Let’s look at some situations people face during this recession, which is affecting more and more people nowadays:

  • Individual insolvencies increased
  • Interest rates cut
  • Falling housing sales and reduced equity values
  • Companies are downsizing, rightsizing, and filing for bankruptcy
  • No job security
  • Unemployment rate continues to get worse

Interest Rates Cut

It is expected that interest rates will be cut by the federal banks to reduce the cost of borrowing. Hopefully this will help some businesses to get through their cash flow problem. At the same time, it may “encourage” people to take the money out of their saving accounts, and use it at other areas such as investment, or just simply spend it to help drive consumer spending.

The lower interest rate affect the return of the poor since most of them don’t know what to do with their money except keeping it in the fixed deposit. How about borrowing money to invest (buying properties etc)? The poor don’t know where to invest. Moreover, banks are reluctant to lend money to them, especially during a recession.

How about the rich? They can borrow money at lower cost because the banks know that the rich are capable of making more money out of the loan.

Falling housing sales and reduced equity values

In the subprime incident, poor people borrow more money on their own inflated residence. When house price drops, they owe bank more money than the value of their home, causing negative equity.

You may say that the rich has more real estates, and mostly acquired for investment purposes. Yes, in fact the rich lose more value in their properties holding. But don’t forget that the rich buy properties for the rental income yield. For the worst case, they may have to sell a few properties at a significant loss. Yet, they are still rich. For instance, they make $50k per month from rental properties during good time, but only make $30k during this recession. Anyway, they still make more money than the poor.

Companies are downsizing

The rich own the companies. They downsize by firing the poor, so that they can keep their money and companies.

Inevitably, their companies’ valuations tumble. Let’s say from $100million to $50million. They are still multi-millionaire. They still drive a big car. They still stay at their comfortable home. They still go for vacation.

But the poor has lost their job, in deep debt, and find themselves very difficult to find jobs elsewhere.

Who suffered the most?

The poor or the rich? Being rich doesn’t make you recession-proof. But the poor will definitely be suffering more than anybody else.


KCLau
KCLau

Personal finance author and trainer

    7 replies to "Who suffered the most during a recession? The Rich or the Poor?"

    • […] policy allows the government, the Reserve Bank rather,  to cut interest rates in order to, among other things, reduce the payment burden for households (assuming the cut is passed on by the banks). Households […]

    • moreincome4malaysians

      Maybe I might add that some of the new rich may have serious problems. Like those whose companies just listed after a rights issue to increase their capital etc.

      But the old rich, they’ll be quite comfortable.

      I am fascinated by the M shaped society theory. Maybe you can write a little more about it.

    • jadelynlee

      I would say the rich benefit most from it most the time.
      Middle class will tighten their pockets but if they hv a secure job in a secure industry its not too bad.
      The lower income group are always a victim at all times?!

    • TStrump

      I think the rich end up doing better because they know how to make money regardless of the economy.
      As a matter of fact, they’re probably buying everything when it’s cheaper during a downturn.

    • mtsen

      in this article middle class consider poor gua, I also have some actual figures illustrating similar idea in this post http://malaysiapersonalfinance.blogspot.com/2009/01/2009-inflation-january-update.html

      • KCLau

        In fact, if all the prediction by international financial gurus are right, there will be no middle class in the future.
        There will be only the rich, and the poor, nothing at the middle. It is called the M shape society.

    • é›·é–€

      how about the middle-class?

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