Encoding Recession
A recession is a situation when the economy stops growing, and there is a fall in the GDP (negative growth or downtown). Company’s profits started to decline, unemployment increased, and the willingness of the consumer to spend soaks. Thus, it can be said as a general slowdown in economic activity over a period of time.
So, Can be said to be a hellistic situation? Or a never desirable situation in the world? Or how does it affects the business? And most importantly, its effect on Startups?
UNDERSTANDING RECESSION
A recession is an economic term for a negative trend in the economic cycle that is defined by a drop in output and employment, which in turn results in a drop in family income and expenditure. Even while not all individuals and businesses actually see a drop in income, a recession makes people’s future anticipation less definite, which makes them put off making significant purchases or investments.
In this situation of decline, there is a reduction in the purchase of goods and services by the households which tend to save money. This increase the inventory of the business. They cut off the production and started to pursue the pre-orders. The companies to have profits cut their cost more and more, making the turn to unemployment and joblessness, which again excavate the situation.
The above graph shows the economic cycle, and two of the major components of the graph are Expansion and Recession. It either retard or expands, depending upon the circumstances. However, one thing is certain that it does not remain constant or uniform all the time. But at the same time, though itn the short run it sees peak or trough, but analyzing in the longer duration, it is determinant that what is the growth trend. If it follows the even path, its way has to be in the even direction in the line of prosperity. In the above graph, this path of prosperity is depicted by the red line, which until and unless it goes on expanding denotes the prosperity and the growth of the country in the long term.
Thus, in general, it has been seen that the recession is the normal part of the economic cycle and not a HAZARDOUS thing until and unless the growth trend moves downward.
Cause of Recession (Inflation)
In general, many factors contribute to a recession, but the major cause is inflation. Inflation can be referred to as the general increase in the cost and prices of products and services over time. The proportion of products and services that may be acquired with the same amount of money decreases as inflation increases. The increased cost of production, rising fuel prices, and federal debt are among a few causes of inflation.
Currently, inflation is touching the skies. Compared to market expectations of 8.3 per cent, the annual inflation rate in the U.S. unexpectedly increased to 8.6 per cent in May 2022, the highest level since December 1981. Fuel prices (up 106.7%, the highest increase ever), gasoline (up 48.7%), fuel oil (up 12%, the highest 12-month increase since August 2006), and natural gas (up 12%) all contributed to an increase in energy prices of 34.6%, the highest since September 2005. (30.2%, the most since July 2008). For the first time since March 1981, food prices increased by at least 10%.
Now one of the layman’s thoughts that strikes the mind is how this increase in price leads to low spending and recession? Even the very factual matrix of inflation shows the increase in demand that leads to a higher price. Then How does it causes Recession?
LET’s Understand
Inflation occurs when the prices of commodities hike. And this price hike would be due to the concurring difference between the demand for that commodity and the supply of the commodity. When the demand for the commodity suddenly saw a latten increment that does not cope with the supply, we can say the growing difference and as this difference grows the inflation rise.
For instance, in the current scenario, Fuel prices rise to an all-time high of 106.7%. This was due to the fact that the oil supply had been stopped by Russia, due to which the supply reducing and the demand constantly increasing, creating a large gap between the two.
This inflation is controlled by controlling the demand. The regulatory body controls the demand by increasing Repo rates. As the repo rates increased, consumers got motivated to save more at higher interest rates.
However, it is also the juncture from which the problem can start, and inflation can turn into a recession. With the increase in the interest rates, the companies also have to pay more for the debt and capital. And thus, their expenses enhance. Now, if the production effects and due to the factors there is low growth, then again the Inflation or prices rise (which this time worrisome).
Now the problem starts with psychological fears trigger. People started to withdraw money from the market. Making the money failure. With the super saving mode less demand. And thus, all this made the negative growth of the economy. And this even turns into depression after a subsequent negative growth of the GDP.
Historical Recessions
The Great Depression of 1929–39
The 20th century’s worst financial and economic catastrophe was this one. This crisis was triggered by the 1929 Wall Street crash, which was the first time when the financial market saws unprecedented overvaluation of companies. Also, the U.S. government’s poor policy choices later made it worse. Nearly ten years of the Great Depression saw significant monetary losses, unprecedented unemployment rates, and decreased output, particularly in industrialized countries. At the height of the crisis in 1933, the unemployment rate in the United States was about 25%.
The OPEC Oil Price Shock of 1973
This was the crisis at the time of the fourth Arab — war, when the OPEC (Organization of the Petroleum Exporting Countries) member countries — primarily consisting of Arab nations offended by the U.S. help to Israel for weapons and support, decided to halt the oil export to the U.S. and its allies. As the oil exports halted, the prices of the oil began to rise, and there is a severe shortage of oil, not only in the U.S. but in many developing allies as well. Also, worsening the situation, inflation got triggered, due to which the prices in the market started to rise. Many economists hold this period as “stagflation” (stagnation plus inflation). It took several years for both inflation and output to return to normal.
The Financial Crisis of 2007–08
The financial crisis of 2007–2008, also known as the subprime mortgage crisis, was a result of the decline of the U.S. housing market, and resulted in a significant loss of liquidity in global financial markets. It almost brought down numerous significant financial and commercial banks, mortgage brokers, insurance providers, and savings and loan organizations; it threatened to topple the global financial system.
The major cause of the financial crises of 2007–08 was the cheap credit and loose lending regulations that drove a housing bubble in the period of 2007–08. Financial firms were left with valueless trillions of dollars worth of investments in subprime loans once the bubble crashed.
Many American homeowners discovered that they owed more on their mortgages than the value of their properties. Following the Great Recession, many people lost their homes, assets, or jobs. After the controversial Wall Street bailout, which kept the banks working and gradually restarted the economy, was passed, the turnaround started in early 2009.
ENCODING ITS EFFECT
Is it formidable?
Not really. One of the key common things in all the above recessions is the over-causation and the presence of the psychological fear that worsen the delipidation. During the great recession (1939), people blindly invested in stocks, and when the market started to decline, a psychological tricker appeared that led to the high takeback that worsened the fall. Similarly, in the 2008–09 recession, due to the cheap rates, the people again invested in housing blindly, and the effect can be seen. Also, as we discussed earlier, the financial institution of the country could control the prices and prevent inflation. And getting experience from the past, it somehow appears that now they could bring trust and control the recession from transforming into depression. One of the key examples of this is the 2020 recession.
2020 Recession
One of the prior examples of how the present time rationale makes a difference is the recession of 2020, which was the worst for the U.S. economy since the Great depression. The growth contracted 31.2% in the second quarter after falling by 5.1% in the first quarter. There are staggering 20.5 million jobs lost just by April 2020, enchanting the unemployment rate to soar to 14.7%. One of the major reasons for this 2020 crisis was the severe pandemic and uncertainty regarding the pandemic’s effects. However, as hard as it frost, as early as it fades. The fed funds rate was decreased by the Federal Reserve to 0%, with an assurance that it will remain there until 2023. Congress also provided aid funding in the billions. The people were more vigilant about the recession, making it not to pull the money from the market. Thus, the money supply was all good, and with this 0% funds and various aid, it again comes to the path, leading to the third quarter’s 33.8% growth of the GDP.
Thus, it is hereby contended that inflation is in general transitory and would not be as vicious as it seems to be. At present, to control the prices, the government has already started to take steps and prepare plans.
- President Biden has a plan to tackle inflation — by lowering costs that families face and lowering the federal deficit by asking the large corporations and the wealthiest Americans to pay their fair share.
- Lowering the Cost of Gas and Energy and Achieving Energy Independence
- Lowering Other Everyday Costs for American Families
- Lowering Prescription Drug and Health Care Costs
- Lowering Food Prices by Helping American Farmers Grow More and Compete More Effectively. And much more.
Also, when the factors such as the Ukraine- Russia works way back to normal, then there is again the push to normality. So, it can be said that due to the development of rationality and vitalness, one of the key factors that are the PSYCHOLOGICAL FEAR moved out and thus, more or less the economy has to come back home and again get back.
Then what to fear
If inflation is as simple as that, then is the world less rational to deal with it as an insidious wicked charm?
Not really, as far as the discussion, we see how inflation is not something to fear for the long term, or it is not something to end the world or bring devastated lives. However, analysing it in the short run, if it gets uncontrolled, then it can bring worse effects.
One can see its effects in the stock market. However, these fluctuations would not be as severe as before now it would not be as the investor knows that as soon as the market cramps as soon as it rises. But still the fluctuation.
One can anticipate the job cuts and growing unemployment.
The saving also should have to be risen up. So as to produce and use more value of the current money. ( as when the inflation goes down, one could procure more goods from the same rupees).
Still, many questions remain about the future of the Russia-Ukraine war. Growth in the A.I. and tech sectors. Growth in the general lifestyle that severely affects due to the pandemic. Trade exports, imports and much more.
But all amongst this, one of the worst things that can produce a severe effect and lead this inflation to hit a severity mark is the Stagflationary debt crisis, a term given by Dr. Doom, Nouriel Roubini. In succinct, it is the no-growth stage which is acquainted with the high inflationary prices. That leads to a severe drop in the economy.
REFERENCES
[1] https://www.nytimes.com/2021/04/29/technology/big-tech-pandemic-economy.html
[2] Harvard Law Review https://hbr.org/2021/09/6-strategies-to-help-your-company-weather-inflation
Other Sources
- https://www.britannica.com/topic/recession
- https://tradingeconomics.com/united-states/inflation-cpi
- Bisaria, Gaurav. (2010). RECESSION & ITS IMPACT ON SOCIETY WITH SPECIAL REFERENCE TO HIGHER EDUCATION. Commerce Today. 5.
- https://www.investopedia.com/terms/r/recession.asp#:~:text=A%20recession%20is%20a%20macroeconomic,as%20a%20rise%20in%20unemployment.
