than there are seats on airplanes, airlines can raise their prices to decrease demand (this could lead to high inflation if it happened across the board, but in the past decade the U.S. economy has shown the ability to grow steadily while keeping inflation under control). In a growing economy, some consumers and producers will not do well, but most will, so the general feeling about the economy is good.


In such an economy, a lot of consumers tend to make investments: They buy things, such as stock in a company, that they plan to sell at a later date. They know that if the economy keeps going the way it has been, their investments will increase in value. These consumers figure they will make money just by holding onto the product for a while.

...must come down!

History has proven that an economy will not keep expanding indefinitely -- eventually it will contract for a while. A prolonged period of contraction is known as a recession. If the recession lasts long enough, and is particularly severe, it is known as a depression. In the next section, we'll find out what happens in this sort of economy.

There are all kinds of things that can change the course of the economy, just as there all kinds of things that can change the demand for a particular product. In some cases, a recession might be kicked off by over-production -- a situation in which the supply exceeds the nation's ability to consume.

One factor that generally plays a role in a recession, whether or not it is the cause, is the confidence level of the millions of consumers and producers. If consumers stop feeling confident about their job security or the value of their investments, they won't buy as much stuff. In the current recession, a lot of people who have been laid off are spending as little as possible, and many people who fear they may be laid off are also saving their money.


Just as in an expanding economy, things tend to snowball in a contracting economy. There are thousands of different elements in this downward spiral; you can see the snowballing effect in any number of specific situations.

Hi'STORY'

Why do we need the Fed?

Sometimes, in order to understand why you need something, it helps to find out what it was like before that "something" was created. Before the Federal Reserve was created in 1913, there were over 30,000 different currencies floating around in the United States. Currency could be issued by almost anyone -- even drug stores issued their own notes. There were many problems that stemmed from this, including the fact that some currencies were worth more than others. Some currencies were backed by silver or gold, and others by government bonds. There were even times when banks didn't have enough money to honor withdrawals by customers. Imagine going to the bank to withdraw money from your savings account and being told you couldn't because they didn't have your money! Before the Fed was created, banks were collapsing and the economy swung wildly from one extreme to the next. The faith Americans had in the banking system was not very strong. This is why the Fed was created.

Facts of the week!

• Did you know that 80 billion Aspirin tablets are taken a year?
• Google's name is a variation of the monumental mathematical figure "Googol", the equivalent of 1 followed by 100 zeroes. Brin and Page felt the name helped illustrate google's monumental mission of Organizing billions of bytes of data found on the web.
  

This week's K-Pill

When I pay for my groceries by check, where does that check go?




In an year, an estimated 70 billion checks will be written in the United States alone. This means that about 270 million checks are processed every business day. Keeping track of all that paper is a pretty complex procedure.

Once you've paid by check for your groceries, the first place that check goes is to the grocery store's bank, where it is deposited. But the funds may not be immediately available, unless you and your grocery store use the same bank -- and actually, about 30 percent of checks are drawn on and deposited into the same bank, in which case the processing, or clearing, is handled internally. But otherwise, the grocery store's bank will probably want to verify the check with your bank, the paying bank, before it converts the check value to cash. But most banks do not communicate with each other directly; instead, they go through a middle man, an intermediary bank.

There are three types of intermediary banks:

* Federal Reserve Bank
* Correspondent bank
* Clearinghouse corporation

The Federal Reserve Bank is the central bank of the United States. Regional branches of the Federal Reserve handle check processing for banks that hold accounts with them, and they charge a fee for their services. Such services include check collection, air transportation of checks to the Reserve Bank and delivery of checks to paying banks. Reserve Banks handle about 27 percent of U.S. checks.

Correspondent banks are banks that have formed "partnerships" with other banks in order to exchange checks and payments directly, bypassing the Federal Reserve and its fee. Outside banks may go through a correspondent bank to exchange checks and payments with one of its partners.

Correspondent banks may also form a clearinghouse corporation, in which members exchange checks and payments in bulk, instead of on a check-by-check basis, which can be pretty inefficient when each bank might receive thousands of checks in a day. The clearinghouse banks save up the checks drawn on other members and exchange them on a daily basis. The net payments for these checks are often settled through Fedwire, an electronic funds transfer (EFT) system that handles large-scale check settlement between U.S. banks.

Correspondent banks and clearinghouse corporations make up the private sector of check clearing, and together they handle about 43 percent of U.S. checks.

There are five basic steps in the settlement process:

1. The grocery store deposits your check in its bank.
2. The grocery store's bank passes your check, along with a payment request, onto an intermediary bank for verification and settlement. The intermediary bank identifies the paying bank.

To identify the paying bank, the intermediary bank looks at your check's routing number, the nine-digit number on the bottom left hand corner of your check, to the left of your account number. The routing number identifies the bank that issued the check. Every bank in the United States has at least one routing number.

3. Having identified your bank as the paying bank, the intermediary bank presents your bank with the check you wrote, along with a payment request. If your bank agrees to pay, the check has been verified.
4. The intermediary bank proceeds to settle the check, debiting your bank and crediting the grocery store's bank for the value of the check.
5. Your bank debits your checking account.

At the end of this process, the grocery store has full access to the cash value of the check you wrote. And at the end of the month, when your bank statement arrives, reflecting the transaction.