The Forces of Recession - Assignment Example

The recent winter weather in the West devastated farmers while providing an additional blow of higher beef prices. There also may be cyclical pressures that are extending the recessionary period. This could be the result of a correction for the recent boom in the real estate market. Many borrowers were strapped with debt beyond their realistic means by below prime lenders. Credit card debt has also risen dramatically and consumers who are servicing these debts do so at the expense of their purchasing power.

Global economics may have some effect on the flat GDP as more products are outsourced and offshored. While free trade agreements have made a system of corporate nations around the world, it has resulted in flattening the median income and created an underemployment situation in the US, which may contribute to a prolonged period of recession. This period may be exaggerated by mounting consumer debt and more difficulty managing it. All these events contribute to the consumer's negative outlook on the economy.

It creates what Banik (2002) calls a climate of fear where the psychological behavior of consumers creates a cycle of recession. While 18 months may seem like a considerable downturn, with the right combination of external events and loss of consumer confidence, the recession could continue to hold back the economy for several more months. The Federal Reserve and the Money SupplyThe Federal Reserve (Fed) controls the money supply by controlling the reserves that banks are required to hold against deposits.

By buying and selling US Treasury securities, the Fed controls the number of reserves and therefore the money supply. With more money in reserve, banks are free to loan out more money. They also control what is known as the currency component. It is a smaller portion of the money supply that deposits and withdraws currency from banks. Together with the reserve deposits, these two factors make up what is known as "high-powered money" (Schwartz 2002). Interest rates are another method that the Fed has used to control the money supply.

"In recent decades the Federal Reserve. interpreted a rise in interest rates as tighter monetary policy and a fall as easier monetary policy" (Schwartz 2002).