How do recessions happen?

[devilsadvocate]

Ok, so it's only fair to point out right off the bat that I'm quite ignorant of economy and what I'm about to present is literally arm-chair economics. As such, it's possible that I'm pulling Dunning-Kruger's in the most embarrassing way. On the other hand, I think there are plenty of false internalized concepts of economy that are concealed from our view by virtue of being so integrated into our thinking.

I've been perplexed by how do global recessions and depressions happen in ordinary circumstances. It's understandable that there is economic downturn in times of war, in face of forces of nature or when natural resources we depend on become unavailable because of our own practises. But often downturns do not have any such real world explanation. This late recession has been blamed on the banks giving out risky mortgages, and when the loans started to default and estate prices started to snowball down, everyone was losing money. (for a good short explanation of the credit crisis, watch this video: http://www.youtube.com/watch?v=bx_LWm6_6tA .) This in turn meant that banks were wary of giving loans and consumers were not buying products anymore, which lead to vicious cycle of decreased production and bankruptcies of manufacturers and retailers, and more consumers losing their jobs and hence even poorer markets.

The problem for me is the above gives only an appearance of explanation, of which acceptance depends on a mind that is too accustomed to thinking in terms of money and economy that the conception acts as a veil to hide the simple questions:

So, money got shuffled around in careless manner, but what of that? Did something in the real world actually change? How does exchange of numbers on bank accounts make the world so poor that it leads to real and tangible suffering of many? This is perplexing since all the resources of the world, the technology and the labour, are still available to the same degree they were before the recession.

The explanation surely cannot be that we simply ran out of money, since moneys whole conception and existence depends on us. Money is an artificial tool of trade, conceived and collectively accepted by us to make trade of goods and services easier. It's the oil in the machine that makes it go smoother, not the machine itself. Ultimately what we trade is products and services made of natural resources and by our labour - Availability of which neither changes during recession.

Likewise, economy is only exchange and distribution of resources - There seems to me be a widespread misunderstanding that somehow by simply trading and keeping trade going we are increasing our wealth. It is true that we increase our well-being by trading what we value less to things we value more, and it is also true that exchange allows specialization and ultimately more efficient use of labour. However, we have to be careful not to equate this into the ideal that the very act of exchange is what is generating wealth (resources, well-being), instead of enabling it to certain degree. In any case, recession doesn't hold any special powers to stop people from exchanging goods for their own benefit, so the blanket explanation "trade is slowing down" fails.

Another misconception I've found out to be plentiful is giving economy agency. This can lead to defeatist mindset like "Economy is just really bad right now". Are we to believe we are so psychotic and apathetic, that when what is our own construct and absolutely dependent on us (the economy) gets into a tantrum, we are completely at it's mercy as if it had mind and intentions of it's own?

So how do, assuming what I wrote above isn't complete bollocks, recessions actually happen?

 

[ImprobableJoe]

There's two economies, that are only loosely linked to one another. There's the real economy of real goods and services, where real people buy and sell things. Then there's the economy of the financial sector... which is like a crooked casino where the collateral for all the bets is the real economy. All the wins go into the pockets of the big players, and all the losses are inflicted on the real economy. A recession is the period between big losses and the liquidation of human beings to get more chips.

 

[PAB]

ImprobableJoe is quite right. If you havent seen it already do watch Michael Moores 'Capitalism a love story'. It goes over the whole casino syndicate of finance capitalism delving into - what the hell are derivatives (they are fancy complex bets on the actual economy).

And as for the liquidation of human beings to get more chips. Well, look around your local economy. It probably has some form of austerity meausres. But the best case is to look at greece. There, in order to get out of the recession the only option presented is mass privitization and a serious reduction in the standard of living for working people. Greece needs to compete with contries like china for the market...and workers wages are damn low in China. This isn't limited to Greece however. However Austerity cannot solve the problems of the recession. As it cuts the market by squeezing the majority of people and therefore cuts demand. Thus limiting incentive for investments.
In the UK the head of the bank of england expects growth by the end of the year despite UK heading in to a double dip recession along with spain. (I suspect this is a purely political move to support the governments austerity program and sustain confidence and the credit rating)

http://econ.economicshelp.org/2008/08/who-is-to-blame-for-credit-crunch.html - an ok little website (intrestingly they predicted in 2006 the problem which led to the credit crunch but never did anything about it)

The short answer to why Recessions happen is : The contradiction of capitalism.
Good little video

 

[televator]

Joe has it right. The financial institutions have the option of playing their own game with fixed rules. The results usually extract wealth out of the economies that are more tangible to you and me. In cases where they fail and can't pay back what they lost they simply leave the deficits for the citizenry and their government to take care of. They can have all the reward (with little payout to the rest of us) even though they essentially have our backing, and don't have to be responsible for the risks.

 

[ImprobableJoe]

... and you can ignore anyone who spouts "supply and demand" in relation to the real economy, because those rules of thumb are largely broken at this point in time. The financial economy runs on a different sort of a demand, a demand for high-reward investments with only little thought to the risk. Gas prices aren't simply tied to the supply and demand of petroleum, they are now driven by the buying and selling of "oil futures".

To see how ridiculous this all is, I want you to think about sports trading cards. I know you guys have them in the U.K. for the football teams, I don't know how widespread they are in Europe as a whole though. Anyhoo, the market for trading cards is based on supply and demand of certain cards based on factors like rarity, the actual performance and popularity of certain teams and players over others, and the potential future performance and popularity of those teams and players. It isn't actually that bad of a comparison, especially since the teams get a cut of the profits on the initial sale of the cards, sort of like selling shares of stock. So we have a derivative product based on a real-world product, and the real world product acts on classical economic principles that then drives the secondary derivative market that also operates under traditional but inherently less stable rules. After all, if a single player has a bad year it doesn't necessarily destroy that player or that team, but it could really cause the cost of that player's card to hit the basement.

Now, imagine what would happen if the secondary derivative market started driving the primary real-world market. Imagine if instead of contracts, teams and players were put on a stock market where their value would fluctuate wildly with the value of their cards. It would then seem likely that the prices of tickets and concessions would rise and fall based on the relative values of the players and teams as well. None of it based directly on the skill of the players, or the popularity of the teams, or supply and demand of the snacks and T-shirts, but on the potential future worth of the trading cards. A freak flood in someone's basement could send the value of a team soaring, and a discovery of a hidden cache of previously rare cards could cause a team to go bankrupt.

Add in the idea that the card traders remove some amount of value from the market on each trade, do large portions of the buying and selling with other people's money, and dump their losses on the teams and players while keeping the profit for themselves... and you've got the modern-day economy. Much of the money and rises and falls of the real economy are held ransom by uninterested traders who are merely engaged in the buying and selling of bets on the future success and failure of the real economy. The risks are high for the real economy, the rewards go primarily to the financial sector. And since the financial sector is only loosely tied to the real economy, there's no reason to avoid recessions and even depressions. They just sell high and buy low, and make money either way.

 

[ArthurWilborn]

And now for a response from someone who knows a bit more about economics then "It's EVIL ARRRGH!"

Ok, so it's only fair to point out right off the bat that I'm quite ignorant of economy and what I'm about to present is literally arm-chair economics. As such, it's possible that I'm pulling Dunning-Kruger's in the most embarrassing way. On the other hand, I think there are plenty of false internalized concepts of economy that are concealed from our view by virtue of being so integrated into our thinking.

I've been perplexed by how do global recessions and depressions happen in ordinary circumstances. It's understandable that there is economic downturn in times of war, in face of forces of nature or when natural resources we depend on become unavailable because of our own practises. But often downturns do not have any such real world explanation. This late recession has been blamed on the banks giving out risky mortgages, and when the loans started to default and estate prices started to snowball down, everyone was losing money. (for a good short explanation of the credit crisis, watch this video: http://www.youtube.com/watch?v=bx_LWm6_6tA .) This in turn meant that banks were wary of giving loans and consumers were not buying products anymore, which lead to vicious cycle of decreased production and bankruptcies of manufacturers and retailers, and more consumers losing their jobs and hence even poorer markets.

The latest downturn was caused in large part by a credit crisis, with banks being less likely to loan money.

Basic economic concept - capitalism is based on the assumption of continual growth. This is a fairly safe assumption - the population grows, technology improves, more resources are found, etc. Credit is a bet that, if you have they money now, you can make it grow faster then the cost of the credit. This is usually a pretty good bet if you're good at business. By trading in on growth - that hasn't happened yet - you can make things grow even faster. However, if you don't have access to credit, growth slows.

So, money got shuffled around in careless manner, but what of that? Did something in the real world actually change? How does exchange of numbers on bank accounts make the world so poor that it leads to real and tangible suffering of many? This is perplexing since all the resources of the world, the technology and the labour, are still available to the same degree they were before the recession.

Kind of - economies rarely suffer any actual capital losses except in catastrophe. The slowing of growth is one factor -the jobs and wealth that should have been created by credit but weren't. The other loss was in growth that shouldn't have happened based on the bad bet that was made on the future. Like building a house on top of a sinkhole. All the industries that were based on bad lending collapsed, and it had a knock-on effect on whatever that money was used for. The economy being interlinked as it is, that hits everywhere eventually.

The explanation surely cannot be that we simply ran out of money, since moneys whole conception and existence depends on us. Money is an artificial tool of trade, conceived and collectively accepted by us to make trade of goods and services easier. It's the oil in the machine that makes it go smoother, not the machine itself. Ultimately what we trade is products and services made of natural resources and by our labour - Availability of which neither changes during recession.

Quite - money is not wealth, as I've said before.

Likewise, economy is only exchange and distribution of resources - There seems to me be a widespread misunderstanding that somehow by simply trading and keeping trade going we are increasing our wealth. It is true that we increase our well-being by trading what we value less to things we value more, and it is also true that exchange allows specialization and ultimately more efficient use of labour. However, we have to be careful not to equate this into the ideal that the very act of exchange is what is generating wealth (resources, well-being), instead of enabling it to certain degree. In any case, recession doesn't hold any special powers to stop people from exchanging goods for their own benefit, so the blanket explanation "trade is slowing down" fails.

Umm... what? Yes, for the reasons that you yourself mention, trade does indeed create wealth. Increased efficiency is one of the key ways wealth is created, by allowing greater effect with the same amount of resources.

Most trade is done on credit, so the credit problem comes up here, too.

Another misconception I've found out to be plentiful is giving economy agency. This can lead to defeatist mindset like "Economy is just really bad right now". Are we to believe we are so psychotic and apathetic, that when what is our own construct and absolutely dependent on us (the economy) gets into a tantrum, we are completely at it's mercy as if it had mind and intentions of it's own?

"Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy."
http://en.wikipedia.org/wiki/Consumer_confidence

So how do, assuming what I wrote above isn't complete bollocks, recessions actually happen?

And my pastor will be happy to tell you about Jesus, as long as you assume god is real and has spoken to us. :roll:

 

[Master_Ghost_Knight]

Although I do agree on some points and not others, I know that I am not an economist, but correct me if I am wrong, that very little attention is being paid to cash flow. Where has the money gone? Unless stacks of money is being set on fire or being put in or taken out of circulation, the amount of actual money is more or less fixed.
ArthurWilborn mentioned the consumer confidence indicator, that although interesting it doesn't seem to very practical much due to the fact that there is no effective way to access it, and even if you could it really doesn't tell you much about the causes of why people are not trading. For very different reasons we know why they are not trading, because they simply have no money much due to the fact that they have no jobs, they have no jobs much due to the fact that there is no trade of commodities which loops back again to people not having any money to trade.
So here we have a group of people who want certain commodities and are willing to produce those same commodities but they don't because they are stuck in this closed loop where there is no money (money that is in essence just to give the feeling that you are getting something in return for your efforts). And only if they had some money, they would produce and they would trade (and in the end of the day all you wanted was the products of production).
So going back to my premise that money didn't simply evaporated out of existence, where is it?

ArthurWilborn also mentioned that:

Basic economic concept - capitalism is based on the assumption of continual growth. This is a fairly safe assumption - the population grows, technology improves, more resources are found

And I strongly disagree that it is a safe assumption. It is actually very narrow minded to be limited to perspective of the now and expect that you can continue at it forever. Everywhere that presumptuous assumption was made has invariably came back to bite us in the ass with severe consequences. There is no such thing as limitless expansion, and it should be kind of obvious much due to the implication that if that were to be true at some point you would be needing an amount of resources that exceeds what is available in the universe. Given this, of course there very important factors that are to great not to be taken into account but that everyone is simply missing. And when the system inevitably fails (way before you can use every resource in the universe, and indeed) due to more down to earth limitations, everyone is wondering "how could this have happened?" What I wonder instead is "How could it not?"

 

[ArthurWilborn]

Although I do agree on some points and not others, I know that I am not an economist, but correct me if I am wrong, that very little attention is being paid to cash flow. Where has the money gone? Unless stacks of money is being set on fire or being put in or taken out of circulation, the amount of actual money is more or less fixed.

This depends on what you mean by "actual money". But the money supply, in terms of both numeric value and total spending power, is most certainly not fixed. It is constantly growing.

ArthurWilborn mentioned the consumer confidence indicator, that although interesting it doesn't seem to very practical much due to the fact that there is no effective way to access it, and even if you could it really doesn't tell you much about the causes of why people are not trading. For very different reasons we know why they are not trading, because they simply have no money much due to the fact that they have no jobs, they have no jobs much due to the fact that there is no trade of commodities which loops back again to people not having any money to trade.
So here we have a group of people who want certain commodities and are willing to produce those same commodities but they don't because they are stuck in this closed loop where there is no money (money that is in essence just to give the feeling that you are getting something in return for your efforts). And only if they had some money, they would produce and they would trade (and in the end of the day all you wanted was the products of production).
So going back to my premise that money didn't simply evaporated out of existence, where is it?

Some of it is taken out of circulation, stuck in bank accounts and bonds instead of being invested into growth and expansion. Less is available because there is less credit - credit expands the current money supply.

ArthurWilborn also mentioned that:

Basic economic concept - capitalism is based on the assumption of continual growth. This is a fairly safe assumption - the population grows, technology improves, more resources are found

And I strongly disagree that it is a safe assumption. It is actually very narrow minded to be limited to perspective of the now and expect that you can continue at it forever. Everywhere that presumptuous assumption was made has invariably came back to bite us in the ass with severe consequences. There is no such thing as limitless expansion, and it should be kind of obvious much due to the implication that if that were to be true at some point you would be needing an amount of resources that exceeds what is available in the universe. Given this, of course there very important factors that are to great not to be taken into account but that everyone is simply missing. And when the system inevitably fails (way before you can use every resource in the universe, and indeed) due to more down to earth limitations, everyone is wondering "how could this have happened?" What I wonder instead is "How could it not?"

The economy has constantly expanded throughout the whole of human history, barring catastrophes. There may be some limit on expansion due to the physical constraints of the universe, sure - but we're nowhere near it right now. When we get to the point where further growth is impossible then we can reevaluate that, centuries from now - but I for one want to reach that point as soon as possible.

 

[PAB]

I have to start with my new favorite quote by William Morris.

"Private property is public theft"

ArthurWilborn mentioned the consumer confidence indicator, that although interesting it doesn't seem to very practical much due to the fact that there is no effective way to access it, and even if you could it really doesn't tell you much about the causes of why people are not trading. For very different reasons we know why they are not trading, because they simply have no money much due to the fact that they have no jobs, they have no jobs much due to the fact that there is no trade of commodities which loops back again to people not having any money to trade.
So here we have a group of people who want certain commodities and are willing to produce those same commodities but they don't because they are stuck in this closed loop where there is no money (money that is in essence just to give the feeling that you are getting something in return for your efforts). And only if they had some money, they would produce and they would trade (and in the end of the day all you wanted was the products of production).
So going back to my premise that money didn't simply evaporated out of existence, where is it?

By 'trade', in the context of consumer's, i assume you mean the buying/purchasing of 'final'products.

Despite the claim by some that we live in a classless society, that everyone today is middle class, we actually still live in a class society. Capitalism is a class society. And i think this is important to understanding the economy. Economics is always the political economy otherwise its only one side of the coin.
'People' are not spending money. Now working people who get their purchasing power in the form of wages have seen stagnation or a fall in their wages. Meaning they have a limited and reduced power to buy the products that they have produced. Credit was used as a prop to hold up purchasing power.

So if we treat money as a store of value. It is the representative medium of value in the economy. Then money has not disappeared nor has value.
In the production of value's workers are paid in wages, (which is the price for their good-labour power.) less then they socially produce. We aren't talking individually here but socially- workers produce value but are only given a part of that value. Part of the value is appropriated via the capitalist employer. Who usually invests most of it back into capital (resources and the means of production). And of course takes a generous sum for themselves and part may go to rent.

The recession is a symptom. Their are normative business cycles. But then their are organic crises of capitalism. All that reinvested money converted into more capital, more production-(growth) along with stagnated wages and reduced or reducing purchasing power, causes crises of overproduction. Which is both a productive and consumptive crises.

Where is the money- The rich i.e. the capitalist class are sitting on a mountain of money -reserved capital if you like.
Normally they would invest it, but are limited by no demand i.e. no market and their is a shriveled market because of the crises of capitalism.

What is being done to make capitalist invests- incentives for them to take risk. In the UK, state insured construction projects to meet demand for housing. And the tearing up of workers rights which have been fought for and gained over 200 years to generate a 'flexible' workforce. (i.e. Beecroft and the new vauxhall plant deal with general motors)

 

[ArthurWilborn]

... What? Wages go up in most professions, excepting some moderate-skill professions, and that's somehow a "crisis"? Some professions do better then others - that's going to happen in any economic system.

And PAB - communism? Seriously? Name a time, one time, when that's ever worked out well.

 

[australopithecus]

And PAB - communism? Seriously? Name a time, one time, when that's ever worked out well.

Hunter/gatherer communities.

 

[ArthurWilborn]

And PAB - communism? Seriously? Name a time, one time, when that's ever worked out well.

Hunter/gatherer communities.

Ok, one time that's relevant to the current discussion.

 

[PAB]

Ok, one time that's relevant to the current discussion.

there has never been a communist society, apart from a form of primitive communism.

Now the soviet union was a disaster right ?

well first it wasn't communist, nor really was it socialist. Communism being a classless and stateless society. And socialism being the first stages of that society whereby private property and the state are appropriated by the majority -the working people.

The soviet union was the first stages of socialism, a workers state. Which degenerated in the form of bureaucratic power with Stalin at the lead. (The bureaucratic in my opinion was the limiter and destroyer of the soviet union)

The Russian revolution, the establishment of the soviet union, was not a disaster, although many disasters arose for numerous reasons, famine, war communism, forced collectivization etc.
. Was Russia (economically) developed by these communist revolutionaries who set up a planned economy based on nationalization and expropriating private property ? YES.

Illiteracy basically eradicated
public health service
Women's rights

and of course, Russia developed into a 'superpower' and had that cold war with america, not that this is a good thing but they couldn't have done so with a completely failed economy.....

I am advocating communism, i am advocating socialism. Im advocating the re-appropriation of private property which is always socially produced back into a social-public property for the use and benefit of all.

I remember a fellow telling me what made him realize capitalism had ceased to be progressive. Watching a program he saw hundreds of thousands of mosquito nets in a warehouse. And then many thousands dying of malaria . The mosquito nets could not be sold to the dying Africans and those such as newly borns at risk because the Africans did not have what we may call "effective demand" i.e. not enough cash. Therefore the nets stayed in the warehouse where they would only make it over to Africa if people in other countries felt like donating to charity to save a couple of hundred lives.

An international planned socialist economy would have solved this problem.

 

[ArthurWilborn]

I remember a fellow telling me what made him realize capitalism had ceased to be progressive. Watching a program he saw hundreds of thousands of mosquito nets in a warehouse. And then many thousands dying of malaria . The mosquito nets could not be sold to the dying Africans and those such as newly borns at risk because the Africans did not have what we may call "effective demand" i.e. not enough cash. Therefore the nets stayed in the warehouse where they would only make it over to Africa if people in other countries felt like donating to charity to save a couple of hundred lives.

An international planned socialist economy would have solved this problem.

Ha ha ha ha no. The mosquito nets would never be made in sufficient numbers; there would be shortages.

Just look at Venezuela, who in the last decade has done what you suggested and had the government seize control of many private industries. In a decade they went from one of the most prosperous countries in South America to having shortages of:

Basic food items
http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?pagewanted=all

Energy
http://www.nytimes.com/2009/11/11/world/americas/11venez.html?_r=3
http://www.bloomberg.com/news/2011-05-23/venezuela-plans-to-ration-power-for-second-year-minister-says.html

Water
http://news.bbc.co.uk/2/hi/americas/8339247.stm

However, no shortage of inflation
http://af.reuters.com/article/energyOilNews/idAFL1E8H57FG20120605

or penis phones!
http://www.guardian.co.uk/world/2009/may/11/chavez-venezuela-mobile-phone-vergatorio

Oh wait, yes there is.
http://caracaschronicles.com/2011/05/19/the-return-of-depression-inducing-economics/