Global economic recession has been become a subject of discussion at local, national and international levels hundreds of time. Last hundred years of the world history has witnessed five economic meltdowns including a great depression in 1929. Before 1930s, functioning of the economy was based on the principles of classical economics associated with the names of Alfred Marshall, David Ricardo, T R Malthus, J B Say, J S Mill and so on. Their economic doctrines enjoyed wide spread authority till the Great depression. But in 1936, an intellectual giant named John Maynard Keyenes, a favorite student of Alfred Marshall in Cambridge came with a set of new inventions and ideas with the publication of a book “General Theory of Employment, Interest and Money”. It is a landmark in the economic history and made a great revolution in the modern economic thought.
At present, the modern world is in the hands of a severe economic recession even though the signs of recovery have been seen. At the beginning of this essay we have seen that recession is a situation when businessmen find difficulty to meet their commitments. Then naturally arise a question why does it happen? The answer is that during recession there will arise a tremendous imbalance between aggregate demand and aggregate supply in the economy. Demand will be very much less than aggregate supply. Therefore the firms will be urged to reduce their production. It will lead to an increase in the rate of unemployment and it in turn reduces income. The only way to over come this situation is to create additional demand in the economy. For this purpose the present governments are declaring stimulus packages of billions and billions of dollars to stabilize the economy. In order to increase the demand, we have to increase consumption or investment or both. During the time of recession, marginal efficiency of capital or amount of profit from additional unit of investment will be low due to the declined state of demand. Therefore private investors will not come to invest. At this time more investment and consumption must be done by the government. In other words government should act as an agent who does not have any profit motive.
When we enquire the background of this contemporary recession, it can be seen that the roots were grew first in U S A and it showed it’s symptoms in September 2008. In 2005, Bush government in U S A brought a policy to meet the aim that there should be no person without house in the country by 2010. So the government wanted the monetary institutions to give housing loans in a liberalized manner. By this reason many people were given loan irrespective of their income. And they became unable to repay this debt with interest even they sell their houses. This situation caused a sudden decline in the aggregate demand of the American economy. Even though classicals and Keyenes created their theories by taking a two sector closed economy model, modern economy is open with external sector or foreign trade. Therefore the situation in the U S economy spread to world wide as many counties are good trading partners of U S A. Indian economy has also affected by the recession to certain extend. But the strong base of banking sector in India and effective and accurate steps taken by the government and monetary authority rescued the country from a great slow down. During the middles of 2008, Indian economy was suffering from acute inflation. Inflation occurs when aggregate demand exceed aggregate supply. In other words inflation is the reverse of recession. Due to the global financial meltdown, India could reduce it’s inflation rate and we have experienced a state of deflation before a few weeks.
Impacts of global economic recession
Even though recession is a part of trade cycle, it has wide range of impacts. It will take a lot of time to cure from the influence of this slow down. Some of he major impacts can be discussed below.
High unemployment rate: Recession means a fall in aggregate demand with respect to the availability of goods and services. So producers will be forced to reduce their production. It will cause high unemployment in the economy.
Deflation or Disinflation: Recession cause deflation up to a certain extend. We have seen that there will be unemployment during recession. As a result these unemployed people become income less. Therefore the aggregate income in the economy decreases. Then the value of money increases and it will lead to deflation.
Foreclosure: Due to a large amount of unemployment in the economy, people will become unable to discharge their debts. Therefore they loss their security resources.
Heavy fall in investment: During recession, people’s marginal propensity to consume will be less. Therefore there arises a fall in demand. It will destroy the expectation of the producers to invest more.
Bankruptcies: We have seen that amount of expected profit will be low at the time of recession. At the same time some of the firms will have to shut down their operation if they can not cover the variable cost. This situation will create bankruptcies in the economy.
Stock Market losses: Performance of the sock market of a country is an indicator of the economic performance. During recession the marginal efficiency of capital is very low. So the people will not have a mind to invest their money in the stock markets. It causes stock market failure.
Fall in Exports and Imports: Demand will be less with respect to supply during recession. It will lead to decline in exports and imports. It affects the balance of trade of the exporting country adversely. America is one of the major trade partners of India. Due to the meltdown, exports to America were stopped for a period of time. This situation played a crucial role in reducing the growth of Indian economy in the financial year 2008 -09.
Lessons from the global economic recession
Present economic system is open with international trade. Therefore recession become a global phenomenon. It is an insomniac and nightmare of many prominent economists. This time we have to learn a lot of lessons from this economic turmoil. If the economy is in the hands of fluctuations every time, it can’t achieve full employment equilibrium. Only an economy without worse effects of trade cycles brings about growth and development. The lessons that can be learned from the recessionary experience may be detailed below.
Need of more government intervention in the financial sector: Earlier we have seen that level of income, employment and output will decrease during recession. In order to overcome recession, demand in the economy should be pushed up. Due to a declined state of aggregate demand, individuals will not invest their money because of the lack of expectation. According to Keynesian sense, this tome government should come to consume and invest more without any profit motive. It will raise aggregate demand and then private investors also will come. Thus the economy will be stabilized from recessionary state.
Don’t spend more than our income: Aggregate demand is good for the economy. But there is a limit in the availability of goods and services. Roots of the present economic recession were from the intemperate consumption. So we have to use money only to satisfy effective demand.
Understand the store of value function of money: According to the classical view, money is only a medium of exchange. It means money has only transaction function. So increase in the quantity of money affects only the price level and other macro economic variables will remain unaffected. But Keyenes said money have three motives. They are transaction, precautionary and speculative motive. Precautionary and speculative motive represents the store of value function of money. From this we can understand that we should be prepared to meet emergencies.
Keep a limit in savings: Savings is good for individuals. But when the full aggregate economy saves more, it will lead to a deficiency in aggregate demand by reducing the marginal propensity to consume. It will in turn lead to recession and then to depression.
Understand the equal importance of product market and money market in the modern economy: People have a misconception that investing money in the monetary institution is the safest way. But along with this saving we have to invest money in the product market also. Only by this way there will be responsible supply of outputs with respect to the demand.
Improvement of social security measures: In order to achieve effective demand and full employment equilibrium, consumption must be increased. People will consume more than their savings only if they have enough social security. Giving more social security is the responsibility of the government.
Need of a strong basement in the monetary sector: The financial sector of a country should be very strong. Central bank of that country can play a crucial role in performing this function. The Central bank should fix strict cash reserve ratio in order to stabilize other banks and monetary institutions.
In the economic history of the world, the most discussed economic systems are capitalism and socialism. All economic theories are formed on the basis of a capitalist economy. Though J M Keyenes created his theory on the basis of a laissez fair two sector closed economy model, he advocated government intervention and gave more importance to fiscal policy than monetary policy. When the recession of 2008 struck the whole world, there arose a question that “should the world move to socialism?”. Even though this is a debatable topic, the meltdown arise the importance of a mixed economic system like Indian economy. In India almost all financial institutions whether it is private or public have a strong base. The best example is when the world sank into deep recession, public and private sector banks in India (except a few ones) achieved more profit. Suitable and effective fixed and monitory measures lead to growth and development. More over we individual should be careful about our economic condition and try to improve our productivity as Keyenes says “If you have no work, go and dig the soil even from their income will generate.”
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