Recent Recession

It is human nature to make mistakes, but only those people who learn from their mistakes later become successful people in their life, while those who repeat the mistakes achieve nothing. This, holds true for every single person on earth, may it be a student, a businessman, a politician, etc. and also on the world economy today.

Economic recession bothers the governmental leaders of most nations. The Federal Reserve Bank is responsible for responding with the monetary policy during the recession in the United States of America. Similarly, the central banks of each nation respond to monetary policy and recession. The monetary policy for recession in America is famed or modified by the Federal Reserve Bank because it is the central bank of the USA.

The fiscal policy of any nation is extremely important for its smooth functioning. The fiscal policy during recession should be changed in such as way that it would prove to be beneficial for the economy of the country. Whenever there is a downfall in the economy, the fiscal policy should be appositely modified for the betterment of the populace of that nation. Fiscal policy for recession should be framed in such a manner that all the issues that arise in the later period are appositely taken care of.

Today, as all the countries are looking forward to implementing the various ways through which they can help their economy rise above the relief level, the recession policy is the only source that can actually help them gain what they are longing for. The recession policy is the only elements that a government has which can somehow enhance their economic conditions. The recession policy has the power to slowly but effectively uplift the traumatized world economy. The basic recession policy that all the governments of the various countries can possibly follow during this grieve situation include:
1. Monetary Policy for recession:
It has been noticed that a lower interest rate makes people to spend their reserves and investments more openly in comparison to that of the higher interest rates. Moreover, the lower interest rates also lead into other situations such as:
• It reduces the cost of borrowing money or taking loans which thus encourages investment of money.
• It also reduces the cost of mortgage payments which thus increases the disposable income of all the house owners.
• And finally, these lowered interest rates also reduce the incentive savings.
Hence, if the MPC (Marginal Propensity to Consume) cut certain rates then the severe conditions of the recession might possible by avoided. At present, the US interest rates are nearly 1% and thus, the effect of this rate going to a low of 0% on the economy is simply unknown. But, just as we think about the cut rates, there are also certain problems which arise with it.
The various related problems with the cut rates:
• Deflation: With the cutting rates dropping to an all time low, the chances of deflation arise. Even the 0% low interest rates prove to be simply ineffective on deflation.
• Liquidity trap: The cutting rates constrain the expenses or the investments of those business people who have lower confidence in their ideas and work. This is a very common problem today. During a time when loans are cheaper than ever, no one wishes to invest their money in this recession thinking about its variant risk factors.
• Bank loans: Moreover, the banks simply don’t wish to lend loans due to the main reason of liquidity shortage.
• Depricate exchange rate: It is interrelated. A lowers interest rate simultaneously reduces the exchange rate which can further cause the inflation to increase by increasing the cost of all the imports.
• Loss of the savers: As the interest rates in the market are lower than the inflation, most of the savers will have to suffer from a decline in their savings or investments.
• Time lag: And most importantly, these lower interest rates take a minimum time period of 18 months to have a positive effect.
2. Fiscal Policy of recession: For a boost in the economic growth of a country, higher government spending is very effective. But this Fiscal policy of recession depends on a few factors such as:
• Income tax cuts for high earners and the poor.
• Initially, borrowing must be low and then later with the improvement in the conditions it should be raised.
• The time it is implemented as it takes some time to have a positive effect.
But this policy is not guaranteed to bring in a positive result.
3. Increase money supply policy: Some or the other type of radical movements are needed during inflation. For instance, increase the money supply, etc. but these plans are too radical for the monetary authorities to think about. But this is one of the possible ways that a country can try to follow to control the recession effects.

Nowadays, most of the citizens of the world are anxious about the prospects of recession and their announcements. They are worried about their likelihood of the recession in the forthcoming future. Though, most of the folks around the world are unaware about the predictors and announcers of the recession.
The NBER is the organization that identifies the instances of the recession and also they do most of the recession announcements. They excel in the task to announce recession. Their recession announcements are extremely reliable and dependable. Mainly, the NBER makes recession announcements for the United States. The NBER was incepted in the year 1920. NCBR stands for the National Bureau of Economic Research. This private organization is not only a nonprofit but also non partisan. The organization is devoted to find out the workings of an economy. They undertake as well as disseminate the economic research which is highly unbiased and accurate. Almost all the business professionals, public policymakers and academic communities approach NBER. The NBER is engaged in a lot of issues which are related to the society. They are extremely focused on researches related with the examination of the business cycles and economic growth for the long term. Sixteen Nobel Prize winners of America in the sphere of Economics and six Chairmen of the Council of Economic Advisers of the President are researchers at the National Bureau of Economic Research. Four sorts of empirical researches are made by the scholars and researchers functioning at the NBER.
Apart from the National Bureau of Economic Research, there are various indicators of the recession also. If you find a significant drop in the stock markets then you can predict it to be the inception of the recession. However, the drop in the stock market should be at least ten percentage of the market’s overall value. Many experts also rely on the trend of the unemployment rate to announce the recession. Joblessness is also considered to be a reliable indicator for announcing the recession. However, the unemployment rates of at least three months are to be evaluated before announcing the recession.
The index of Leading Economic Indicators is also a very reliable source to predict recession. Numerous factors are included in the index. The factors such as unemployment rates, spending of the consumers, inflation etc is included in the index of Leading Economic Indicators. Before making a recession announcement, reliable references just as the index of Leading Economic Indicators prove to be extremely helpful.

The consequences of the 2004 recession were felt in almost all the continent of the world. The United States, European Union, Australia, Russia, Japan, Eastern parts of Asia and many other countries were adversely affected because of the 2004 recession. There was a period of Boom in the 1990s, therefore many of the economists of the predicted that there would a harsh recession in the 2000s. There was a global recession in 2004 and it’s after effects were endured by mostly all the nations of the globe.
Due to the recession in the United States, many of the employees who had a high pay scale were forced to accept much lower pays. It was declared by the BCD Committee that during the year 2001, there were peak commercial activities in the United States. And the due to this peak the beginning of the undesired recession was started. It was stated by the NBER President, Martin Feldstein that they were still waiting for the supplementary monthly information before they can make a concluding judgment about recession. He also stated that they were unable to make a decision because they did not have sufficient supplementary data. Before the recession in 2004, the NASDAQ had crashed and also the Dot-com Bubble drooped. This had an enormous impact on the recession of 2004. The markets were permanently rebounded in the year 2003, which also contributed largely towards the issues like unemployment and recession in the United States.
It is a fact that the economy of Canada is closely related with the economy of the US. Due to drop in the stocks, the stock markets of Canada were affected very negatively. Giants like BCE and Nortel were also collapsed due to the recession. Even the airline sector was facing a lot of devastation. However, Canada did not follow the economic downturn of the US. They did not have to face the problem of unemployment. Even the fiscal management of Canada during the recession period is highly praiseworthy. They did not introduce any sort of tax cut or any major expenditure during the recession. However, the governments at the provincial level were affected adversely.
Under the leadership of President Vladimir Putin, Russia continued and reasserted the part of the federal government and made it more powerful. The policies framed by Putin were extremely popular amid the Russian citizens. There was a rebound of exports in Russia, and therefore, they were least affected due to the recession of 2004. Japan was also pessimistically affected due to the problem of deflation. However the European zone were only affected for a short while, then their economy was again on the track.

Every single day, we spend some of our time catching up with the rise and the fall of the world economy. Even today, months after the world economy simply crashed from its long maintained great heights, people try to learn about its main reason. For a common man, it all happened in just a few days time. But for those dealing with the share markets and FOREX, the reasons take us far behind today’s time.
USA- The key factor for the fall of world economy:
For a clear view, we need to get back to the past of the housing sector of America. Over sometime back, the property value in the housing sector of America was driving the country’s economy to a completely new level. People easily gained the credit conditions to take the home loans from the perfect combination of the low interest rates and that of the large inflow of the foreign funds. Thus, within a very short span of time, the demand for property shot up and thus also fueled the home prices further more than earlier.
At the same time, the loan agencies widened their plans and strategies to lure people take the loans for their new properties. Looking at the demand for properties, they provided huge bonus values to the customers and thus succeeded in attracting a respectable number of customers. But, at this point in the greed for money, they ignored the general checking procedures such as the repaying capacity of the customers. They had blindly provided huge loans to even those people who are included in the NINJA category, No Income, No Job, No Assets. This disregarded all the principle of financial cautions.
Moreover, as the property value was at an all time high, people made the use of the increased property value so as to refinance their homes at a much lower rate and further gained the second mortgage. The loans providers despite of knowing that the interest rates would increase with the passing time, lured the customers with an all time low interest rate thinking that they would quickly refinance their money under more favorable terms. But this is where the things went wrong. Over construction of houses thus led to the fall of the extra accounts of homes from the year 2006. Thus refinancing became extremely difficult and many people, who were unable to refinance their homes, began defaulting the loans which thus raised the interest rates which worsened the matter.
High price of crude oil:
The Middle East war fears that was pushed upwards by the world wide speculations and the increase in the demand for the crude oil across the world increased the price of the energy sources which acted as the inflationary tax. The high priced production thus lowered the profit value and also at the same time reduced the consumption across. This partially affected the funds of countries across the globe.
Devaluation of the dollars:
The value of dollars in the global market is the key factor for its economy. The Iraq blunder along with the Federal Reserve generated excess of dollars which thus caused the continuous decline in the value of dollars in the global markets. This was pushed further into a grave due to a few other factors related to that of dollar values.
The purchase of crude oil across the world takes place through the dollars. Thus, the fall in the value of dollars means hike in the prices of crude oil. This further added to the problems of high value of the crude oil.
Across the international currency system, dollars are the major reserve currency. Moreover, the various dollar paying investments that include of the US treasury bills, etc. deal with excessive amounts of governments and foreign banks. With the decline in the value of the dollars in the world economy, these huge investments become less luring. But, the smallest disinvestment in these investments would directly affect the bond prices and simultaneously increase the interest rate.
Lastly, dollar value simply prevents the dragging of the US interest rates further lower by the Federal Reserve. Thus, any small value of additional Federal Reserve easing would further cause recession. Thus, all that we can do is wait and let the global market force liquidation on the varied mal-investments. Liquidation is the only way to restore the economic conditions of the market for a better future.