RK&S Smart Solutions, Inc.: Risk Management
RK&S Smart Solutions, Inc.: Risk Management
RK&S Smart Solutions, Inc.: Risk Management
RISK MANAGEMENT
The economy and financial system may be in turmoil but your future doesnt have to be. If the information that the media has been reporting has increased your anxiety level than you havent considered the structural and economic causes and how you can prepare yourself to minimize their impact on you and your family. Accordingly, some background information is required. BACKGROUND Key factors of our economy are that it tends to travels in a cyclical course and is predominantly affected by political policy. Considering the cyclical nature of the economy first, there are basically three stages that the economy goes through: growth, stability and recession. The reason for this is that as an economy grows, it reaches a point when over borrowing, overinvestment and speculation reach a point that the economy can no longer absorb. At that point it seeks equilibrium by receding to a more practical point. This begins the recession which in the last ten recessions lasted approximately ten (10) months. During this period both businesses and governments are ridding themselves of excess and collectively reducing the problems that contributed to the recession. As these are rectified, the economy reaches a point of stability and business and individuals feel more confident that they can reinvest, borrow and speculate, which causes the economy to start growing again. Since the 1940s, the United States has suffered 10 recessions. Most could be seen at least one year before they began but no one wants to stop the train until it crashes. One interesting aspect of this cyclical nature is the perception that most individuals have. In a growth phase the optimism is that the growth will continue forever. Isnt that what caused the real estate melt down? Individuals believed that the price of real estate would continue to grow forever, speculation set in and borrowing became lax. As long as demand exceeded supply, that was true. But when everyone who could hold a hammer began building, supply exceeded demand and prices started to drop. Except this time as prices dropped, those individuals who thought they could sell their real estate at twice what they paid, found they could not hold onto their homes and the melt down began. In a recession, individuals believe the recession will never end and so they over compensate, causing businesses to lose their most important resource (labor) as they feverishly cut out anything that they dont need at the moment. This brings us to a truism that things will drop as fast as they rise. See the dot.com problem, the real estate melt down and the rise and fall of Washington Mutual (WaMu). Another truism is that as more and more individuals begin to think alike, they reach a critical mass that what 1|Page
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We wish to thank all individuals and organizations who helped develop this white paper.
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