Monitory Policy and Recession - Essay Example

A recession is a period of general economic decline; specifically, a decline in the gross domestic product (GDP) for two or more consecutive quarters [2]. Monetary expansionary policy is traditionally used to combat unemployment during a recession, by lowering interest rates and increase in the total money supply. This is done to increase consumer spending, creating demand for goods and services. However, if checks and balances are not kept in place, increased money supply with an inadequate increase in the supply of goods and services may lead to inflation, which in turn may accentuate demand contraction and therefore, recession!

Mackay and Evans's article, ‘Recession fears weigh heavily on the markets’ (WSJ, Nov 26, 2007) deals with the situation of the US economy in the background of mounting worries of market players about the sluggish economic growth and sub-prime crisis in the housing and mortgage markets. The 8.4% drop in the Dow Jones Industrial Average index, during the third week of November 2007 from its all-time high and increased interest in the bond market are pointers to the market worries. Federal officials do not share this gloomy prediction and expect the economy to clock 1.8 to 2.5% growth in the next year and that the subprime crisis should bottom out soon. This view is also supported by the Commerce Department, which is revising the Jul. – Sept. 07 GDP growth to 4% and confirming positive income and job growth. J.P. Morgan, on the other hand, predicts a much lower growth rate of 1.5% in the first three quarters of 2008. Both predictions do not amount to a period of recession – rather a slowdown only.

The article points out the delicate balance in the various sectors of the economy which could be upset, if institutions reduce lending to the housing sector and if this is coupled with a reduction in spending by consumers on gasoline due to rising fuel prices. A slump in consumer spending is bad for the US economy as well as for the economies around the world, which export their products to the large US market. The contagious effect of the US housing crisis on the European markets is already being felt with inter-banking rates firming up and funds drying up.

Call it a recession or a slowdown, the reduced consumer confidence is having an impact on some sectors of the economy, like automakers, the financial sector, and home makers. Of late, share prices of companies in these sectors have sharply declined. Surprisingly, even the revenue earnings of companies dealing in luxury goods are declining, which are normally insulated from recessionary trends.
The redeeming feature of this otherwise gloomy picture is the surge in US exports supported by a weak dollar and strong demand from the Asian, Latin American, Middle East, and Emerging Markets. Read More