Recession: lies in the eye of the beholder.
The topic above might sound funny; but the beholder above refers to the common man i.e. you and me. With this post I somehow want to establish a relation between how the mentality of a common man brings about recession in the economy. According to me true recession is brought by the fear the common man feels seeing his environment. I would like to define FEAR as "Fear Ends All in Recession". Ill like to start this post with my layman understanding of how the economy/industries operate today.
Most of the industries today typically make just enough money for the organisation to sustain and make minimal growth (considering the fierce competition). To obtain exponential growth most of the companies rely upon financial institutions (like banks, venture capatalists etc) and people (share and security holders). The actual growth in the world with respect to land prices, minerals, commodities etc is very limited. Now how do each of these organizations get a piece of pie from this growth (they also have to pay back debt taken from financial instituations); even though they get some it would not be significant. In order to maximise profits these organisations go ahead and anticipate/prepare for a much higher growth. The net result is higher prices of land, minerals etc. Lets now see how does this artificial growth move towards recession.
The National Bureau of economic Research defines economic recession as: "a significant decline in the economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." This decline (or negative) growth is because the economy was growing at a rate that is neither natural nor proportional to the actual growth. Lets see how a common man affects this and makes this condition worse.
When the economy is in recession organisations start losing money; hence they start cutting cost and try to get rid of employees they hired taking into consideration higher growth than natural. When people lose their jobs they tend to spend less; even the people who havnt lost thier jobs tend to start spending less in anticipation of bad times ahead. When people spend less, organisations make even lesser money and lay off more people. The result is more bankrupt organisations and more jobless people. Its a cycle that keeps going on, only till the mindset of consumer changes. Once the consumer feels it is a good time to spend (due to many reasons like low prices etc) the process reverses as organisations start making more money and start hiring more people. Remeber, in a capatalist economy the common man is the catalyst the fuels the economy for future growth. Today if the US is the largest economy, its because of the mindset of the citizens it has here, who just love spending. My advice would to be to spend, but be wise.
-Ashish
Most of the industries today typically make just enough money for the organisation to sustain and make minimal growth (considering the fierce competition). To obtain exponential growth most of the companies rely upon financial institutions (like banks, venture capatalists etc) and people (share and security holders). The actual growth in the world with respect to land prices, minerals, commodities etc is very limited. Now how do each of these organizations get a piece of pie from this growth (they also have to pay back debt taken from financial instituations); even though they get some it would not be significant. In order to maximise profits these organisations go ahead and anticipate/prepare for a much higher growth. The net result is higher prices of land, minerals etc. Lets now see how does this artificial growth move towards recession.
The National Bureau of economic Research defines economic recession as: "a significant decline in the economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." This decline (or negative) growth is because the economy was growing at a rate that is neither natural nor proportional to the actual growth. Lets see how a common man affects this and makes this condition worse.
When the economy is in recession organisations start losing money; hence they start cutting cost and try to get rid of employees they hired taking into consideration higher growth than natural. When people lose their jobs they tend to spend less; even the people who havnt lost thier jobs tend to start spending less in anticipation of bad times ahead. When people spend less, organisations make even lesser money and lay off more people. The result is more bankrupt organisations and more jobless people. Its a cycle that keeps going on, only till the mindset of consumer changes. Once the consumer feels it is a good time to spend (due to many reasons like low prices etc) the process reverses as organisations start making more money and start hiring more people. Remeber, in a capatalist economy the common man is the catalyst the fuels the economy for future growth. Today if the US is the largest economy, its because of the mindset of the citizens it has here, who just love spending. My advice would to be to spend, but be wise.
-Ashish
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