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Modern Economic Nonsense — The self-fulfilling recession

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Written by   34
4 days ago

The global economy is in a tailspin. To make matters worse, everyone knows it will likely only get worse before it gets better. Consumers are afraid to spend, businesses are afraid to hire, and banks and investors are so scared to invest. In these times of peril, the best way for companies to deal with risk is to cut back on expenditures and remain as liquid as possible. Unfortunately, that’s not exactly what’s happening. The global recession is becoming a self-fulfilling show that everyone wants it to arrive, but it may never do. There may not be an official declaration from the U.S. Department of Commerce or the Bureau of Economic Analysis but rest assured that we’re currently in a state of recession. The first thing you should know about a recession is that it’s not the same as a depression or general economic malaise lasting years or even decades (like the Great Depression). A recession is generally understood as a sudden decline in economic activity—as measured by things like unemployment or retail sales—that lasts no longer than six months. Now that’s good news because if a recession was anything else we might all be out of jobs right now. The bad news is the recession may already be here that we just can not predict after the confirmation.

Defining Recession

A recession is defined as a period of two consecutive quarters where economic growth has been negative, or if GDP shrinks by more than 10%. This can be attributed to a number of different factors, such as increased tariffs, an unstable housing market, or a general oversupply of goods and services (which is referred to as a “stimulus glut”). In essence, a recession is a drop in the overall pace of economic activity. A recession is generally understood as a sudden decline in economic activity—as measured by things like unemployment or retail sales—that lasts no longer than six months in usual. However, some recessions may drag longer than we anticipated. 

Why We Should Be Thankful We’re In a Recession Right Now

Economists usually say we should be thankful we’re in a recession because it’s a sign of an efficient market. But in addition to that, there are many specific reasons why we should actually be thankful that the global economy has hit rock bottom. Here are just a few of them: 

- The best way to get out of a recession is to let the recession run its course. By “running its course” we mean that it will naturally come to an end once the economic factors that caused it in the first place have been resolved. This can take anywhere from six months to several years, but it will end. To speed up the process, governments often try to intervene with fiscal stimulus, monetary stimulus, or a combination of the two. However, this rarely helps the situation. Instead, it prolongs the duration of the recession. 

- A recession is a natural consequence of a free-market economy. When it comes to the world of business, nothing good ever comes from artificially inflating demand. This is exactly what governments do when they try to “stimulate” their economies: they artificially inflate demand. And when this artificial demand ends, the market corrects itself through a period of recession.

Above are textbook recessions.

How a Recession Actually Works

When businesses and investors are experiencing high confidence, they are more willing to take on risks. They invest in new endeavors and start new ventures, and they employ more workers. This increase in spending is what drives economic growth. On the other hand, when they are experiencing low confidence, they are more risk averse. They try to preserve their current assets, and they become more conservative when it comes to investing in new endeavors. This decrease in spending is what drives economic contraction. When the economy has hit rock bottom and confidence is at an all-time low, the government steps in to “rescue” the situation. However, the best thing that government can do during these times is to stay out of the way.

This time, the government has already underwater. There is no rescue plan to let the market slowly experience the painful process one step at a time. 

The Self-Fulfilling Cycles of Recessions

Recessions are self-fulfilling in the sense that expectations about the future drive present-day behavior. When investors and banks see that a recession is on the horizon, they start loaning less money. This results in less cash flow for businesses, which means they can’t hire as many employees. When companies aren’t able to hire as many employees, unemployment rises. A similar thing happens with consumers. When they start to expect that their income is going to decrease, they stop spending. This too results in less cash flow for businesses.

Consumer Effects During a Recession

A recession is normally a bad time for consumers. For starters, they usually lose their jobs. But it doesn’t end there. Because consumers know that they’ll probably need more time to find a new job, they also have to deal with decreased income. And since consumers can’t spend as much as they used to, businesses have fewer customers. They either have to close down or lay off employees, which only makes the situation worse for consumers.

Crypto During a Recession

This is the first time cryptocurrencies have experienced a real recession. We do not know how it will perform during the downturn. However, it does not perform well in the past 6 months. We hope crypto will lead the recovery faster than the other business activities, but it has performed less ideal than we expected. However, it is an insurance plan with the cheaper premium for the grab.

Business Effects During a Recession

Businesses that rely on consumers for a large amount of their revenue are usually forced to cut back on their expenses. This includes things like marketing, hiring new employees, or investing in new technologies. Because consumers aren’t spending as much cash, businesses have to find ways to make their products less expensive. This is often done through cost-cutting measures. Businesses will decrease their hours of operation, lay off employees, and try to find cheaper suppliers.

Bank and Investor Effects During a Recession

Investors and banks are usually the first to see the recession coming. The moment they realize that a recession is imminent, they become more conservative with their money. They stop investing and start hoarding their cash. Because cash is less plentiful, banks start to loan less money. This results in less cash flow for businesses, which means they can’t hire as many employees. When companies can’t hire as many employees, unemployment rises.

Lessons Learned

A recession is a self-correcting economic cycle. If we keep our heads down and work hard, it will pass. It’s far from an ideal situation, but it’s better than an economic depression. It’s best to keep in mind that recessions are a necessary evil. They happen because of a number of different factors, and they’re often unpredictable. There’s no way to prevent them, but we can take measures to lessen their effects. If we want to get out of this recession as soon as possible, we need to keep our heads down and work hard. We need to spend less and save more, and we need to do our best to minimize our spending. We also need to be patient, because this recession will likely last longer than we’d like.

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