In more technical terms, Krugman argues that the private sector savings curve is elastic even during a balance sheet recession responsive to changes in real interest rates disagreeing with Koo's view that it is inelastic non-responsive to changes in real interest rates. A July survey of balance sheet recession research reported that consumer demand and employment are affected by household leverage levels.
Both durable and non-durable goods consumption declined as households moved from low to high leverage with the decline in property values experienced during the subprime mortgage crisis. Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels. Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects. A liquidity trap is a Keynesian theory that a situation can develop in which interest rates reach near zero zero interest-rate policy yet do not effectively stimulate the economy.
In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; the lower interest rates are like " pushing on a string ". Economist Paul Krugman described the U. One remedy to a liquidity trap is expanding the money supply via quantitative easing or other techniques in which money is effectively printed to purchase assets, thereby creating inflationary expectations that cause savers to begin spending again.
Government stimulus spending and mercantilist policies to stimulate exports and reduce imports are other techniques to stimulate demand. Behavior that may be optimal for an individual e. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession.
Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets. During April , U.
Recession: Meaning and Causes of Recession, Questions
The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy.
Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash. And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic.
He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole. The U. Conference Board Leading Economic Indicator year-over-year change turns negative before a recession.
Usually the signal happens during in the three months of the recession. Except for the above, there are no known completely reliable predictors, but the following are considered possible predictors. Analysis by Prakash Loungani of the International Monetary Fund found that only two of the sixty recessions around the world during the s had been predicted by a consensus of economists one year earlier, while there were zero consensus predictions one year earlier for the 49 recessions during Most mainstream economists believe that recessions are caused by inadequate aggregate 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 policy , while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent zero interest-rate policy conventional monetary policy can no longer be used and government must use other measures to stimulate recovery.
Keynesians argue that fiscal policy —tax cuts or increased government spending—works when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster. For example, Paul Krugman wrote in December that significant, sustained government spending was necessary because indebted households were paying down debts and unable to carry the U. This would be fine if someone else were taking up the slack. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down.
And this government spending needs to be sustained Some recessions have been anticipated by stock market declines. In Stocks for the Long Run , Siegel mentions that since , ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months average 5. The real-estate market also usually weakens before a recession. Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments.
During an economic decline, high yield stocks such as fast-moving consumer goods , pharmaceuticals , and tobacco tend to hold up better.
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There is significant disagreement about how health care and utilities tend to recover. There is a view termed the halfway rule  according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U. Thus, if the recession had followed the average, the downturn in the stock market would have bottomed around November The actual US stock market bottom of the recession was in March Generally an administration gets credit or blame for the state of economy during its time.
Can Central Banks Goose Growth?
Thus it is not easy to isolate the causes of specific phases of the cycle. The recession is thought to have been caused by the tight-money policy adopted by Paul Volcker , chairman of the Federal Reserve Board, before Ronald Reagan took office. Reagan supported that policy. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession.
Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession. In other words, unemployment never reaches 0 percent, and thus is not a negative indicator of the health of an economy unless above the "natural rate," in which case it corresponds directly to a loss in gross domestic product, or GDP.
The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment  in a downturn.
After recessions in Britain in the s and s, it took five years for unemployment to fall back to its original levels. Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers , with a negative impact on the wider economy: the suspension of competition policy in the United States in the s may have extended the Great Depression.
The living standards of people dependent on wages and salaries are not more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being. Fixed income benefits receive small cuts which make it tougher to survive. By this new definition, a total of four global recessions took place since World War II : , , and The worst recession Australia has ever suffered happened in the beginning of the s.
The nation also benefited from bigger productivity in manufacturing, facilitated by trade protection, which also helped with feeling the effects less. Economic recession hit by the middle of the year , with no change in policy enacted by the government as a measure to counter the economic situation of the country.
Consequently, the unemployment level rose and the trade deficit increased significantly.
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Another recession — the most recent one to date — came in the s, at the beginning of the decade. It was the result of a major stock collapse in , in October,  referred to now as Black Monday. You don't use chemical fertilisers and prepare organic manures using cow dung and similar stuff on your own. You don't buy fodder for your cattle or poultry which fulfil your milk and meat requirements. You use biogas as fuel for household energy. This means you have a self-sustained viable economy. But you are contributing nothing to country's gross domestic product GDP as you are not using money.
Now, consider this. Your neighbour works in a factory and earns a salary. She buys grocery from a kirana store, milk and butter from a dairy parlour, clothes from a shopping mall, dines out and watches a movie or a play on weekends, employs a help in her home and pays taxes. Her activities are the guarantee that the country's GDP clock is ticking upward. Every single purchase by her begins a chain of purchase and sale. The kiranawallah goes to wholesale market to buy stuff for shop. The wholesale market sources its supplies from the farmers, who purchase seeds, fertilisers, tractors, diesel and employ labourers on their fields.
All are paid in money. This is repeated for every single purchase by your neighbour. She ensures flow of money that defines growth of measurable GDP.
This chain of sale and purchase has shown signs of slowdown over the past few months. It is visible in almost every sector of the Indian economy. The result was worrisome for , for which the GDP growth rate was 6. This is the slowest growth rate of GDP since The previous low was 6.
Recent GDP figures have only aggravated the concerns of economic slowdown.
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