Wednesday, 26 November 2008

The Truth About Recessions

The numerous bailouts of financial institutions and "financial stimulus" packages promised by both George Bush and Barack Obama have not stopped the financial crisis from plunging to ever-lower depths. As more and more money is pumped into the economy, the crisis grows worse.

What officials from governments in the US and around the world don't realise is that attempts to increase consumer spending are exactly what you don't want in a recession. Prices need to fall for the economy to start up again. Recessions are caused by overvaluation of products and services, by using a claim on future production to buy those products and services at current levels. Normally, this would be alright, as money would be diverted from other areas of spending to paying off debt. However, government inflation and expansion of the credit supply have led to artifically increased demand for products, and as thus, price hikes.

A recession is a large market correction, putting the prices of goods and services back at their true levels of demand. Therefore, the last thing government should do is to try to keep prices at their overvalued levels, in the interests of preserving an unsustainale economy.

Instead, with falling prices, businesses have the opportunity to rejuvenate themselves, as not only does demand for consumer goods falls, but also capital, natural and human resources. It also means that failed business and economic models can be replaced with better ideas -this is seen in the fact that many great corporations were formed during a recession. If anything, it means that people can start working from the ground, up.

Over the long term, a recession is a boon to the world economy. There is always short-term suffering (caused by the shortfalls of the inflation-induced boon-and-bust cycle), but it is far better than holding off for an even greater doomsday in the future.

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