Wealth

Part 18 - Recessions

https://www.youtube.com/watch?v=B45r6FIF3WE 

North America has experienced one depression and 33 recessions since 1854, and, since 1945, recessions have lasted for an average of 11 months each.

A recession is a widespread economic decline that lasts for several months. A depression is a more severe downturn that lasts for years.

The Great Depression was actually a combination of two recessions. The first lasted for 43 months, from August 1929 to March 1933. The next lasted from May 1937 to June 1938. Combined, the severe downturn lasted for about 10 years.

In a typical recession, gross domestic product (GDP) contracts for at least two quarters before it turns negative. Other critical economic indicators show a fall in employment, manufacturing and retail sales and, as these are reported monthly, they typically signal a recession long before GDP turns negative.

A depression is more destructive than a recession with years, not quarters, of economic contraction. During the Great Depression, GDP was negative for six out of the 10 years. In 1932, it shrank by a record of 12.9%. Unemployment reached 25%. International trade shrank by more than two-thirds, and prices fell more than 25%. The stock market didn't recover until 1954. 

The Great Depression was exacerbated because the U.S. Federal Reserve raised interest rates (instead of lowering them) in an attempt to protect the gold standard. Today, the world economy is no longer based on the gold standard. The Fed also failed to increase the money supply (as it should have) to combat deflation. Then, as consumers noticed prices were falling, they delayed making major purchases, decreasing demand further and thus causing a downward spiral.

The U.S. government also ignored bank failures as people took their money out of their banks as the banks desperately called in demand loans and unsuccessfully tried to borrow money from other banks. Today all bank deposits are insured against bank failure.

A recession typically follows the peak of the business cycle and is typically identified by irrational exuberance, asset bubbles or a significant shock to confidence.

Early in 2020, the U.S. economy entered a recession caused by the COVID-19 pandemic. The government closed non-essential businesses and urged people to stop the spread of the virus by staying at home. The economy contracted 5.0% in the first quarter 2020 and by April, there were 23.1 million unemployed, sending the unemployment rate to 14.7%. However, economists had learnt from the Great Depression. The U.S. Federal Bank lowered interest rates at the first sign of the recession, made sure that banks had plenty of capital to lend and flooded the economy with an increase in the money supply to encourage people to spend. The Federal Deposit Insurance Corporation insures 100% of bank savings, chequing and money market deposits so people no longer risk losing their savings although they might not make much in interest.

A recession is often the loss of business or consumer confidence that results in a drop in sales and laid off workers as business slows down creating a downward spiral of unemployment, loan defaults, and bankruptcies.

Many factors can cause a loss of confidence;- a stock market crash, wage-price controls, the collapse of an asset bubble or unexpected government action, such as deregulation or an increase in interest rates. In 2020, it was a pandemic.

A stock market crash often triggers a recession because stocks are a piece of ownership in a company and the stock market is a vote of confidence in the future of all these companies. As such, it's also a referendum on the economy itself. If confidence is not restored, the stock market will continue to fall. A drop of more than 20%, traditionally marks the start of a bear market. This reduces financing for new businesses and these in turn spend less on new assets in turn causing worried workers and consumers to buy less, deepening the recession.