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1953 recession was a V-shaped recession, showing a quick and strong recovery which suggests that fundamentals were strong and possibly the external factors caused that recession. A little knowledge of history tells us about those ‘external factors’. They were, inflation during Korean War and Federal Reserve’s tightened monetary policy to tackle the expected higher post war inflation. Expected inflation never actually happened. Policy still went into effect on the expectation of delayed inflation. Another factor which is proven, without any doubt, by 1953 recession, is the negative effects of over speculation on government policy. Escalated post war spending in security related infra-structure and tightened monetary policy made people speculate about bad prospects of economy.
Due to these speculations and fears, the demand fell, drastically and a recession ensued. The total cost to the economy, due to those speculations, based on government interventions, was 56 billion Dollars. At the same time, treasury also started to refund the war debt which drove the interest rates very high and damaged economy even further. Federal Reserve finally recognized the damaging effects of very high interest rates and offered more reserves. Paradoxically, this measure was taken by people and investors as the last resort to save an ailing economy and demand fell, even further. In addition to this, government spending and investments just deepened the recession, even more.
So, this was a demand driven recession and demand fell because people were speculating on government interventions, in other words, it happened out of uncertainty. This is a very important hazard caused by government interventions, which a Keynesian tend to completely overlook. People and businesses know that government interventions can seriously disrupt the normal proceedings in markets. So, they start speculating like Fed or Government is going to do this or that or they are doing this or that because of this or that. These speculations causes lots of uncertainty and result into reduced demand, as people are more inclined towards savings than spending, under uncertain conditions. Reduced demand then hurts businesses and jobs.
That is why government’s hands must not replace the hidden hand. Hidden hand represents the real and natural market forces while government’s hands represent manipulation and uncertainty. Regular capital markets work in a very sensible and understandable manner. People work and make money. They spend, and part of their incomes goes into savings and investments. These investments go to research and development. R&D results into new creative and innovative products, and inventions. These new and improved products, and services create new markets and drive up demand. Increased demand results into new, improved and expanded business operations.
The new, improved and expanded business operations need more of better educated, trained, experienced and smart worker. So, new and better paid jobs are created. These better paid jobs raise the income level and standards of living. Even this, is just a small part of whole picture. New and improved products, and services, new and improved businesses, and more of better employed people help, support and lift the whole economy. Everyone from manufacturers to service providers, to contractors, to transporters, to builders to suppliers and distributors are benefited. When they are benefited, their employees are benefited, too.
Every one of those also have to hire more people. The increased and improved demand for workers, especially the skilled workers helps raise their pays and benefits. These more and better employed people and better earning businesses start a new cycle of economic and financial uplift. If for any reason or interruption, this cycle breaks down or slows down or gets reversed, the whole process starts running into the reverse direction, otherwise known as recession or in severe cases known as depression.
Recessions and depressions cause reduced demand. Reduced demand drives down the prices. Reduced prices cause lowered cost of living, doing business and hiring people. With lowered prices people start buying again and the money saved by lowered prices goes into savings and investments. The savings and investments along with rebounding demand result into start-ups and expansion of current business operations. New jobs are created, injecting even more money into circulation and raising the demand even further. This is the way hidden hand used to take care of recessions and depressions, quickly and effectively, until the big government interventions, fiat money and Federal Reserve came into existence.
Now, the government interventions through loosened monetary and aggressive fiscal policy, do not let prices go down. The goal usually is to allow little or no deflation. In the absence of deflation required by the economy to recover, the cost of living, cost of doing business and cost of hiring people never really does down. Since prices are still at the same level or even going up, as during and after current recession, people cannot save. Since there are no savings there are no investments. Businesses hurt by recession cannot afford to expand or hire at maintained or even increased cost.
Another disastrous effect of modern government interventions is that the government rescue and stimulus packages, and quantitative easing, keep the bad and failed businesses in business. These are the businesses which were originally the cause of recession and crash. They failed because there was something wrong with them. They were either an outdated design or were dishonest or had bad products and services or their customer service was bad or demand for their goods and services lowered in real and competitive markets or they simply had bad management.
Free money to these failing or failed big corporation through tax payers’ money, debt financing and borrowed money raises the level of sovereign debt, devalues the currency, causes inflation, keeps cost of living, and doing business and hiring people irrationally high at a non-competitive level. So, economy cannot rebound. It is like cutting the legs of a person and asking, why are you not walking? Even in the current recession, government has spent about two trillion dollars in rescue and stimulus packages, and is spending eighty-five billion dollars every month on QEs. But, what are the results? Unemployment is till high. Cost of living, doing business and hiring the people is not going down, as it should in a recession.
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