recession

a general slowdown in economic activity over a sustained period of time

Recessions are characterized by a fall in production (a decline in Gross Domestic Product for two or more consecutive quarters), employment (at least 1.5% rise in unemployment within 12 months), investment spending, capacity utilization, household incomes and business profits.

Governments usually respond to recessions by decreasing taxation, increasing government spending and/or lowering interest rates. Let’s look further into these three measures:

• decreasing taxation is a way to relieve the financial pressure supported by tax payers and businesses, therefore promoting investment;
• increasing government spending, i.e starting new projects, is a way to spark growth by giving companies business so that they keep running and give people work;
• lowering interest rates is a way to promote businesses’ investment and households’ consumption in order to boost the economy. It makes it easier for companies to borrow in order to invest and produce more. It also makes it easier for people to borrow in order to buy the products produced by those companies.

In the current economic crisis, the US government is also resorting to a more drastic solution given the depth of the problem: printing more money. How is this helping the situation? First of all, part of the printed money goes to the banks in order to prevent the banking system to collapse. Part of the money is also given to major companies that are in financial trouble (it is said that companies are bailed out) in order to keep them running so as to prevent further unemployment. Finally, printing money is also a way of desinflating debts (in the case of loans with fixed interest rates only). As more money is chasing the same amount of goods, prices go up (a phenomenon known as inflation), goods cost more, businesses’ profits rise and wages also go up over time. As profits and wages rise, any debt (again, provided the interest rate is fixed) is relatively worth less that it used to be. The downside of printing more money though is that the currency loses value. Therefore savings are worth less, which is a setback for savers.

If the recession is severe (GDP down by 10%) or prolonged (three or four years), it is called a depression.

Find this term in Shortoncashflow’s following entries:

• Does the Media Want to Hide the Economic Truth?
• This Rally Is Devastating my Brokerage Account