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Global Recession: Causes, Consequences, Fixes, Part 6





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By far, I totally agree with balance sheet recession approach. Here is what is actually happening. The Capitalist economies essentially work on the assumption of continuous growth. In the times of economic booms, both, businesses and consumers assume that this will go on for ever, now. Businesses believe that their profits will keep going up and consumers believe that income will keep increasing. Both of them devise their strategies, and spending and investment habits on these assumptions. This results in massive debt both, on the part of businesses and consumers. When crisis hits, profits shrink. Many businesses close down and many people lose their jobs. Lots of other businesses find themselves in a hole. With reduced profits and incomes, the debt stays where it was before. So, may not be in real terms but, on balance sheets they look bankrupt. To save the business, in the middle of grim forecasts about economy , businesses stop spending and cut their expenses as much as they can. To improve balance sheet they try to pay off and reduce debt as much as they can. On the other hand the consumers who were lucky enough to save their jobs, find their incomes stagnant and couldn’t keep up with inflation. They still have to pay the debt they accumulated during boom. A big part of this debt is tied to their very important possessions like home and car. So, paying off debt becomes their priority, too. They cut back other spending and keep paying debt in the hope that some day it will be low enough to a comfortable level for their stagnant incomes. Decreased job security due to recession also plays a role in their spending decisions. Beside all this, even if a business or a consumer goes to a bank for money, the banker looks at their balance sheet and refuses to make this risky investment in a business or consumer who already has such a bad balance sheet. So, the money gets stuck in banks. In addition to this, even more money is flowing to banks because, every business and consumer is trying to improve balance sheet by paying off the debt. This scenario is made worse by tax payer financed stimulus and rescue packages, which provide most of the money to biggest beneficiaries of crisis, the banks. The net result is that the same banks which were under deep waters just a while ago are now making record profits and more and more money is being accumulated in them while rest of the economy is struggling for it.
Please, refer to Wikipedia article “Recession“. It states:
“In economics, a recession is a business cycle contraction, a general slowdown in economic activity.”
“Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble.”
“In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was “two down consecutive quarters of GDP”.”
“In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions.”
“In the UK recessions are generally defined as 2 successive quarters of negative growth.”
“A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity.”
“Economist Richard C. Koo wrote that under ideal conditions, a country’s economy should have the household sector as net savers and the corporate sector as net borrowers, with the government budget nearly balanced and net exports near zero.”
“A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different.”
“The type and shape of recessions are distinctive.”
“Recessions have psychological and confidence aspects.”
“The bursting of a real estate or financial asset price bubble can cause a recession.”
“A liquidity trap is a Keynesian theory that a situation can develop in which interest rates reach near zero (ZIRP) yet do not effectively stimulate the economy.”
“Although there are no completely reliable predictors, the following are regarded to be possible predictors.”
“Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed’s overnight funds rate.”
“The three-month change in the unemployment rate and initial jobless claims.”
“Index of Leading (Economic) Indicators (includes some of the above indicators).”
“Lowering of asset prices, such as homes and financial assets, or high personal and corporate debt levels.”
“Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions.”
“Some recessions have been anticipated by stock market declines.”
“The real-estate market also usually weakens before a recession.”
“Since the business cycle is very hard to predict, Siegel argues that it is not possible to take advantage of economic cycles for timing investments.”
“During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.”
“There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession.”
“Generally an administration gets credit or blame for the state of economy during its time.”
“The 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. ”
“Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood.”
“The full impact of a recession on employment may not be felt for several quarters.”
“Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close.”

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Read our articles Global Recession: Causes, Consequences, Fixes, Part 5 and Global Recession: Causes, Consequences, Fixes, Part 7

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Born in 1964, business owner, from Woodbridge, VA, owns ExcitingAds! Inc. ( and blog ( He was born in Mirpurkhas, Sind, Pakistan. His elementary school was ST. Michael's Convent High School, Mirpurkhas, Sind, Pakistan. Graduated high school from ST. Bonaventure's Convent High School, Hyderabad, Sind, Pakistan. His pre-med college was S. A. L. Govt. College, Mirpurkas, Sind, Pakistan. Graduated from Liaquat University of Medical and Health Sciences, Jamshoro, Sind, Pakistan in 1990. Earned equivalency certification from Educational Commission for Foreign Medical Graduates, Philadelphia, PA in 1994.

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