It will be too early to draw the conclusion that the current global economic recession crisis is over. Conclusion can not be drawn until we get the final assessment of the costs/impact of recession to world economies. This becomes even more intricate for since the collapse was a global phenomenon, so, no recovery can be said to have occurred if it is not global.

Recession is a ground reality which cannot altogether be avoided. Nevertheless, it is a momentary phenomenon; however worst it may be, it will pass away. But it is that hardship which unveils numerous truths at a time. It is truly a testing time for everybody; even the human values and moral standards are in jeopardy.

One thing is sure, only economic theories do not help in predicting Recession, because sometimes many non-economic factors play lead role in inviting this bottleneck which are hardly noticed. Paul Samuelson rightly states, “What we know about the global financial crisis is that we don't know very much.” To, the economist, real life is a special case. An economist is someone who knows more about money than the people who have it. (George Bernard Shaw) And the Economics itself is the science that hangs like a gathering fog in a valley, a fog which begins nowhere and goes nowhere, an incidental, meaningless inconvenience to passers-by.

Yet, facts do not cease to exist because they are ignored. Recession unveils several such facts.

1. Recession is real and can come again. The great depression started in 1929 and naturally, most people have not seen that with their own eyes. So, the idea may have come to many people that USA is the richest country on earth and economic recession would not touch its economy. The year 2008 perhaps taught these kinds of people a crushing lesson that it can happen anytime in any country.

2. It is now fully evident that the key indicator of current recession is the greed of those who failed to anticipate the consequence of their actions which badly affected the lives of billions.

3. Credit Buying is always intoxicating. In the 1920s, the US economy expanded rapidly on the basis of cheap credit, rising money supply and an exuberance bordering on overconfidence. It led to consumers buying large quantities on credit and a booming realty and stock markets. By 1928, the US economy was heavily unbalanced with over inflated asset and share prices. Negligence to same realities allowed history to repeat itself in 2008-09. Sub-prime Mortgages caused almost unhealing ulcers to the world economy and its almost unsure amidst ongoing treatment that cure would total. The Governments should focus on real economic growth attributed by real effective demand. Steroid is not a permanent solution.

4. In any situation, Government should not allow Banks to fail in order to prevent economic earthquakes. In 1920 Depression, one of the most damaging events was the widespread failure of medium sized American banks - with the Federal Reserve unable or unwilling to act as lender of last resort. The widespread bank failure caused a decline in the money supply and loss of confidence in banking sector - investment fell drastically. Same event replicated in 2008. It not wrong, almost 124 Banks have so far gone astray.

5. The rich become richer and the poor become poorer is a cry heard throughout the whole civilized world. Secondly, Labor is prior to, and independent of, capital, in fact Capital is only the fruit of labor. But the irony is such that in tough times, the workers are first to bear the brunt of a crisis that is not of their own making. Workers are the last to benefit from an economic boom but now they are the first to be sacrificed in the midst of a global recession that was sparked by high rollers in the casino capitalism. It is now a high time to have a probe on the very idea of free markets and capitalism. People have started realizing the need of Regulated Free Economy. If there is a lesson to be learned from the present crisis, it is that it’s a time to strengthen the real economy and shutdown the casino economy. It is indeed a height of paradox that even in this distressful recession, nobody has perhaps thought so far about the Bail-outs for workers. If it had been so done, it would have been not simply a measure of social justice, but also a viable solution to the economic slowdown. To protect the human source is the major responsibility of not only the governments, but Corporations too are equally and ethically responsible to do so, not as philanthropists, but as the visionary who can see that skill and strength of human sources is the key factor to reshape future economy. In sharp contrast to this, we have locally witnessed several examples in which sector specific industrialists have marooned hundreds of thousand workers overnight and forced them to commit suicide rather genocide in one-by-one format. As if this was not enough, they shamelessly shirked their own responsibility blaming the Government for not providing bail-out for them.

6. In recession, government cares only for the big companies not poor individuals. It would be interesting to see that bailout plans to support global financial systems of the nations are nothing but a financial looting of country’s exchequer. Question arises from where bailout money comes – Answer is ‘Taxpayer’ who is liable for recession!!! Bailout of US$ 700 million is aimed to help US Fed Reserve to purchase all toxic assets, hold them for years and pay millions of dollars to those firms who would manage them, but not help even a single family to save their home which they have lost. It has been rightly criticized by an American intellectual that the Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value. Nations borrow billions for war; seldom for education. No nation is rich enough to pay for both war and civilization; it has to choose from one. On account of unreal liquidity pumped into financial systems, stability may again be fancied by nose-less economists, but no surprise, if it turns out to be stillness between tremors.

7. National Debt should not be allowed to increase. The effect of higher National Debt will be higher taxes in the future. The remote but potential risk is that the US government could one day default on its debt. If the US government became a bad debtor, that really would be the end of the world. The dollar would collapse, the financial system would collapse, and in 20 years we would probably be all speaking Chinese. In this context, Mark Faber has rightly regarded the Currency Printer as the most destructive weapon on this earth. Rampant Quantity Easing bangs on to erode purchasing power of currency and result is always immeasurable in terms of inflation.

8. In so far as developing countries are concerned, it is true that many countries have been caught up in this global crisis by Default as a consequence of no precipitating policy actions by their own governments other than endeavoring to participate fully in the global economy and financial system. But, they must now make Better Preparation. A country will be better off in the phase of a global crisis if its own vulnerability is limited, for example, if its fiscal affairs are reasonably stable, if its inflation rate is low, its internal and external debt position is sustainable, and if its exchange rate is flexible. Second, a country will be better off, if it has preserved the room to maneuver to respond to external shocks through the use of domestic policy instruments, primarily fiscal and monetary policies. Besides, Countries should self-insure against future crises by putting in place as best as they can, robust economic and financial policy frameworks. If these lessons are not learned, then the course of globalization could well go into reverse. The risk is that the globalization trend will be replaced with inward-focused regionalism, selfish nationalism, and disguised as well as evident protectionism. A major lesson to be leant is that, export led growth model of development will have to be re-assessed as countries that pursued this model have been hit most due to their expose to the external economies, leaving themselves in utter turmoil. Balancing of export model of development with boosting of domestic consumption is emerging as the best option, not only during this crisis, but also in the foreseeable future.

9. The Human Cost : Lasting nearly a decade, the 1920 Great Depression caused massive levels of poverty, hunger, unemployment and political unrest. The study of the human cost of unemployment reveals that a new class of poor and dependents rapidly cropped up among the ranks of young sturdy ambitious laborers, artisans, mechanics, and professionals, who till the invasion of depression time, maintained a relatively high standard of living and were the stable self-respecting citizens and taxpayers of the state. Unemployment and loss of income ravaged numerous homes. It had broken the spirit of their members, undermined their health, robbed them of self-respect, and destroyed their efficiency and employability. Many households were dissolved, little children parcelled out to friends, relatives, or charitable homes; husbands and wives, parents and children separated, temporarily or permanently……..Men young and old had taken to the road. Day after day, breadlines for food deluged on the roads. … Physical privation undermines body and heart.… Idleness destroys not only purchasing power, lowering the standards of living, but also destroys efficiency and finally breaks the spirit. Did anybody ever think about the present and future cost in terms of skill and efficiency of manpower lost by industry during recession and to be regained aftermath of recession? Those entrepreneurs relentlessly blowing the trumpet of Darwin’s principle of ‘Survival of the Fittest’ for ratifying their own dirty deeds must read - Road to Wigan Pier by George Orwell. They must stop betraying their own conscience by disfiguring the concepts of human welfare, sustainable development, human rights, CSR and such other good-to-hear terminologies. Sophisticated or rude, race of dacoits is same. History is made up of the bad actions of extraordinary people. All the most noted destroyers and deceivers of our species, all the founders of arbitrary governments and false religions have been extraordinary people; and nine tenths of the calamities that have befallen the human race had no other origin than the union of high intelligence with low desires. However, it’s time now to understand that true acumen lies only in preserving valuable scarce resources for future.

Teach a parrot the terms "supply and demand" and you've got an economist.”

SUPPLY AND DEMAND

The law of supply and demand, briefly, states that when demand is high, prices will rise, and when supply is high, prices will drop. In other words, The Law of Demand holds that other things remaining equal, as the price of a good rises, its quantity(supply) demanded will fall, and vice versa. The Law of Supply holds that other things being equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Did anyone ever think why do teachers earn say Rs.3 lakh per year and a Filmy Hero earns say 100 times more (conservatively) than teachers? Isn't education more important than Movies? In the month of March, mangoes are sold at Rs.1000/- a dozen (roughly 3 kgs.) and yet people have strong urge to buy them. In contrast, perhaps better quality mangoes are available at Rs.100 per 3 kgs during May-June, yet people pay relatively less attention to them. Why?

DEMAND FACTOR AND RECESSION

Some economists are of strong view that 'what goes up must come down'. It seems that either they are not aware of the catastrophe and panic of the suspected recession/ depression or they are carelessly trying to avoid the worry. Neglecting a problem is no solution. They must try and find out the cause.

Lord Keynes applied the logic that recessions are caused by a lack of Effective Demand.

The effective demand comprises of consumption demand and investment demand. Therefore, the lack of effective demand may come about due to the lack of either the consumption demand or the investment demand or both. Hence, to increase effective demand the consumption demand or the investment demand or both should be increased. Let us see one by one how the effective demand can be increased:

TO INCREASE CONSUMPTION DEMAND

There is a functional relationship between consumption and income. People mostly increase their consumption as their income increases, but not by as much as the increase in their income.
Consumption expenditure is determined by disposable income more correctly than by total earnings.

Consumption function depends upon the nature of consumption which is again dependent upon the consumption behavior of the people throughout the variation in income. This behaviour study can be for shorter or longer term, but it must correspond actual observation and experiments. Short term is sufficient enough to experience a significant change in the parameters of the economy, especially in case of a developing economy where the entire socio-economic setup is being changed fast on account of rapid economic development through development plans.

Now, consumption behaviour solely depends upon the Marginal Propensity to consume (MPC). What this MPC mean? It is a metric that quantifies induced consumption with every increase in disposable income after taxes and transfers. If a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. If person borrows money to finance his expenditure, definitely, MPC is more than 1. Also, MPC varies from individual to individual and their respective circumstances. For example, a thirsty man in the middle of desert has a very high MPC for Water than the man pillowing in his A.C. room. With this, it becomes more obvious that MPC goes on declining at higher levels of income and approaches to zero at a very high level of income where all available consumption goods are already available in list of items which gives maximum possible satisfaction to the people. If you have plenty of what you want, MPC is perhaps Minus 1. At higher level of income where you have plenty of everything, MPC corresponds to other factors like tastes, habits, fashion, traditions, technology etc. that may prevent the consumption from increasing. These factors are determined by the entire social, political and religious way of living of the people.

Today, when there is a panic and panic only the world over on account of unbearable recession, when even the developed economies are also suffering from considerable level of inequalities in income distribution, consumption demand can be increased by introducing new consumption items, improving quality of existing items and making income distribution more equal will help to increase consumption demand almost equally in both the developed and the developing economies.

TO INCREASE INVESTMENT DEMAND

How Investment Demand can be increased to enhance effective demand? Situation for induced investment differs both in Developed and Developing Economies.
Developed economies are required to only preserve the existing productive investment in the time of slow-down period. It can well be done by raising the purchasing power of the middle income group, the dominating group in the consumption goods market, through the measures for increasing consumption as discussed hereinbefore. Also, the easy consumer loans either free of interest or at an insignificant rate of interest and restriction on both commodity speculation and non-commodity speculation activities would be proved most helpful to preserve the existing productive investment.

But, in the situation of economic recession, economies of developing countries need not only to preserve the existing productive investment but also to increase it. It depends upon the excess of Marginal Efficiency of Capital (the rate of profit earning on investment) over the prevailing rate of interest' always holds good.

Therefore, the developing economies apart from increasing consumption demand have to bring interest rates significantly lower and to increase the 'Marginal Efficiency of Capital' to fight against recession. The restriction on speculation will help very much in the developing economies because they are always short of capital and the liquidity engaged in speculation not only makes a dent on the supply of capital but also makes the interest rate high. It should be noted that supply of capital (money) depends not only on physical money printed in the economy but on the Velocity of Money Circulation (turnover ratio) which declines drastically on account of recession – rising unemployment, falling investment and consumption. In such insecure time, confidence is at its lowest ebb and people tend to hoard cash rather than spending it.

Apart from this, actions should be taken to mitigate the inequalities of income distribution. A part of the flow of income from high income group (the group having insignificant MPC) should be diverted to the middle income group (the group having high MPC) whereby the consumption demand will improve by raising income, employment and induced investment.

Thus for increasing Effective Demand and thereby recovering from recession phase, the income of the middle income group and the low income group should be preserved against unemployment. The inequality of income distribution should be alleviated fast so as to divert a considerable portion of income of the high income group towards the middle income group and the low income group who actually constitute a real effective demand. A wide range of consumer loans at negligible interest rate or interest free should be floated in the market. A subsidy scheme for the consumption goods should be launched in a way that consumption goods pertaining to high income group may become under the reach of middle income group and consumption goods pertaining to middle income group may become under the reach of low income group. Speculation activities should be stopped. The flow of funds towards enhancement of trade and commerce should be restricted.

But,,,,, it may also happen……………….. Strong economy causes an increase in the demand for housing; the increased demand for housing drives real-estate prices and rentals through the roof. And then affordable housing becomes completely inaccessible. During the boom, a speculative fervor gripped homeowners, particularly in the United States, where they got hooked on cheap, gimmicky mortgages. They believed that they could buy low, sell high, and could always get out at the peak, instead of being the last player in the game to hold the old maid card. Unfortunately economists don't see this — including their voodoo economic theories and strategies that helped causing the recession, such as the belief that economic good times could go on forever. This leads to a very important cause of the present recession. There is no shortage of expert opinion, particularly from economists and financial analysts — too often, however, the wrong ones prevail.

Ultimately, Rulers are the reasons of growth and also the remedy of slow-down. In both conditions, they gain and people loose. Why? Reply is simple: They have to support money owners in both conditions for mutual benefit. Though being regulators, they are paid to deregulate and they do so! Why should a common man break his head for understanding Demand-Supply fallacy?


Many say : World Economy is on the path of recovery, Recession is Over, because statistical figures says so. Some cautiously say: Recovery is there but it would be slow. Very few attribute the improvement appearing on the screen, to the relentless increase in money supply by currency printing. How many care to study the effects of remedial measures taken in 2008-09 and make systematic economic forecast for 2015 without getting carried away by hearsays ?

Amidst all these, fact that remains universal is ," There can not be a sustainable economic recovery and growth unless there is an increase in Real Effective Demand. " Purpose of presenting this articles was to simply convey this fact.

Global Recession 2009

Quote : Credit buying is much like being drunk. The buzz happens immediately and gives you a lift.... The hangover comes the day after. ~Joyce Brothers

Recessions are a common occurrence in any economy, part of the pattern of expansion and contraction known as the business cycle. However, increasing economic insecurity on global sphere recalled the turmoil of the Great Depression. These days, everybody seemed to be talking about recession and describing it as “the worst decline since the Great Depression 1929.” Thank God, the difference between the “worst since” and “as worse as” the Great Depression is vast. Some events are similar: The failure of major investment banks and the largest commercial bank, as well as a sharp decline in consumer spending, decline in employment and production, have been the main points of comparison between these episodes. However, every event is unique in itself. Although there is a strong correlation between financial crises and severe economic downturns, not all financial crises result in a depression or even a recession.


Now, let us unveil the story of current recession, try and analyze it in a way it can be understood by a common man. What has caused this major economic upheaval in the world? What is the cause of falling share markets the world over and bankruptcy of major banks? (No. of failed Banks – 94 ( Sept. 09)). It all started in US and then gradually dispersed across the globe.

• In US, a boom in the housing sector was driving the economy to a new level. A combination of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans.

• This stimulated the demand for property and fueled the home prices further. As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions. Systematic marketing campaign prevailed through out.

• The loan agents were offered huge bonuses and incentives to find more potential homes and buyers. Since it was a good time and property prices were soaring, the only aim of most lending institutions and mortgage firms was to give loans to as many potential customers as possible.

• As a result, prior KYC (Know Your Customer) or say Due Diligence Norms and practices for measuring the customer’s repaying capacity were completely ignored or rather shelved in large number of cases. As a result, many people with low income and bad credit history were given housing loans in sheer disregard to all principles of financial prudence. These types of loans were known as sub-prime loans as those were are not part of prime loan market.

• Because the demand for homes was extremely high, many homeowners used the increased property value to refinance their homes with lower interest rates and take out second mortgages against the added value (of home) to use the funds for consumer spending. The lending companies also lured the borrowers with attractive loan conditions where for an initial period the interest rates were low, known as adjustable rate mortgage. As a result of burgeoning housing prices, they were fantasized enough to honestly believe that they would be able to quickly refinance at more favorable terms.

• Ultimately, nightmare occurred as it had to. Supply outstripped demand to a great deal. Over construction (production) of houses finally led to a surplus inventory of homes, causing home prices to decline. Refinancing became more difficult. Home owners, who were expecting to get a refinance on the basis of increased home prices, found themselves unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts. In the US, an estimated 8.8 million homeowners - nearly 10.8% of total homeowners - had zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provided an incentive to “walk away” from the home than to pay the mortgage.

• Then, what followed was the destiny - Immensely large number of Foreclosures. Due to this and also unwillingness of many homeowners to sell their homes at declined prices further increased the housing inventory available for sale that reached a record of figure of nearly 4 million unsold existing homes for sale including nearly 2.9 million that were vacant. Process of seepage of prices did not stop and hence, more homeowners were at risk of default and foreclosure.

• A million dollar question aroused as to how this housing bubble and its burst which seem to be a domestic problem of USA, resulted in the world-wide current economic depression which is more often than not compared with the Great Depression 1929. It is interesting to see as to what happened next. It no more remained a problem between the lenders and unreliable borrowers. Sub-prime loans looked very attractive to the lenders in terms of handsome return because the interest rate charged on sub-prime loans was about 2% higher than the interest on prime loans obviously due to higher risk involved. However, it was an assumption in this belief that a sub-prime borrower would continue to pay his loans installments. And in case a sub-prime borrower could not pay his loan and defaulted, the lender shall have the option to sell his home at a prevailing high market price and recover his loan amount. In both the situations the Sub-prime loans were excellent investment options as long as the housing market was gearing up. Basking on a dream sky, possibility of Demand-Supply disequilibrium was not given necessary attention at all literally by anybody.

• Story does not end here simply leaving a wise moral behind. Stock markets were buzzing like beehives with immense liquidity. Major hedge funds and mutual funds saw sub-prime loans as attractive investment opportunity. They purchased the portfolio from the original lenders. This in turn meant the lenders had fresh funds to lend. The sub-prime loan market thus became a fast growing segment. Major American and European investment banks and institutions heavily bought these loans, known as Mortgage Backed Securities, to diversify their investment portfolios. Here, they had their independent risks which cannot be shared equally among all investors like Mutual funds game. Mutual funds normally buy shares and bonds whereas banks usually buy securities that are backed by loans. In this sense, banks entangled into net risk.

• Due to heavy buying of Mortgage Backed Securities of sub-prime loans by major American and European Banks, risk factor (fall in market prices) did not remain confined to US but steamed into the world’s financial markets.

• With the home prices started declining in the US as discussed hereinbefore, sub-prime borrowers found themselves in a doldrums. House prices were decreasing and the loan interest on these houses was increasing. As they could not manage a second mortgage on their home, it became very difficult for them to pay the higher interest rate. As a result many of them opted to default on their home loans and vacated the house. However, as the home prices were falling rapidly, the lending companies, which were hoping to sell them and recover the loan amount, found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans. The problem got worsened which by that time had become significant part of investments of leading banks in US & Europe that immensely destroyed their capital.

• The effects of these losses were so huge that it caused a tornado like turmoil, which is evident from these estimations: Global banks and brokerages had write to off about $512 billion in sub-prime losses. Larger victims were Citigroup and Merrill Lynch, US-based firms, European firms and to a mediocre extent Asian firms. In spite of financial backup by US Federal Reserve, Bear Sterns could not be saved from going under. Lehman Brothers and insurance giant AIG faced a replica of crisis.

• Here onwards, a snow-ball effect or say chain reaction of panic started. Huge losses incurred by banks and other financial institutes adversely affected various businesses and industries in the form of serious cash crunch. The losses suffered by banks in the sub-prime mess directly affected their money market the world over. At this stage, it would be necessary to first understand what the Money Market is. It is actually an inter-bank market where banks borrow and lend money among themselves to meet short-term need for funds. Banks usually never hold the exact amount of cash that they need to disburse as credit to companies for working capital and to individual customers for spending on belongings. With growing sub-prime housing crisis, banks became risk-averse and tended to put a hold to inter-bank dealings which dried up the flow of funds to the ‘real’ economy. Panic begets panic and as the loan market went into a tailspin, it sucked other markets into its centrifuge. Confidence evaporated from everywhere. Common investors too are now finding safe-havens like Gold or Government Securities for investing their surplus funds further jeopardizing the liquidity of funds . They resist spending money liberally, inviting a decline in sales, production and therefore employments. Like a contagious disease, the infection spread over to important sectors like stock markets. Developing Countries whose economies thrived upon their export models in the recent era of globalization have been worst hit due to global meltdown. Governments and central banks (like Fed, RBI etc.) are deploying all possible measures to command situation. They are taking all possible measures, from policy actions, interest rate revisions, bail-out plans to printing additional money in order to reactivate inter-bank and credit markets. Large financial entities have been nationalized. The US government has set aside $700 billion to buy the ‘toxic’ assets that sparked off the crisis. Collective efforts of revival are being made on international forums like G20, G8, World Bank, IMF, and WTO at finance level and ILO, OECD etc. on socio-economic level. But, success is too far. Even if the GDP and macro-economic indicators show improvement on paper, apprehension of uncontrolled inflation is always there. If situation can be improved simply by printing currency out of worth less papers, why recession should arise. Things have to return to normalcy sooner or later, not because of mindless statistics and imaginary measures, but because of economic systems themselves have the tendency to self-correction. All and all, silver lining is always there at the end however, dark may be the cloud. History repeats history teaching valuable lesions to mankind. No matter anyone pays attention to it, life goes on relentlessly. But it should be precisely kept in mind that Growth for the sake of Growth is an ideology of the Cancer Cell. It is an unpleasant and unaccepted face of capitalism.

Unquote : "Owners of capital will stimulate the working class to buy more and more of their expensive goods, houses and technology, pushing them to take more and more expensive credit, until their debt becomes unbearable.
The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism" Karl Marx, Das Kapital, 1867

What Was The Great Depression?

The Great Depression of 1929 was a worldwide economic depression that lasted approximately 10 years. On October 24, 1929, known as “Black Thursday” when 12.9 million shares of stock were sold in one day, triple the normal amount prices fell 15 - 20%, causing a stock market crash. By 1933, unemployment had risen from 3% to 25% of the nation’s workforce. Wages for those who still had jobs fell 42%. GDP was cut in half, from $103 to $55 billion. This was partly because of deflation, where prices fell 10% per year. By 1933, world trade plummeted 65% as measured in dollars and 25% in total number of units. Depression caused many farmers to lose their farms. At the same time, years of erosion and a drought created the “Dust Bowl” in the Midwest, where no crops could grow. Thousands of these farmers and other unemployed workers traveled to California to find work. Many ended up living as homeless or “hobos” in shantytowns called “Hoover villas”, named after then-President Herbert Hoover. The Great Depression had devastating effects in virtually every country, rich and poor. Personal , tax revenue, profits and prices dropped, and international trade plunged by half to two-thirds. Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60 percent. Facing plummeting demand with few alternate sources of jobs, areas dependent on Primary Sector industries such as cash cropping, mining and logging suffered the most. Recession is inherently an unpleasant and unacceptable face of capitalism. One step ahead, recession is a period in which you tighten up your belt. In a depression you have no belt to tighten up. And when you have no pants to hold up, it’s a panic.

Story of Great Depression:

After the end of World War I in 1918, American Economy was still bubbling with buoyancy. A large number of factories established during war for the purpose of ensuring supplies to defense forces now stopped getting fresh government contracts for U.S. military. In order to survive, these factories started to re-engineer and prepare themselves for full-scale commercialization.

Though having huge installed capacities at their disposal, they were in dire shortage of money for undertaking production of variety of consumer goods. On the other hand, common people also required enough money to purchase these goods. Production cannot increase unless there is a demand and demand cannot be driven without purchasing power. In view of these, American Government started printing more and more currency notes and spending three times more money than the actual tax revenues. Federal Reserve Bank began liberally giving funds to commercial banks at quite a cheaper rate and correspondingly these banks started lending money to companies at equally cheaper rates of interest. This brought unprecedented 50% increase in Production and therefore stimulated employment generation very fast. In order to push the sales of these productions, banks lent ample money to the people in the form of home loans because they were getting bags of money from Federal Reserve. People having employment at the helm were highly confident to dare availing loans. Thus, the process of accelerating both demand and supply rallied faster than ever before. Time witnessed unbelievable boost in economy and resulting prosperity.


Here, companies started bagging huge profits and handful of their directors started accumulating immense wealth. Capitalism grew in its ugliest form. Stock market index constantly went on scaling newer heights. With the treasures of money on hand, rich people were inclined to book maximum profits by speculative practices of buying stocks at low level and selling the same at upper level. In order to manipulate the movement of stock market in their favour, taking a step ahead, these people formed a syndicate. The Syndicate maliciously started cornering the shares of specific companies and thereafter, pronouncing sharp rises in the prices of these shares. This influenced even common people like taxi drivers, employees of municipal corporations, bus conductors, office clerks, hotel waiters and even sweepers to invest money in these stocks and earn profits. On an average, prices of shares had risen by 40% and shares of some companies went up by 250 to 300 percent. This was attributable to the huge money lent by banks to the share brokers.


However, limit is a limit ….. Ultimately, during 1929 Federal Reserve also got tired of lending money and therefore commercial banks too had to take a halt. They opted to increase Interest rates to control the further outflow of money. As a result, share brokers increased their margin from 10% to 20% and forced their share holders to pay the deficient money. In order to fulfill commitment, share holders started selling their shares for paying margin money. Bullish cycle thus started moving back in rear gears and what happened their after was, a Great Depression, ghastly cry of which was heard in every corner of the world.


There is a difference of opinion among the economists about the causes of the said Depression. There are many Theories to assess the causes. First Theory considers excessive savings as the reason for Depression. Excess Saving means Less Purchasing. This means declined sales and therefore, production which ultimately results into loss of employment and/or wage cuts, hence further damage to the demand. This ends up into manufacturers facing financial scarcity due to slashed sales which in turn, hampers purchase of raw material for production, payment of bank borrowings, renewal of transport contacts and so on…. downfall becomes intense. Suggested solution: Impose Extra Taxes on affluent class having higher saving capacity and distribute these revenues among needy people. This will again ignite the growth process.


Another theory believes the Lack of Proper Investment Opportunities which invades the Savings of common people reach the industrial sector. As a result, investments in Plant & Machinery, factory buildings etc. stops and again the above described cycle of economic downfall starts. Suggested Solution: Government should introduce more and more new investment schemes that guarantee higher interest to investors. And it should spend this borrowing for infrastructure development as well as for rehabilitation projects.

Third Theory looks at the recession as an integral part of business cycle comprising of both boom and recession. Hence, recession cannot be avoided like boom. Suggested Solution: Measures can be taken only to ensure that the situation does not skip out of control and further deteriorates. Regulation should be reviewed and redesigned.


In 1932, the then American President Roosevelt introduced an Action Plan to redevelop the U.S economy which later became popular as New Deal. From the worst ever experiences, he could infer that the first job to charge up the Demand-Driven economy is to create real, effective demand. Demand without Purchasing Power was of no use. So, in order to increase the purchasing power, he concentrated on putting more money in the hands of people by spending almost US$ 9 Billion for constructing new bridges, roads, dams and other infrastructure. Within 100 days the “New Deal” was signed into law, 42 new agencies were formed to create jobs, allow unionization, and provide unemployment insurance. Many of these programs, such as Social Security, the SEC, and FDIC (Federal Deposit Insurance Corporation) are still in practice today, helping to safeguard the economy.


As a result, Purchasing Power of the people gradually increased, warranting the need of production of various commodities which they were longing to purchase. But, the manufacturers needed money to undertake the production and the only source to borrow the funds was the Bank. Hence, in order ensure more liquidity in the system, Mr. President doubled the security undertaking amount in an attempt to rebuild the confidence of depositors and inclined them to deposit their savings in Banks. Thus, economy received a support. New Deal campaign brought the Great Depression to an end by 1939.. However, the extent of the Great Depression was so great that government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs. Truly, Emergence of World War II had addressed the remaining shortfalls and provided a major fillip to U.S. Economy leading it to become a Super- power of the world.


Again by end of 2008, the Super Power has been engulfed into severe recession; the period for which this recession may last will also again depend on the Business Cycle. Rampant money printing and gigantic bailouts may seem to be working as a first-aid plaster, but actual repercussions…. Inflation, deflation, stagflation, mass inflation or hyperinflation…… is yet to follow. And as usual, Economists…NBER, IMF, World Bank etc…. do make predictions without accountability. Almost all economies of the world, especially those largely thriving on export-led growth models, have been severely affected due to globalization of world economies. Senator Chris Dodd notes that the proposal of bail-out of US$ 700 billion looks stunning in terms of volume. Unfortunately, US government will use it for purchasing toxic assets of same value, hold on these assets for years and pay millions of dollars more to hand-picked firms to manage them. It would do nothing to help a single family save a home. Trillions of government monies ($700 billion to begin with) will be infused directly into the coffers of corporations and wealthy individuals via hedge funds. The national debt will likely grow 20-30% in a single year, with obligations extended to many trillions more in guarantees. What we know about the global financial crisis is that we don't know very much.” Paul A. Samuelson.


Quote:

The first panacea for a mismanaged nation is inflation of the currency (printing money); the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

Franklin D. Roosevelt (1882-1945) Thirty-second President of the USA.

Next: Recession 2009

To choose a hardship for ourselves is our only defense against that hardship

How to Survive a Recession?

• Avoid taking on any unnecessary debts. The debts you have tried to reduce and consolidate into a lower interest rates bearing account.

• If you fear unemployment, start thinking what you might do as an alternative. Is it viable to consider working on a second income, such as online business?

• Do you have unemployment insurance to cover mortgage payments? If not, it would be worth taking insurance out now. ( Indians need to wait for generations)

• Don't panic. Firstly, the unemployment may not occur; there is nothing to be gained by worrying over what we cannot control.

• If you are made unemployed, the best solution is to be flexible in looking for work. Consider new avenues and skills that you could learn. Also recessions will be short lived; a period of temporary unemployment does not have to become permanent. During a pause, ways of improving skills and knowledge should be seriously planned out.

• Create a worst-case scenario Create a worst-case cash flow forecast. Predict how bad it could be if you lost your job or if your business dropped in sales substantially. Learn to live on less than your income. You may see pay cuts in your job during an economic recession, so look now for ways to trim your budget as much as possible. Compromise on your lifestyle. When everything doesn’t seem to work out for you, try reducing your lifestyle dramatically. Sell luxury car, move to a small house and cut down expensive dining and avoidable shopping.

In a very interesting article titled as “ Breezing through recession without Air conditioning" published in the leading US News Paper, it is stated that those people who were considering Air Conditioning as boon, are nowadays advocating a natural way of living in this way…….. The Allies won World War II without it (A.C.), and the great pyramids of Egypt were built outside in open-air (al fresco). Rather spend summer sitting in the lawn with kids and other family members. It is very therapeutic and at the same time, brings each other more closely. This is really the way it should be. An American lady is quoted to have said “You live with your windows and doors open, you use fans, drink lots of cold liquids and take it easy,” she said. “You come to realize that winter and summer is going to be kind of a bear but you dress for it, and you enjoy fall and spring very much. What’s interesting is you acclimate to it.”

The other thing is quality of life; if you have a place where you can go and have a picnic with your family, it doesn’t matter if it’s a recession or not, you can include that in your quality of life.- Jim Fowler

• Always strive to be the best, no matter which field of profession you belong to. Keep up your efforts without any frustration or else, you will be the first to be led to the exit door during a recession.
• Look for ways to minimize costs without compromising the business. There are always ways to cut costs and increase inefficiency. Some economists even go so far as to say that recessions are a good thing because they force the economy to become more efficient.
• If your business is particularly affected by the downturn, look to see whether you can diversify to reflect the changing economic environment. For example, if you specialize in selling luxury goods with a high margin try including some new product lines which appeal to people's desire for frugality. A fall in profits is likely to be cyclical. Therefore try to plan a financial plan to borrow at a low cost for the difficult years.

Preparation for a recession will enable you to react to changing times and take advantage of select opportunities. “Without a measureless and perpetual uncertainty, the drama of human life would be destroyed” Winston Churchill.

Recession is never a welcome event

1. A recession makes the survival difficult for new entrepreneurs and traders who have just entered the fray. Most new firms have high set up investments and before they have reached break-eve, a downturn in the economy could make them close down.

2. It breeds Monopolies. As the recession causes smaller and newer firms to go out of business then the larger dominant players will gain substantial monopoly power. In the long run this will lead to lesser choice and higher prices for consumers. This is a definite disadvantage of a recession.

3. It is usually said that the past is a predictor for the future. Basically, if there is high unemployment in present, then it is more likely to have high unemployment in the future. If people are made unemployed in a recession, it may take a long time for them to find work again. When they are unemployed they lose skills, become de-motivated and unproductive. Besides, in spite of getting unemployment benefits if any, many will see a substantial drop in income which makes paying bills and loan repayments difficult. It will force a change in lifestyle for many. The unemployed will spend less causing a further fall in consumption and lower economic growth. This makes economic growth more difficult.

4. In recession, the productivity of an economy is badly impaired. Firms can go out of business and therefore shut down their resources. Furthermore due to recession environment, there will be a significant fall in new investment. It can be detrimental to the long term development of an economy.

5. A recession is unnecessary to increase economic efficiency. The long term future of an economy can be best helped through stable growth, which avoids the extremes of boom and bust economic cycles.

6. Hard times turn spotlight on business ethics. The rising market covers a lot of sins and a falling market exposes one's nakedness. Ethical values take backseat and lack of confidence is witnessed at all levels of dealings. Idiots (politicians and those fed up with prosperity) are shielded for the results of ugly deeds and even encouraged to breed their idiocy further. Those who are engulfed in the mire of poverty are first stranded and then taught lessons about how to combat the tough time. Media and economists, who are basically responsible to send alerts of recession to society, cherish recession which fosters their importance. Great Management Guru Mr. Peter Drucker has rightly quoted, “ In all recorded history there has not been one economist who had to worry where the next meal would come from.”

Can a recession be avoided?

1. If there is a lack of aggregate demand in the economy, various policies to boost demand can be implemented.There are a number of strategies that can be implemented to help an economy to move out of a recession. The strategy adopted and applied varies and depends on the type of economic system and analysis followed by the country’s policy makers.

2. Government and Monetary authorities can try:

• Cutting Interest Rates (monetary policy) to try and boost spending and investment
• Cut income tax and / or increase government spending (fiscal policy) to try and increase Aggregate Demand
• Ensure stability in banking system and financial system and overcome worst impact of credit crunch on lending and housing market

3. Quantitative easing - increasing money supply – should be tried out. This may be necessary if the recession is so severe it creates deflation. Deflation has a powerful negative impact on consumer spending and economic growth.

If the fall in demand is moderate, these policies may be successful in boosting demand and avoiding a recession. However, if this is severe and if it is caused by falling house prices / assets, credit crisis leading to fall in bank lending, and then it is much more difficult to avoid a recession, because these create powerful decreases in economic activity. With falling asset prices, Japan tried everything to boost economic activity such as reducing interest rates to Zero percent, introducing expansionary policy etc., but struggled for many years to get out of a deflationary state of being. In this case the government can at the most minimize the depth and length of the recession. There are also significant time lags in these policies working. The recession still occurs, it can not be avoided. But, the recession may have been even deeper if the one or the other policies had not been implemented. No escape!!!

To be continued....

What goes Up must Come Down

The economy is a dynamic entity composed of various factors which interact with each other contributing to it’s over all health. It is a cycle which has its ups and downs.

There are five basic elements in an economy. They are producers, consumers, market, supply and demand. Producers of course produce the goods and services which are bought by consumers. We are all producers and consumers at the same time. We buy groceries produced by farmers, factories and other institutions. But we also produce labor or work which is also bought by the companies we work for. During the peak time in the economy, producers make the maximum amount of goods and services while the consumers also buy the maximum amount they can. This leads to a lot of money spent on goods and services leading to a bigger amount of demand. Since there is demand for more goods and services, producers can charge more for their products. This leads to higher prices which lead to inflation. When inflation reaches its peak, consumer demand for goods and services would start going down and since demand will go down, the suppliers will have an over supply of stocks or services. In other words, since people have stopped spending their money due to high prices, a surplus of goods and services has occurred in the market. When this surplus occurs, producers will have to cut production cost by either lowering their prices lest their customers buy from competitors or they lay-off workers in order to save on overhead costs. Unemployed workers will have even less money to spend, driving the producers to lower their prices even more. When prices are low enough, demand will again pick up and the cycle begins all over again.

Mr. Wesley C. Mitchell, more than 80 years ago, described how the “error of optimism at the heart of every boom grows in scope and magnitude. ... But since the prosperity has been built largely upon error, a day of reckoning must come. ... Then the past miscalculation becomes patent (evident) -- patent to creditors as well as to debtors, and the creditors apply pressure for repayment. Thus prosperity ends in a crisis."

Then, as Mitchell further adds, "The error of optimism dies in the crisis but in dying it 'gives birth to an error of pessimism. This new error is born, not an infant, but a giant; for the boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.'" This is why many will be blind to the light at the end of the tunnel that marks the exit from this recession.

As sure as the spring will follow the winter, prosperity and economic growth will follow recession.


What happens in a ‘Recession’?

1. Decline in economic activity brings recession causing unemployment, fall in income, consumption and therefore production. It enhances tendency to save more among people. However, mere parsimony is not economy. Expense may be an essential part in true economy.

2. Economic stagnation takes place, wherein productive capacity keeps on rising due to technological development of economy, but income-derived(wage) purchasing power (not the one derived from loans) of people do not rise in equal proportion. Extra working hours may sustain the purchasing power but it also has limit. In other words, shortage of money arises with people who actually create demand say, lower and middle class people and governments.

3. In recessions, interest rates tend to fall. Because inflation goes downside and central Banks wish to try and stimulate the economy.

4. The government will also try to use expansionary fiscal policy. This involves cutting taxes and increasing government spending. It will cause higher government borrowing (higher budget deficit), because Tax Cuts tend to stagnate Government revenues, discouraging increased government spending. Expansionary fiscal policy may not work in the long run due to crowding out.

5. Governments may try out both lower interest rates and lower taxes.

6. The problem with lower interest rates is that it is causing a further devaluation of the currency.

7. Also lower interest rates may not actually help increase consumer spending if confidence is low. In spite of Central Bank’s strict instructions, neither bank can throw money overstepping the norms, nor can people be inclined to take loans and buy more.

8. There is a limit to how much the government can cut taxes because government borrowing is already quite high. As the reports reveal, US national debt is about 65% of GDP. In the recession this will definitely increase. There is huge loss of revenue to government in the form of direct and indirect taxes.

9. Stock Markets fall because firms make less profit. There is also the danger of business establishments going out of business.

The present contains nothing more than the past, and what is found in the effect was already in the cause.

Effects of Recession :

Bankruptcy: is a situation in which a business' debt exceeds the fair market value of its assets. It is also a court action under which a debtor may be discharged for unpaid debts, in whole or in part, and in which creditors receive distributions of assets from the debtor's property under the supervision of the court. Chapter 11 of the Bankruptcy Law (US) provides for reorganization in which the debtor remains in possession of the business and in control of its operation, while the debtor and creditors are allowed to work together It is a state of legally declared inability or impairment of ability of an individual or organization to pay their creditors. When they fail to pay off their debt and meet their liabilities, they become the defaulters causing snow-ball disruption and damage down the line.

A credit crunch is a sudden reduction in the general availability of loans or other forms of finance, or a sudden increase in the cost of obtaining loans from banks. There are a number of reasons why banks may suddenly increase the costs of borrowing or make borrowing more difficult. It may be due to an anticipated decline in value of colleteral used by the banks when issuing loans, or even an increased perception of risk regarding solvencyof other banks within the banking system. It may be due to a change in monetary conditions or credit controls. A credit crunch is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debt becomes known. These institutions may then reduce the availability of credits , and increase the cost of accessing credit by raising interest rates.

Deflation, economics, is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate.

As per classical economists, deflation is a persistent decrease in the general price level of goods and services or in other words, decreases in the money supply and credits. The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level. The crunch is generally caused by a reduction in the market prices of previously "over inflated" assets and refers to the financial crisis that results from the price collapse. This can result in widespread foreclosure or bankruptcy for those investors and entepreneur who came in late to the market, as the prices of previously inflated assets generally drop sharply. In contrast, a liquidity crisis is triggered when an otherwise sound business finds itself temporarily incapable of accessing the bridge finance it needs to expand its business or smooth its cash flow payments. In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability. It is often difficult to know, in the midst of a crisis, whether distressed businesses are experiencing a crisis of solvency or a temporary liquidity crisis.

Foreclosure is the legal and professional proceeding in which a lender obtains a court ordered termination of a mortgager equitable right of redemption. Commonly, the violation of the mortgage is a default in payment of a promisory note , secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that "the lender has foreclosed its mortgage or lien".

Stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles. Stock market crashes are in fact social phenomena where external economic events combine crowd behaviour and psychology where selling by some market participants drives more market participants to sell.

Unemployment means a person is available for doing work does not find a work. Unemployment rises sharply during recession time due to decline in production caused by decline in sales for the want of effective demand attributable to the real purchasing power measured by the disposable money in the hands of consumers. Unemployment is the greatest dread of any man. Steep rise in unemployment during recession further slows down the economy with a multiplier effect. Some economists believe that due to sticky nature, due to minimum wage regulations or union pressures, wages do not proportionately decline with the fall in demand, resulting in unemployment. Few others believe that unemployment results from insufficient effective demand for goods and services in the economy. Alternatively, some blame unemployment on Globalisation. It is rightly said that the workers are the last to benefit from an economic boom but the first to be sacrificed in recession. It is a great paradox of capitalist economy that government, through bail-outs and stimulus packages, puts money in the hands of those who engineer crisis and not a penny is spared for those who really shape-up the economy. What a great interpretation of Darwinian Doctrine!!! Workers contribute hand-in-hand in their employers’ growth and there is hardly any vice versa Patronage System. However, it should be clearly understood that if a free society cannot help the many who are poor, it cannot save the few who are rich.

Business Closure : Recessions have the tendency to touch painful spots of businesses. Those which are no longer viable in a given condition are shut off. Market promotion agencies are more prone to negative consequences as the companies are forced to cut down their costs for advertisement, PR and other modes of promotion. Staff in the office faces retention as now the work load is divided between only the most necessary employees. Those left can also forget about the raise in salaries and also work hard. Sales of luxuries are the hardest hit category in such hard times. In the time of fast globalization, most of the developing countries are also the helpless victims of recession grown in the developed nations whom their economies largely depend upon.

Gross outcome:
As a measure to combat recession, central banks of countries force the banks to cut down their interest rates. As a result, borrowers with standard variable mortgages, people with large debts get benefits in terms of lower interest payment. Also, due to weakening currency, exporters get benefited by rising profits. Some other people who may benefit from economic slow down are companies dealing with bankruptcies and debt settlements, people making cash payments for goods at bargained prices, traders selling inferior quality goods at low price and last but not the least, economists and analysts who get to talk about recession and how to get out it. On the other hand, people loosing their employment are at the greatest disadvantage in terms of their subsistence and so also the people having large amount of Cash on hand as well as savings and retired persons in terms of their interest earnings.

For retirees, and those who plan to leave the workforce soon, fears of a prolonged economic downturn are intense, because they have less time to recover and replace those losses they are suffering now in recession. For the people who have a long career ahead, it is easier to heed advices like ‘Stay calm, think long-term’, but hard for older people

Cash is the King during recession and those having it sufficiently can plough it back to reap stupendous profits in post-recession period.

Realty sector suffer badly in terms of plummeting housing prices and the Government itself, in the form of falling tax revenues as well as burden of forced bailouts.

Take away the cause, and the effect ceases

Causes of Recession:

It’s been a lot of time; “Recession” is the hottest topic the world over. Everyone is talking about recession. People hang on to newspapers, television, news channels, and financial reports only to discover “what next” in recession. Reports of IMF, World Bank, WTO, OECD and stalwarts of finance discipline have assumed unfathomable importance overnight.

There are various causes of recession happening but ‘fall in Aggregate Demand’ is perhaps the cause of causes. Inflation is a condition of an economy when the prices of goods and services rise immensely over a period of time. On account of rising inflation, a person can now buy lesser goods and services than before even with the equal amount of money. This lower discretionary income in the hands of consumers occur on account of increased production costs, higher energy costs, cost of living including food consumption and national debt. When the prices of goods mount very high, people tend to cut on overall spending especially on luxury goods, restrict them towards basic necessities and thus save more and more. As a result, GDP declines and amidst diminishing sales, the companies are forced to cut their costs as well as retrench workers which bring unemployment.

Most mainstream economists believe that recessions are caused by inadequate aggregte demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policies, while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. Laissez-Faire minded economists may simply recommend that the government not interfere with natural market forces. For Capitalists, it is phase of inevitable business cycle.

There are other causes which also role their reason and are obviously attributed to various recessions in past.

A currency crisis, which is also called a balance-of-payments crisis, occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store value. It is a type of financial crisis and is often associated with a real economic crisis.

An energy crisis is any great bottleneck(or price rise) in the supply of energy resources to an economy. It usually refers to the shortage of oil and additionally electricity or other natural resources. An energy crisis may be referred to as an oil crisis, petroleum crisis, energy shortage, electricity shortage or electricity crisis.

War not only causes death and disability among military personnel and civilians, but it also destroys the social, economic, and political infrastructure necessary for well-being and health. War violates basic human rights. As a violent method of settling conflicts, it promotes other forms of violence in the community and the home. War causes immediate and long-term damage to the environment. And war and preparation for war deplete human and economic resources that might be used for social good.

In Underconsumption theory, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced.
In an expanding economy, production tends to grow more rapidly than consumption. The disparity results from the unequal distribution of income; the rich do not consume all their income, while the poor do not have sufficient income to meet their consumption needs. This imbalance between output and sales has led to theories that the business cycle is caused by overproduction or Underconsumption.

General over-production is meant a production of commodities in general beyond the needs of society. Careful thought will show at once the absurdity of such an idea. The purpose of production is always consumption. Imperatively, there has hardly been a time when more economic goods were produced than men really needed to satisfy their legitimate wants. On the contrary, there has never been enough produced for this purpose. When there is an almost universal difficulty in disposing of goods, the chief cause is not Over-production but Underconsumption. Men want the goods, but they cannot at the time dispose of their services, and consequently lack the purchasing power which restricts them to satisfy their wants. Mistakes in judgment result in over-production in particular industries and over-production in a few industries often leads to the spread of doubt and uncertainty throughout the business world. Then men in their fear restrict production and thus incidentally close the market for labor. Laborers seeking and failing to find regular employment lose their purchasing power, with the result that the Underconsumption spreads all along the line, and society passes through what is called an industrial crisis or panic.


Overproduction is the accumulation of unsaleable inventories in the hands of businesses. Generally believed, an abundance of production creates general prosperity. However in the capitalist economy, commodities are produced for profit. This so-called profit motive, leading to uncontrolled production, causes negative consequences. The overproduction of commodities forces businesses to reduce production in order to clear inventories and alleviate blockage of funds. Any reduction in production implies a reduction in employment. This creates a "feed-back loop" or "vicious cycle", whereby excess inventories force businesses to reduce production, thereby reducing employment, which in turn reduces the demand for the excess inventories. The general reduction in the level of prices (deflation) caused by the law of supply and demand also forces businesses to reduce production as profits decline. Reduced profits render certain fields of production unprofitable.

Failure of Financial system: Rampant lending by Banks is a new but vital reason which played a pivotal role for inflicting worst recession of 2008-09. During growth period, banks made an increasing number of loans regardless of ability to repay. Banks found ways to increase the number of mortgage loans such as interest only mortgages, 100% mortgages and lending to people with poor credit histories ( sub-prime mortgages). Over confidence and complacency seeped into the whole financial system brought banks at the doorstep of bankruptcy, paralyzing the entire global financial system.

To be continued......

Economists have forecasted nine out of the last five recessions

Recession brings hardship for common people of society and also for economists, but in superlative terms. For common people, it is a painful surprise and perplexion about series of unpredictable developments concerning collapse of house prices, banking system, financial policy, and insolvency of insurance companies, job losses, inflation, and car sales and so on. It's hard enough to understand what's happening. However, for academic economists who are entirely dedicated to the subject, situation is unreasonably awkward and they feel like eating their humble pie when they fail to forecast the distressful recession. Different schools of thoughts propounding different theories are finding a shelter in such times. When we look back to history, we find that periods of severe economic distress have shaken up economics and economists have run over haphazardly to find the ways of recovery and forecast future meltdowns. It is well said that the astrology was invented to make the economy a more accurate science. To an economist, real life is a special case. There is one good joke in this context. During morning walk, three friends – Surgeon, Architect and economist were boasting about their profession’s supremacy. Surgeon said that he is very important because God Himself was a surgeon and the first thing He did was to extract Eve from Adam’s rib. The architect said, ‘wait a minute, God was Architect as he made the world in seven days out Chaos. Economist simply laughed and asked “ And who made chaos !!!”

It is a natural instinct of human being to look for someone to blame after the occurrence of crisis. Also, hindsight is always better than foresight; anyone can become wise after the event. Ever since the gravest Great Depression, there has been much soul-searching of the economics profession. There are too many criticisms leveled against economic profession. There is a large number of mathematical models, ideologies, theories, assumptions. There are monetarists, Austrian school economists, Keynesians, Marxists who have their own reasoning. But it is difficult to measure how much plausible their comprehension is because the debate for self-defense never ends. It has been observed that an entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of lifetime that has taken place in 2009.

However, to be realistic, it should be remembered economists don't run the economy. They don't even necessarily make the decisions which influence the economy. The failure of economists is partly due to the difficulty of keeping updated with a very fast changing financial system. But, there is still huge room for improvement.

What is recession? - The decline in river flow after a tempest has passed

A period of recession is a significant decline in economic activity. A recession documents simultaneous decline in employment, profit and investment, and an upscale inflation. A period of recession witnesses a stock market drop at the onset. It can also be sensed via the unemployment rate and subsequent claims, a housing recession and the use of index indicators.

In economics, the term recession is generally used to describe a situation in which a country's GDP (Gross Domestic Product), sustains a negative growth factor for at least 2 consecutive quarters However, this is the explanation that presents recession only as a definition to remember. To understand what it actually means, we need to first understand the meaning of GDP. It is the value of all final goods and services produced in an economy in a given year. These final goods are those goods which are not transformed into other goods. These goods are evaluated as per their market value. It means when the value of all final goods and services produced in a given year declines for two consecutive quarters, the state is referred to as “recession”. It is visible in real GDP, real income, employment, industrial production, and wholesale-retail sales in an economy.

Recession can be defined differently by different economists. Some economists also suggest that a recession occurs when the natural growth rate in GDP is less than the average of 2%. Typically, a normal economic recession lasts for approximately 1 year. A recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits, falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. So, economic recession can be spotted before it happens. While the growth in GDP will still be present, it will show signs of sputtering and one can see higher levels of unemployment, decline in housing prices, decline in the stock market, and business expansion plans being put on hold. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy is called economic collapse. One definition that distinguishes recession and depression was a favorite of U.S. Presidents Harry S. Truman and Ronald Reagan. “A recession is when your neighbor loses his job; a depression is when you lose yours.” Nowadays, one funny comment is added these days to sum up the definition -Recovery is when Obama loses his job.

To be continued…………

Nothing is permanent except Change

Today, ‘World Economy’ is the matter that repeatedly strikes the head of even every common person of the world. Originated from USA in second half of 2008, economic slow down and its impacts have inevitably engulfed almost the entire world on account of fast globalization of world economy that has taken place in last few decades. Slow down has gradually turned into a rare economic crisis which is compared with the Great Depression of 1929 in USA. Situation is differently described as either Credit crunch, Economic slowdown, Recession or Depression by different school of thoughts. Whatever it may be, reality is undeniably very painful. Imagining sudden collapse of Global Economy was something ‘never thought of’ just a few months back. However, this is the very reality of today. Ironically, the worst affected nation is USA, which led the growth process of world economy after World War II in a stupendous way. According to the World Bank, the current economic crisis, born in the United States with sub prime defaults has grown into the first global recession since World War II. According to the World Economic Forum, not less than forty percent of the entire world's wealth has been destroyed in the recent financial collapse. In the U.S. alone, between housing and the stock market, more than $18 trillion in wealth has been estimated to have already been destroyed. Big Private Banks that largely control the financial systems of the western world are bankrupt. So, western world's economies cannot be expected to have urgent recovery as they are heavily dependent on bank-system credit to operate. As reports reveal, more than 10,000 homes go into foreclosure and more than 20,000 people lose their job every day in USA. And the collapse is accelerating, developing its own self-reinforcing dynamic. Job losses further aggravate foreclosures, reducing demand, leading to more job losses and further downfall of the financial system. None of the stopgaps designed to stanch the bleeding have yet worked. There seemed no bottom in sight. Economists apply number of theories and principles, as also indulge into relentless analysis of the crisis, its real causes and magnitude. But, a fact of the matter is, all judgments are after all the conclusions drawn on the basis of specific understanding of the discipline which a scholar belongs. However, diagnosis is not an end, but a beginning of practice. If disease is known, it is half cured. Even during Great Depression of 1930, all measures taken to combat the situation were a part of trial and error exercise. That time, recovery had come along the set of fresh circumstances and major events like World War II, which excited economic growth in a post-war period, leading the USA to become the superpower and the entire world getting economically sound, as it is today. One thing is sure; the cause of current recession is the greed of those who failed to anticipate the consequence of their actions. What started as a small matter of sub-prime loan defaulters has now become a subject of global discussion and has engulfed the global economy scenario. On a more ideological front, it is high time to have a rethink on the very idea of free markets and capitalisms

Federal Reserve economist Lawrence Kotlikoff has suggested that the U.S. government is "actuarially bankrupt." Renowned Investor Warren Buffett stated that the U.S. economy has "fallen off a cliff" virtually facing an "economic Pearl Harbor," experiencing a "close to the worst-case" outlook of falling business activity and rising unemployment. Despite declarations like bailout packages of billions, decrease in interest rates, reserve requirements and bank-lending rates to correct the global economy, the conditions seem too stubborn to improve. Yet, the coordinated efforts of world leaders on the forums like G-20 reassure that things have taken a proper route. Of late, some signs of recovery have been seen, but, no one knows, it is natural or the one germinated by unusually large dosages of financial packages. Uncertainty is truly a pervasive feature in economics.

In the light of above, it would be pertinent to take a look to and step-by-step comprehend every minor point attributable to world economy, pros and cons of recession and recovery measures and so on, a large number of relevant subjects.

At the outset, it is essential to understand that the process of globalization that has made the world a Global Village. It has brought the entire world under one umbrella which has been recently sabotaged by economic upheavals developed in USA. Increased communication through internet and interdependence of the world's markets and businesses has made this process intensively faster. People around the globe are more connected to each other than ever before. Information and money flow more quickly than ever. Goods and services produced in one part of the world are increasingly available in all parts of the world. International travel is more frequent. This phenomenon has been titled “Globalization”. Globalization in its literal sense is the process of transformation of local or regional phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together.
"The Era of Globalization" is the frequently used preferred term for describing the political, economic, and cultural system of today. There are inherent advantages and disadvantages of any system. Some of the advantages of Globalization are as under:

• Increased free trade between nations
• Increased liquidity of capital allowing investors in developed nations to invest in developing nations
• Corporations have greater flexibility to operate across borders
• Global mass media ties the world together
• Increased flow of communications allows vital information to be shared between individuals and corporations around the world.
• Greater ease and speed of transportation for goods and people
• Reduction of cultural barriers increases the global village effect
• Greater interdependence of nation-states
• Reduction of likelihood of war between developed nations
• Increases in environmental protection in developed nations

On the other hand, there some disadvantages of globalization. In addition to some negative effects which may not be relevant for discussion here, there is always an increased likelihood in the globalized economy that economic disruptions in one nation affects all associated nations and their financial as well as banking systems.

It can now be well judged about how the current US recession has been transformed into a big, severe global recession and become the cause of concern to all and sundry across the globe. The effect of the slowdown on exports, finance and investment is earthshaking. Low income countries have been and are getting hit very had. The flow of private capital to the emerging markets has dried up. Export-led Growth Modules of developing nations seem to be the rolling stones gathering no moss. With this background, it would be easier to study the current face of recession.

To be continued…………………