A recession is rarely triggered by one specific cause. It is rather a combination of factors often linked to recessions. These factors may be external (such as conflicts, wars, political instability or market crashes in other parts of the world) or internal (interest rate increases, housing market crash). At any given time, there are contradictory opinions on whether or not a recession is coming. Some analysts think we’re headed towards a recession, others think we are in one and there are even others that say we just got out of one. Even while deep in recession, some economists give grim predictions while others are optimistic.
At least in the US, the external factors seem to play a smaller role in recessions; the most significant are the internal factors that can more or less be summed up in one word: FED. In most countries the Fed’s counterpart is the National Bank.
But let’s talk about the FED.
The Federal Reserve (the Fed) is responsible for the measures taken to control the money supply in the US economy. In an ideal economy, the Fed should maintain the balance between money supply, interest rates and inflation. The problems arise when the Fed loses balance and the economy destabilizes. What is happening now is nothing but a consequence of Fed’s actions (or lack of).
By supplying huge amounts of money for the money market, the Fed helped keep interest rates low, while the inflation kept rising. On the other hand, the relaxed lending policies made it very easy to borrow money. As a result, the economic activity became unsustainable and slowed down. The credit market problems and the thousands of foreclosures are but a normal consequence.
So, RECESSION= BAD FED; this is the equation that defines recession. Now, some websites out there present a number of causes for recession such as inflation, stock market crash, real estate market collapse and so on. These are not really causes, but merely effects, or symptoms if you will, of bad Fed policy.
If the Fed is not smart enough to take the right measures at the right time, recession happens. Here is a scenario: say we have Regular Joe working for Big Business Inc.
The economy is booming and Big Business is making big bucks;
Big Business starts expanding, increases production and also increases Regular Joe’s pay.
Regular Joe starts spending more while Big Business keeps producing more and greedily increases the prices of their product since all the Joes out there have the big bucks or easy credit.
Prices get so high that Regular Joe and all the other Joes start spending less. Big Business with their new line of production just opens start piling up products in their warehouses.
At this point Big Business can either cut prices or fire people. By this time Joe is in a pickle anyway…his new Porsche has been repossessed and the Big Bank is threatening to put his house up for foreclosure. Things are bad and the economy is down.
Now, either the Fed takes action to resuscitate the economy or things follow their course and situation eventually comes back to normal. But it takes time to wobble back to equilibrium again. On the one hand it is hard for Joe to settle for less pay and to lower his comfort level. On the other hand, Big Business is slow on cutting down prices.
There seem to be many opinions as to what triggers a recession, for example, I also read a really different take on Recession (sort of a conspiracy theory version) with which I don’t agree, although is not that far fetched; here it goes: A fake recession is initially created by the BIG Media by flooding us with bad news which, in time, destroys consumer confidence. The scared and confused consumer starts spending less and thus creating more bad news and triggering the real recession.
Causes of Recession
Now, let’s look at what causes recessions.
A recession is rarely triggered by one specific cause. It is rather a combination of factors often linked to recessions. These factors may be external (such as conflicts, wars, political instability or market crashes in other parts of the world) or internal (interest rate increases, housing market crash). At any given time, there are contradictory opinions on whether or not a recession is coming. Some analysts think we’re headed towards a recession, others think we are in one and there are even others that say we just got out of one. Even while deep in recession, some economists give grim predictions while others are optimistic.
At least in the US, the external factors seem to play a smaller role in recessions; the most significant are the internal factors that can more or less be summed up in one word: FED. In most countries the Fed’s counterpart is the National Bank.
But let’s talk about the FED.
The Federal Reserve (the Fed) is responsible for the measures taken to control the money supply in the US economy. In an ideal economy, the Fed should maintain the balance between money supply, interest rates and inflation. The problems arise when the Fed loses balance and the economy destabilizes. What is happening now is nothing but a consequence of Fed’s actions (or lack of).
By supplying huge amounts of money for the money market, the Fed helped keep interest rates low, while the inflation kept rising. On the other hand, the relaxed lending policies made it very easy to borrow money. As a result, the economic activity became unsustainable and slowed down. The credit market problems and the thousands of foreclosures are but a normal consequence.
So, RECESSION= BAD FED; this is the equation that defines recession. Now, some websites out there present a number of causes for recession such as inflation, stock market crash, real estate market collapse and so on. These are not really causes, but merely effects, or symptoms if you will, of bad Fed policy.
If the Fed is not smart enough to take the right measures at the right time, recession happens. Here is a scenario: say we have Regular Joe working for Big Business Inc.
The economy is booming and Big Business is making big bucks;
Big Business starts expanding, increases production and also increases Regular Joe’s pay.
Regular Joe starts spending more while Big Business keeps producing more and greedily increases the prices of their product since all the Joes out there have the big bucks or easy credit.
Prices get so high that Regular Joe and all the other Joes start spending less. Big Business with their new line of production just opens start piling up products in their warehouses.
At this point Big Business can either cut prices or fire people. By this time Joe is in a pickle anyway…his new Porsche has been repossessed and the Big Bank is threatening to put his house up for foreclosure. Things are bad and the economy is down.
Now, either the Fed takes action to resuscitate the economy or things follow their course and situation eventually comes back to normal. But it takes time to wobble back to equilibrium again. On the one hand it is hard for Joe to settle for less pay and to lower his comfort level. On the other hand, Big Business is slow on cutting down prices.
There seem to be many opinions as to what triggers a recession, for example, I also read a really different take on Recession (sort of a conspiracy theory version) with which I don’t agree, although is not that far fetched; here it goes: A fake recession is initially created by the BIG Media by flooding us with bad news which, in time, destroys consumer confidence. The scared and confused consumer starts spending less and thus creating more bad news and triggering the real recession.