Recession

A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic Product (GDP) in two or more successive quarters of a year. A recession may also involve falling prices, called deflation; alternatively it may involve sharply rising prices (inflation), in which case this process is known as stagflation. A severe or long recession is referred to as an economic depression or slump. A recession can also be defined as two consecutive periods of negative growth.

In a developed capitalist / free market economy, recessions come and go at fairly regular intervals - often 5-10 years - in what is known as the business cycle. There is much debate as to whether government intervention smooths the cycle (see also Keynesianism) worsens, or even creates it (see also monetarism).

Causes of recessions

Recessions are mostly caused by external economic shocks, or the unwinding of major imbalances in the economy.

One mechanism is based substantially on the role of consumer confidence and business confidence, which are important for example for individuals and organizations to decide whether their current investment or debt levels are correct. A wave of bad news (e.g. job losses at a big company) may lead enough people to worry about the future, increase their saving and reduce their spending, so that further bad news is caused. This can cause a recession through the multiplier effect.

The greatest worldwide recession that humanity has ever experienced was the beginning of the Great Depression (late 1920s and 1930s); other notable recessions include the two Oil Crises in the 1970s and the Long Depression of the late nineteenth century. The sharpest recession on record is that following the First World War when hyperinflation hit much of Europe; this recession did not last very long, however.

There is some debate as to whether a recession is a normal part of the business cycle. The theory of business cycles suggests that there will be times when employment and growth are relatively low. However, this does not mean that the economy will enter a recession on the formal definition.

Marxists hold that economic "crisis" is an inevitable part of capitalism, while Austrian economists hold that it is inevitable and has some desirable consequences.

A historic correlation between recessions in the 20th century and Federal Reserve interest rate hikes preceding them by 12 to 24 months has supported free market advocates' claims that, in fact, those recessions are caused at least in part by the Fed (as well as other government intervention), a claim which was taken up even by the Fed's most popular chairman, Alan Greenspan, as being worth further examination.

Depression

Main article: Great Depression

Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. The investments lost their face value and the loans on them "went bad", which, among other things, triggered a crisis of the banking system. In consequence, there was the famous run on banks, with people not being able to access their deposits.

When U.S. President Franklin D. Roosevelt entered office in 1933, he began an aggressive program called the New Deal with three goals, to provide immediate relief for the unemployed, to recover the economy to normal levels, and to reform the system so it would never happen again. Roosevelt got GNP moving upward again, with 11% annual growth 1933-36.

To date no repetitions of the Great Depression have happened in the industrial world. However, Japan suffered from a depression during the 1990s, and the former Communist states of Central and Eastern Europe also fell into an economic depression during the first decade of their transition to capitalist economics. Additionally, the term "depression" may be used to describe the situation of many poorer countries in the Third World (although in many cases these countries never achieved sustained economic development in the first place).

The Great Depression in Europe was one of the reasons for Adolf Hitler's election, so could be said to be a cause of World War II.

External links

Macroeconomics | Market trends

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Causes of recessions

Depression

See also

External links