Recession: To greed or not to greed.
The Sunday Feed!
A recession is an economic term that refers to a significant decline in economic activity within a specific country or region. It is typically characterized by a contraction in the gross domestic product (GDP), a slowdown in business activity, rising unemployment rates, reduced consumer spending, and declining investment.
During a recession, various factors contribute to the negative economic trend, such as decreased consumer confidence, a decline in business profits, reduced industrial production, and tightening credit conditions. These factors often create a downward spiral, leading to further economic decline.
Recessions can have widespread effects on the economy and society as a whole. They can result in job losses, reduced income levels, increased poverty rates, and financial hardship for individuals and businesses. Governments and central banks often implement measures such as fiscal stimulus packages, monetary policy adjustments, and other interventions to mitigate the effects of a recession and promote economic recovery.
It’s important to note that economic cycles are a natural part of market economies, and recessions are considered temporary periods of economic contraction. Eventually, economies tend to recover and enter a period of expansion.
Throughout history, there have been several significant recessions that have had a profound impact on economies worldwide. Here are a few notable historic recessions:
1. The Great Depression (1929–1939): The Great Depression was one of the most severe and prolonged economic downturns in history. It began with the stock market crash of 1929 and lasted throughout the 1930s. The depression originated in the United States but quickly spread to other countries. It resulted in massive unemployment, bank failures, a sharp decline in industrial production, and widespread poverty.
2. The Oil Crisis Recession (1973–1975): This recession was triggered by the oil crisis of 1973 when the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo on countries that supported Israel during the Yom Kippur War. The resulting oil price shocks caused a global energy crisis, leading to inflation, high unemployment rates, and a significant economic downturn in many countries.
3. The Dotcom Bubble Burst (2000–2002): The dotcom bubble was a speculative boom in technology stocks during the late 1990s. However, by early 2000, many internet-based companies began to experience significant losses, leading to a market crash. This event resulted in a recession that impacted the technology sector and affected the broader economy, leading to job losses and decreased business investments.
4. The Global Financial Crisis (2007–2009): The Global Financial Crisis, also known as the Great Recession, was triggered by the collapse of the U.S. housing market and the subsequent subprime mortgage crisis. It quickly spread across the globe, causing major financial institutions to fail, stock markets to plummet, and economies to contract. This recession resulted in widespread job losses, foreclosures, and a prolonged period of slow economic growth.
These recessions, along with others not mentioned, have shaped economic policies, influenced financial regulations, and served as lessons for managing and mitigating economic downturns in the future.
While recessions are primarily driven by economic factors such as declining demand, reduced investment, and financial imbalances, psychological factors can also play a role in exacerbating or prolonging economic downturns. Here are some psychological factors that can contribute to recessions:
1. Consumer and Business Confidence: During a recession, consumer and business confidence often decline. Consumers may become more cautious about their spending, leading to reduced consumption.
2. Fear and Uncertainty: Economic recessions can create a climate of fear and uncertainty among individuals and businesses. Fear of job losses, financial insecurity, and a general sense of economic instability can lead to reduced spending and increased savings, further dampening economic activity.
3. Herd Mentality and Behavioral Biases: Psychological phenomena such as herd mentality and behavioral biases can contribute to economic downturns. During periods of economic uncertainty, individuals and investors may exhibit herd behavior, following the actions of others rather than making independent decisions.
4. Loss Aversion: Loss aversion refers to the tendency of individuals to feel the pain of financial losses more intensely than the pleasure of equivalent gains. During recessions, the fear of losing wealth or investments can lead individuals to adopt risk-averse behavior, reducing spending and contributing to a contraction in economic activity.
5. Credit and Debt Psychology: Credit plays a significant role in modern economies, and excessive borrowing can contribute to economic imbalances. During periods of economic expansion, easy access to credit may lead individuals and businesses to accumulate high levels of debt. However, when a recession occurs, the psychology shifts, and there can be a heightened aversion to borrowing and a focus on debt reduction, which can further constrain economic growth.
The COVID-19 pandemic caused a global recession as governments implemented lockdown measures to control the spread of the virus. These measures led to widespread business closures, job losses, disrupted supply chains, and decreased consumer spending.
The economic impact varied across countries, but it was one of the most severe and globally synchronized recessions in recent history.
The Reserve Bank of Australia has increased the interest rates 12 times in a year. The rationale is to reduce the supply of money to curb inflation. Most of the money earned by people will now go towards funding their property or paying rent.
However, I think it is a well-thought-out strategy to make people understand that they should spend only what they can afford. Because, apart from the natural crisis, the one factor that really facilitates recession is greed resulting in overspending till the consumer realizes that things are way too overpriced for their worth.
But while controlling greed can be good on a personal level, it can be detrimental when it comes to new products or services. If everyone gives it up, startups will never succeed.
So, while many try to find a way out, some keep repeating, “It is good to be rich!”
John Khalkho: CEO — Dolores Education