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Benefits Of Economic Recessions
Recessions are often said to be caused by natural variations in the business climate referred to as the “business cycle” or the “economic cycles.” These are said to occur either for no known reason, or as a result of relatively rapid growth or stagnation due to technology, invention, emotional or perceptive climate, and other factories.
More concretely, though, recessions are often caused by rapid growth, followed by a rapid decline of that growth – such as in the housing market in 2008 (huge growth, irrational growth in many ways – a side effect of rapidity – for the preceding decade, followed by a stop of the growth), the dot-com bubble growing unexpectedly fast prior to 2001, etc.
Rapid changes in economic climates of any sort often creates irrational behavior in the market, both in the sense of people expecting growth that isn’t coming, and in the sense of people making decisions simply based on previous trends.
Joseph Schumpter, a famous economist, theorized about business cycles, suggesting that in fact, there may be as many as 7 different business cycles which effect our economy – the shortest of which, is the simple inventory cycle, rotating every 3 years or so, over the simple amount of inventory businesses can stock and produce, combined with the inelastic effects of such rotating demand.
Keynesian economics might disagree with this view – suggesting that cuts in wages be too inelastic to accurately keep up with changes, and therefore, recessions are in fact caused by falls in prices that cannot be met with equal falls in wages, over time.
Each business cycle leads to different ups-and-downs in the economy; which helps create both booms and recessions.
Recessions clearly have many drawbacks – increased intervention to try to fix people’s difficult lives, to the actual difficulty of people’s lives, it seems everything to do with recessions, even the word itself, is negative.
A recession may help those who practiced diligent saving significantly during the boom – prices fall (short-term), deals become available, and everything seems to be “on sale.”
But alas, there’s another side to everything. Recessions force companies, and even households to be more frugal, to learn and be more reasonable about their personal and corporate finances, and how they spend their money. They force proper management and better decision making.
Of course, the interventionism helps consumers too – the IRS, during the 2008 recession, mailed out a large tax rebate payment to consumers designed to “stimulate” the economy. Of course, it’s unlikely such stimulus works, but to any individual, they reap the rewards of seemingly free money.
With central banks dropping interest rates dramatically in effort to stimulate spending, the ability to borrow money for those who already intended to do so becomes much easier. Or, at least, cheaper; borrowing money in recessions is often difficult, as banks and lending institutions tighten up their policies and credit availability for the same reason everyone else does – they don’t have as much available capital.
Anything I Missed?
So this is the list of Benefits and Causes of Economic Recessions.
There you go guys, take all these points into account when entering the stock market.
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