A Recession Not a Depression ???

Saturday October 31, 2009,

8 min Read

The saying goes “America sneezes and the world catches a cold”. In the new global economy the adage holds true with devastating consequences. It’s not exactly the first time that America has had a recession, in the 1930’s they had something called the “Great Depression”- a recession that lasted for 10 years or so with 25% of the American population staying unemployed for the period.

Franklin D. Roosevelt the then President instituted a set of changes now known as the “New Deal” that put the stopper on the Depression like a shot of Prozac.

The economy was revived through reforms in the major industries and benefits were offered to labor unions and the common man. The entire program spanned over so many sectors with so many changes that some were considered downright unconstitutional and revoked later. It also spawned the social security act for Americans. The measures were desperate attempts to revive the economy which it did in a fashion.

Germany had a similar downturn at the time, the Deutschmark was not worth the paper they printed it on and a little chap called Adolf Hitler took advantage of the situation. However before he did that the German economy was revived through price control and wage control with public spending programs. It was a much simpler world back then where the exports and imports had not assumed the important positions of today.

It goes without saying that 10 years of recession are the worst that any nation could ever have to face, but that’s what America did in 1930. We in India have seen recession and rising prices and seem to be holding up fine. The recession of 2009 feels more like a media scare to some of us. Somewhat akin to how we have chicken flu and the prices of fish and pork goes up and then we have swine flu to balance the sheet.

There are many reasons why the American economy bottomed out and people thereby become jobless. It is caused by multiple factors and one of them is the greed of the rich. When FDR (Franklin Roosevelt) became President at the peak of the recession he started by saying "Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . . The money changers have fled from their high seats in the temple of our civilization." He was referring to the greed of the rich that caused the Recession then.

The statement sounds similar to President Obama’s address chastising the “Fat Cats of Wall Street” for the 20 billion in bonuses they pocketed in 2008. (If that’s a bonus I wonder what their salaries are.) However the blame for the collapse does not solely rest with them (The Lehmann Brothers are guilty though).

It is clear that people do not learn their lessons and neither do governments. The same factors keep popping up when you examine the reason for the recessions be it 1931 or 2008. From the mortgages that people take out and then fail to pay back to the overspending of the wealthy. It all points to greed foolishness and gullibility.

The US housing market kept growing to a point where people thought there would be no end to the growth. The false faith that prices would never fall made Americans take out mortgages on their property and go for vacations and buy LCDS. It also made the banks give out loans to people it would normally not consider for a loan. The great run of the capitalist machine had one flaw, the fact that humans don’t think properly when they have money.

It’s easy to assume that a million dollar house will never fall in value, and to assume that your stocks will not crash because it’s all in blue chip. The forward thinking that is required is not present at all in an economy and a nation that has the responsibility of steering the world economy. What will they do next to counter the recession? Perhaps place trade embargoes or waive taxes like George Bush did???

The world has not yet caught the American cold in its totality. We have not seen a closing of stores and large corporations declaring bankruptcy in Asia yet. The threat of a world wide recession looms large while Americans debate on what the GDP has to be to be called a recession. Andrew Leonard in his blog “The Great Depression-the sequel” says “The U.S. economy is not even technically in recession yet, either by the standard definition of two consecutive quarters of negative GDP growth, or as "officially" declared by the National Bureau of Economic Research. If we define a "depression" as a decline in GDP of 10 percent, then the U.S. is nowhere close.”

By comparing the figures of the Great Depression to the present recession, Economists are making a mistake. They cannot see the forest for all the trees around them. The recession can be countered a depression will change the world. India has already picked up on the signals; our CEO’s have taken a cut in their salaries and the bandit at Satyam (Ramalinga Raju) has been caught (but not before the damage was done).

For an emerging economy like ours there are many lessons to be learnt. Don’t take out loans you cannot repay, or invest in things you do not need. A great run at the sensex is just that a run, our economic stamina is growing, but there will be a bear market sooner or later. There has to be a minimum wage law passed someday in the future, where workers are paid a standard price in keeping with a minimum standard of living. We cannot continue to concentrate riches in the hands of a few. After all an economy runs on the consumer and it is better to have many consumers with money than one super rich consumer who will not spend as much. Its common sense a billion people spending one rupee each every day makes it a billion rupee work day. Maybe it is an over simplified example but it’s also real enough.

China has already had a taste of the recession; their Shenzhen SEZ (makes 1/3 of its exports) is experiencing a downturn as their American consumers have stopped buying. China’s heavy investment in America is starting to cost them and the threat of economic limbo has spurred our dear Neighbors to action. Instead of buying materials they now want to own them, as in the mines in Australia.

Jeff J. Barry says “America’s panicked response to the financial crisis hasn't on the face of it been very different from China's. It’s the State that has had to step in and take control. But China had money in the bank; America only has a credit card. The US government has spent trillions of dollars bailing out busted banks. The figures are so astounding they'd blow your mind. To solve a debt crisis they have just bailed out the very people who caused it with more money than it cost to fund World War 2, NASA, The Vietnam War and the invasion of Iraq, all put together.”

He was talking about Obama’s $787bn (£547bn) cash flow plan to hotwire the economy. From Tax cuts (reminiscent of George Dubya) for individuals and businesses to half a trillion dollars allocated to government spending for infrastructure (which make me wonder what they are building now) to health care and help for cash-starved state governments. The American citizens also get a 250 dollar bonus in their social security check if they are old and geriatric. It makes me wonder how much money they can throw at the problem till goes away and they go back to billion dollar Wall Street bonuses. Will America learn its lesson this time or will they go crazy with the loans again? Will there be a depression or not? I cannot say for sure. “Truth be told” the only reason the Depression of the 1930’s ended permanently was World War II (not FRD’s new Deal) but that’s just my take…




conferenceboard.ca “Why Economists Failed to Anticipate the Severe Recession-KipBeckman”

salon.com “The Great Depression-The sequel - Andrew Leonard”

ezinearticles.com “Addicted to Money-Jeff J.Barry”

About me:- I am a Content Writer and a Voice & Accent trainer. I also moonlight as an arm chair political thinker and economist. My views are usually cynical (take no heed) and hopefully enlightening. My views are mine and solely mine and in no way shape or form reflects the stance, leanings or ideology of yourstory.in 

It's a recession when your neighbor loses his job; it's a depression when you lose yours. 

- Harry S. Truman

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