Why do we have a recession now? No, I am not asking why and how recession began. My question is why it is continuing even today.
Our minds, whether at individual or at corporate level, have receded into postponement of spends, whether capital expenditure or revenue. This is because of the losses we say or think we have incurred in the recent market crash. This postponement of spends at individual levels has caused reduction of aggregate demand. It is thus the fear psychosis leading to recession today.
The remedy therefore lies in reversing the situation. If our minds are rejuvenated, this in turn will ultimately regenerate demand and re-energise the economy. No, we do not necessarily need to wait only for Government spending to revive the economy, as is said in the Keynesian theory. The revival of the economy can be made by aggregation of micro demands of individual persons and organisations.
Most of us say that we have lost money in the stock market, in mutual funds, in real estate etc. in the recent market crash. But you will agree that these were really paper money that we have lost, in most cases. Have we been adversely affected in our cash flows because of the market collapsing?
Banks created asset bubbles through hyping up the real estate market and through structured derivative products. They loaned money based on these bubbles and then lost money when the market collapsed. But this money, created by smart bankers, was something they never had in the first place. The losses are mostly in paper and thus notional. Unless it has affected cash flows adversely, we cannot say that the losses are real.
The impact on personal lives, however, has been severe and real. Thousands have lost their jobs and thus lost real earnings and suffered in cash flow terms. There is no denying this harsh truth.
Banks have stopped lending because they apprehend that more they lend the more they will lose (this has always been true). This has created a shortage of fund availability in the market. Industries have been forced to cut back on production on account of lower funds as well as lower perceived demand. The cycle has been completed with resultant job cuts and loss of employment and the vicious spiral is still growing. But it all started in the mind with fear in the market place.
Banks have to lend money to survive, that is their business. Industries need to grow to survive, they cannot hold back on production for ever. If they do, they will perish. We individuals need to live our lives normally (not recklessly though). For example, I need to replace my old car and not postpone the decision because running an old car is more expensive.
We need to spend normally to survive and this will allow the economy to function normally. This is true for banks, industries, government and individuals. When we remove fear and negative thoughts from our minds and carry out our economic and social functions in the usual course, aggregation of these individual micro-demands will rejuvenate the economy and recession will be on the run. Hakuna Matata.Email This Post 1