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Recession Ahead!

Photo by Mikael Seegen on Unsplash

“It’s a recession when your neighbour loses his job; it’s a depression when you lose yours” — Truman.

You look around everywhere and chances are that ,probably unsurprisingly, you might find hoards of people saying, “Economic Recession is gonna take all our job and livelihood”. While this may be true, there are lot of activities that will happen during the time of recession which may have gone unnoticed and lets also dig deep on why recession matters for economic prosperity.

We will start from the first. Now what is recession? While there are no universally accepted definition of recession, many might argue that two continuous decreases in GDP rates is called as recession. While that is indeed a sign of recession, that is not the exact cause for the Recession. The reduced consumption behaviour over minimum of two quarters is what makes a recession.

Why does a recession occur?

To answer this one has to look up to the Ray Dalio’s explanation on how the economy as a machine works. To put things on a simple perspective, imagine a person having 10,000 dollars as his annual income, since he may have some needs and wants such as starting a business, buying assets or buying something. He may need more money to buy than what he earns and this is where banks come in to play. Banks, based on his asset worth and his income, can lend him some excess money in order for him to buy his needs. Thus, this very act by bank to lend can increase the purchasing power of the buyer by leading him to a higher consumption. Here , the one man’s spending is other man’s income so when one consumes more, the other person’s income gets raised there by increasing his spending limit. The domino effect takes place there by raising the consumption more and more which atlast increases GDP of a nation. The assets such as home too will see a raise in its value during this scenario due to higher demand from increased spenders.

However, this is not something that can go on forever. There will come a time where one needs to repay the debt he owes to bank or to the lender. Hence, he will be forced to spend less on consumption by collaterally clearing his debt. This will lead to decreased spending with same domino’s effect as every starts to spend less. This will lead to less consumer confidence with a result of less demand. As demand falls, the value of assets drop and lesser consumption leads to lesser GDP there by falling into a recession. This is where the cycle of recession and economic boom is created. Usually a recession occurs atleast once in a period of 8–10 years.

Two sides of same coin i.e, Recession

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Bad news first! The recession, as spoken above is not an uncommon phenomenon, leads to lot of negative impacts. First off, the assets which you value high may have very less value as there wont be enough buyers and funds to liquidate your assets in case of emergency. As the credit-worthiness( the ability to repay the debt) drops, since the income and asset value falls, it will become difficult for you to borrow the money required to buy or to run a business. Thus the economic activity naturally takes a downturn. Second off, we might see shortage of liquidity of funds everywhere. Essentially, banks would get money from lenders and income savers who deposit money in the bank. If there is a recession, the bank would literally run out of money since large savers would withdraw the cash for daily needs and lenders would feel risky to lend money at this point in time. Thus with lesser money, the Central bank(RBI) would raise the interest rate of lending to reduce the number of persons to whom it can lend its money. Another issue during this time is the unemployment percentage of people in the country. If there are no buyers to buy things, there is simply no meaning of producing more than demand, hence the production/ manufacturing will be limited thereby limiting the human resources required to run it by laying off the employees, leading to avalanche of unemployment across the country. This may even lead to, in extreme cases, devaluation of the currency by an unexpected value.

However, not all is bad during the recession. For example, the recession can be the time where the stocks can be at their lowest value which, when taken advantage of, can lead to value investing thereby guaranteeing a higher returns in the future. Recession cuts the inflation of goods value. Since the demand falls, there would be no justification in seller raising a price to lose all of everything than to lower the prices to get piece of something. Recession also redirects us to concept of “creative destruction” which the economists argue that the “inefficient business models” may be driven out of business thereby giving rise to innovative and newer versions of business. For example, Airbnb and Uber business came into existence during the end of the recession period of financial crisis of 2008. Airbnb started as an alternative to hotels that were mostly an expensive affair. Uber started out as an inexpensive way of hiring cabs and making it an organised sector with almost a standard tariffs based on demand traffic and few other parameters.

Balancing a Recession

Photo by Jeremy Thomas on Unsplash

Though it’s rare that natural phenomenon is trying to bring about the recession like the one we are witnessing right now by reducing the supply, the recession can be overcome by balancing. So whats the balance here? Recession can be balanced by printing money, fluctuating interest rate for borrowing and reducing the excess cost spent and creating employment for large number of people. Recession when handled with extreme care can turn out to be a boon which can lead us to higher economic boom/rise than what we have seen before and lessen the impacts of next recession compared to previous. Thus they are adapted to a form of necessary evil which people may have to live with. I would like to end this article with a positive message to all my readers who may have concerns about the future possible recession with a saying

“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” — Bo Bennett

For my other articles click here to read and follow my medium profile to get further updates on my future articles.

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Yeshwant V

Yeshwant V

Ambivert | Mechanical Engineer | Epistemophile | Content speaks …. Always…