Causes of the Economic Recession - Essay Example

Business Economics Causes of the Economic Recession Table of Contents 1.0 Causes of Economic Recession 3 1.1.1 Financial Crisis 4 1.1.2 Currency Crisis 5 1.1.3 Energy Crisis 6 1.1.4 Wars 7 1.1.5 Under Consumption 8 1.1.6 Over Production 9 2.0.0 Great Depression 9 2.1.0 Countering the Great Depression 10 2.2.0 Modern reforms to deal with Global Economic Recession 11 2.3.0 The better option for global economic crisis 12 Bibliography 14 1.0.0 Economic Recession An economic recession is a slowdown in the activities that are concerned with the economy of a country in a general definition. The economic activities slowdown is experienced in a country over a period of time. Currently, the world economy is undergoing an economic recession and this is particularly in a number of the developed countries and the far reaching effects are also felt in the developing countries. Many indicators of macroeconomics vary in an almost similar perspective and this includes the measurements of production which are investment spending, incomes of the households, employment, investment spending and business profits. During an economic recession all these indicators are at low levels. Economic Recession has adverse effects on the economies and they include such aspects as unemployment which can hurt the economy of a country. Economic recession is also responsible for the lower standard of living for various people around the world (Siegel, 2002). 1.1.0 Causes of Economic Recession There are various causes of an economic recession in a country's economic or rather in the world economy. This can be attributed to various effects which may vary from one country or region to another. There have been identified a number of causes for economic recession and this include financial crisis, energy crisis, war, under consumption, over production, currency crisis and increased fuel prices (Bulow, 1985). 1.1.1 Financial Crisis This is a situation in which various financial institutions or financial assets loose their value greatly and at a very sudden way. The situation can be expressed under many circumstances and it has been documented in historical perspective. One of the major causes of financial crisis in from the 19th century to the modern day world is the aspect of banking panics which have been associated with many recessions in the world. Financial crisis is also characterized by the crashing of stock markets all over the world, sovereign defaults, currency crisis and the financial bubbles bursting (Markus, 2008). There have been recorded a number of financial crisis in the world and the most notable is the Asian Financial Crisis of the year 1997 which was responsible for economic recession in Asia and the far reaching effects were felt all over the world. The most notable of the financial crisis was the Global Financial Crisis of 2008 and 2009 which sparked off in the United States of America and spread to major European economies and consequently its effects were felt all over the world with the third world countries being adversely affected (Charles, 2005). Prior to the economic recession of 2008 and 2009 various financial institution collapsed and this led to the closure of many corporations in the world. The majority of these corporations were in the world leading economies notably the countries of United States such as American Insurance Group and corporations from Europe. These countries are the leading world economies and with this economies being affected by financial crisis, the world consequently was affected by economic recession (Siegel, 2002). 1.1.2 Currency Crisis A currency crisis is also referred to as a balance of payment crisis and it happens when the currency of a country either appreciates or depreciates suddenly. This change of the value of a currency undermines its qualification as a medium of exchange or also as a store of value. It is a character of a financial crisis and it is incorporated into one of the association of the real economic crisis. Currency crisis adversely affects the open economies which are small in nature or even bigger open economies but its destruction is limited on the stable economies mainly the developed economies of the world and the second world economies of the world. Governments around the world usually fends off this effects of a currency crisis by ensuring that there is satisfaction in the excess demand for a particular currency by utilizing the country's own currency reserves of foreign currency. To this effect the most common foreign reserves currencies are the United States Dollar, Euro and the United Kingdom Pounds (Bulow, 1985). Currency crisis causes the economic recession by the virtue that it is mainly accompanied by speculative attack on a currency and when this attack is underway, the local currency is currently at the fixed exchange rate regime. This in turn results in slowed economic activities in the affected countries or region or the world economy. A good example of currency crisis is the Asian Financial Crisis of the year 1997 and the Argentine Economic Crisis from 1999 to 2002 (Markus, 2008). In the global economic recession that is being experienced all over the world, there various currency crisis that affected the major leading economies like United States and the European economies and this can be said to have caused the economic recession that is being felt all over the world (Markus, 2008). 1.1.3 Energy Crisis Energy crisis is any situation when the prices of the energy rise to higher levels. It is important to note that energy is very crucial to the economy of any country and hence the necessity for stable prices in the energy. There are various sources of energy and the most important of them is oil in the modern world although with new technology it may be phased out by renewable sources of energy. Other sources of energy are natural resources like wind and sun and electricity. Energy crisis can be termed as energy shortage or energy crisis due to rising of the prices of such things as petroleum and electricity (Siegel, 2002). Prior to the 2008 and 2009 global economic recession, the world had just realized that the oil reserves in the world were diminishing and this sparked off the increase in the prices of oil and its products all over the world. There was also the shortage of oil and this means that the world was experiencing energy crisis. All countries in the world were facing energy hardships and this did not have any limits as far as both the developed countries and the developing countries were concerned. This means that the global economic recession was contributed in part by the energy crisis that was being experienced all over the world (Charles, 2005). 1.1.4 Wars A war is an armed military conflict between two or more nations. In a war, there is always the destruction of various infrastructural and development aspects of a country. The Second World War being the best example of a war left the entire European economy ruined and this needed the assistance of America to help them to come back to their feet economically. During a war, the involved countries invest a lot of its resources to the military in terms of personnel and also in terms of equipments and weapons. This means that a good proportion of the country's economy is dedicated to its war efforts (Bulow, 1985). Prior to the 2008 and 2009 economic recession, the world leading economies were various wars around the world but the most notable was the United States war with Iraq in which the North Atlantic Treaty Organization (NATO) was involved in support of the United States which is the leading member of the organization. It is important to note that the organization's members are the world leading economies and they include the countries of North America and Western Europe. To this end, these countries spent a lot of resources in the war against Iraq and hence this can be seen as a major cause of the global economic recession that was being experienced all over the world (Markus, 2008). 1.1.5 Under Consumption This is a situation in which the consumers demand is not sufficient enough to meet the producers supply. This theory is concerned with recessions and stagnation that arise due to the consumer demand being inadequate in relation to the amount produced by the producers. This theory can be traced back to the times of Thomas Malthus and even earlier. The theory of under consumption has been widely criticized until it was replaced by the Keynesian Theory economics which directs the people to a better understanding of the effects of the shortcomings of the aggregate demand to meet the potential output of an economy and this can be furthered to say the shortcomings of the level of production in relation to full employment (Charles, 2005). Since the global recession can be attributed to the financial crisis, then under consumption can be seen as a major cause of the current economic recession. This is because many people lost their jobs and the households did not have enough money to spend as they would have spent prior to the financial crisis. This means that the manufacturing industries did not have the customer base they used to have and this can be attributed to the fact that the households did not have the income to spend on the produced goods. This was experienced in the developed countries especially the United States and the United Kingdom. In these countries, many companies had to collapse due to under consumption (Bulow, 1985). 1.1.6 Over Production Over production refers to the producers producing more goods than the consumers can buy and this result in the goods being under sold or not being sold at all. This means that the products will also lower their value. Although there are different ways to look into how this aspect caused the global economic recession one factor to consider is that many corporations in the United States and Europe had produced goods in their normal way of doing things and this was in anticipation that the market trends would continue normally. When many people lost their employment due to the financial crisis and consequently many household did not have sufficient income to ensure that they continued their spending habits, the products that had already been produced did not have a market and this brought about over production. In retaliation, the companies registered a lot of losses which can be accrued to their over production and this also brought about the companies firing a lot of employees. This can be construed as to how the economic recession was caused by over production (Markus, 2008). 2.0.0 Great Depression The Great Depression initiated in the United States of America in the year 1929 and it quickly spread to other places in the world and it ended in different times in different countries the time frame being from the 1930s to the 1940s. It was the largest economic recession in the world during the twentieth century and has been used as an example of how the world economy can collapse. It was sparked off by the crashing of the stock market on 29th October, 1929 and this date is popularly known as the Black Tuesday (Markus, 2008). The economic collapse had a far reaching effect in almost all countries irregardless of whether the country was rich or poor and it has been characterized by the plunging of the international commerce by almost half, tax revenue, profits, prices and personal income. The cities that were by then dependent of heavy industry were the worst affected. Rural areas as well as farming areas were also affected because the prices of their products fell by almost half. There was the case of plummeting demand and this led to the loss of many jobs (Siegel, 2002). 2.1.0 Countering the Great Depression Many countries that had been affected by the Great Depression did nothing to counter the predicament that was facing their economies. However, many felt that there was need for radical changes in the way the policies concerned with the economy were being implemented and hence some countries introduced various policies during and after the Great Depression. In United States for example the administration of Franklin Delano Roosevelt assumed the power in the year 1933 and this was during the Great Depression. During his inauguration Roosevelt stated that there was the need for economic reforms so as to prevent another Great Depression and also there was the need to improve the ailing economy of the world although he undertook restoring the economic prowess of the United States as his first objective. It was during his presidency that he came up with The New Deal which was a policy formulation of the much need economic reforms that sought to lower both the prices and wages of the people in order to counter the Great Depression (Bulow, 1985). However, many countries did not do any tangible reforms during and after the Great Depression and this means that many countries only left the depression to cater for itself in anticipation that the world economy would play its part in reducing the effects of the Great Depression and that this would lead to the Great Depression being experienced no more in the world. However, there were a number of insignificant economic reforms in various countries around the world (Markus, 2008). 2.2.0 Modern reforms to deal with Global Economic Recession The recent global economic recession has prompted many countries to adopt numerous economic reforms that have been deemed to be apt to the requirements of an individual economy to deal with global economic recession. This means that unlike during the Great Depression in the 1930s where only a few countries adopted economic reforms, the current economic recession has precipitated a lot of economic reforms in countries around the world and this is irregardless of the country being developed or undeveloped or whether the country is rich or is poor (Siegel, 2002). To this effect many countries have come up with policy implementations which are supposed to reduce the effects of the recession on the economies around the world. In countries like the United States the government has invested a lot of money in the falling corporation and this is deemed to be very beneficial to the economy because the activities of the economy will be simulated to increase the productivity of the economy. However, the economic recession that is being experienced in the world today has had very far reaching effects even to the economies which are still not stable like those of the developing countries. The policies that will be implemented by the developed countries will have very far reaching effects on the economies of the third world countries and it has not yet been deemed whether they will be positive or negative (Markus, 2008). 2.3.0 The better option for global economic crisis When considering the economy of the world at the Great Depression of the 1930s and the world economy during the economic recession of the 2008 and 2009, it is important to note that the world economy has developed to such extent that considering the factor of globalization, it is a very complicated matter of international concern. With globalization has come the world economy, a term that has different meaning from the world economy of the era of the great depression of the 1930s. This means that it is necessary for various countries to implement radical economic reforms in their countries. However, there is a catch; any economic reform will be deemed to be effective if it works with other countries without jeopardizing the other economies. It has been criticized for some developed countries to implement policies that are very harmful to the developing countries (Markus, 2008). In conclusion, it is important to note that the world is changing and hence the need for the change in different entities in the economies of the world. This means that even the households, business entities, governments and economic institutions to adopt organizational reforms in order to align themselves with the new global economic changes that are taking place. It is important for economic reforms to be adopted in case of global economic crisis that may hinder the development of the economy of the world (Charles, 2005). Bibliography Siegel, J. J. (2002). Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, 3rd, New York: McGraw-Hill, p. 388. Bulow, J. Geanakoplos, J. and Klemperer, P. (1985), 'Multimarket oligopoly: strategic substitutes and strategic complements'. Journal of Political Economy 93, pp. 488-511. Charles P. Kindleberger and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises, 5th ed. Wiley pp 265 - 289 Markus B. (2008), 'Bubbles', in The New Palgrave Dictionary of Economics, 2nd ed. Pp. 296 - 315 Read More