Recession
In contrast to popular belief, a recession is not correctly defined as a drop in a country's real Gross Domestic Product (GDP) for two or more successive quarters. Rather, it is a period of simultaneous declines in coincident measures of overall economic activity such as output, income, employment and sales. In fact, the 2001 U.S. recession did
not see two successive quarterly declines in real GDP. In the U.S. after World War II, recessions lasted from six to 16 months. However, some international recessions have lasted much longer, e.g. in Japan, the 1997-99 recession lasted almost two and a half years.
Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. For example, the U.K., Canada and Australia have not seen recessions since the early 1990s.
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 was the
Great Depression (1929 to 1930s). Other notable recessions include the two
Oil Crises in 1973 and 1979, and the
Long Depression of the late nineteenth century. The sharpest recession on record is that following the
First World War.
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 former chairman,
Alan Greenspan, as being worth further examination. This view ignores the fact that interest rates are usually increased in order to stem
inflation.
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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, inflation greatly increased. 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.
*
List of recessions*
Business cycle*
Central bank*
Measuring well-being*
Money supply*
Political economy*
The Thirty-Five Most Tumultuous Years in Monetary History: Shocks and Financial Trauma, by Robert Aliber. Presented at the IMF*
Recession? Depression? What's the difference? (About.com)
