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Escaping Recession

Recession is an economic concept that revisits every economy as frequently as decades. We often hear about recessions in various economies and in a rare enough situation as now – a global pandemic, we experienced a global recession. Economists generally define the cause of recessions with the business cycle, also known as the boom–burst cycle which explains the concept of recession as a phase that inevitably occurs after a phase of a boom in the economy. However, why can’t the economy continue to expand rather than face a recession? Is recession inescapable?


In the graph above, the years are represented on the x-axis while the inflation rate is on the y-axis, showing the regularity of the business cycle. Some economists refer to the cause of a recession to be psychological such as excessive optimism and confidence in the economy which leads to the formation of a bubble as it did during the 2008 financial crisis in the US. Apart from that, unforeseen events like wars or pandemics also result in a recession which may be followed by a depression. Recession includes impacts such as widespread unemployment, capital destruction i.e., idle capital, low standard of living, market lows, and so on in the economy. Because of all the above arguments, people tend to look at recession from the negative bank of the river.

The Austrian School of Economics has quite an interesting take on the concept of recession. They evolve economic policies based on ‘thought experiments’ rather than simply trusting facts and mathematical data. They consider recession as ‘healthy and necessary’. They contemplate recession as cleansing to the economy. They view the recession as a period where labour costs decline, productivity and competitiveness increase and the mismanagement of the economy by the government is exposed. After this corrective process, the foundation of the economy is more stable and healthier, according to the Austrian School of Economics.

The Austrian Business Cycle Theory (ABCT) roots the cause of recession to the fiduciary media of exchange which refers to the predominant function of banks, which is the creation of credit. The creation of money leads to a temporary illusion of a strong economy where the price level and spending are increasing. Nonetheless, the plans of investors, consumers, and savers will be in conflict and the illusion does not last long. However, the system of credit creation offers benefits such as funding industrial development, expansion of the economy and so on which cannot be neglected. Hence, the system of the fiduciary media of exchange will continue to play an important part in the growth and existence of many economies, making the event of recession technically inevitable.

Inflationary policies impact the debasement of money which hits the underprivileged the most. The wealthy will not suffer much when the value of their assets dips a little. Recession isn’t always bad, and it doesn’t necessarily cause loss of business to all. Some industries and professions such as accountants, economists, realtors, property managers, the healthcare industry, groceries, and so forth manage to thrive during a recession.

Politics also has its fair share of the game in deciding and determining the type of monetary policies. To control the boom-bust cycle, the Keynesian theory and the monetary theory by Milton Friedman are utilized by governments. In a democratic form of government, the elected party wouldn’t take up a policy that is bitter in the short term and benefits in the long term as it defies the result scheme that the political parties are re-elected for. The Bank for International Settlements (BIS), which is considered to be the central bank of central banks, states that endless attempts of avoiding recession can have negative impacts. F.A. Hayek comments that the united global defense mechanisms only postpone the crises making the economy more vulnerable to it. Political parties which form the government mostly opt for an inflationary policy with moderate inflation citing the development and progress in the economy. The Mises Institute regards monetary inflation as a form of embezzlement. The concept of inflation or monetary debasement is closely related to the story of the king who collected the gold coins from the public claiming to make new currency and return the same value of the old currency in the new currency. However, while returning the currency he made sure to return the same value with the gold in the coin weighing lesser than what it originally used to, essentially making the value of the currency drop. He used the excess of gold for his expenditures. This was mostly done by kings who couldn’t control their expenditure on par with their revenue. This is very much similar to the situation in most economies today. The government is responsible for the inflation by increasing the money supply in the economy but incriminates the industries and businesses for the rise in price level while taking credit for the economic progress.

The best examples are always at home. Before the 2014 elections in India, during the administration of the UPA (Congress), the inflation of both CPI and WPI was predominantly in the food and associated consumer products, which meant more revenue for the farmers in rural India. However, during the government of the NDA (BJP), the inflation was mostly in non-food commodities, therefore, giving more revenue to businesses than to farmers. Predictably, the support for BJP is more in urban areas than rural areas. Nonetheless, it is to be noted that BJP won 5 times more in rural areas than urban areas in the 2014 elections, as rural areas have 6 times more seats to the Lok Sabha than the urban areas. Having said that rural distress matters in Indian politics, “The present-day voter is concerned more about the ideology than the inflation” , says Sanjay Kumar, a political analyst. Inflation technically creates more money for the government so that the government can maintain the same level of spending without increasing the taxes. Governments also tend to inflate the economy by increasing the money supply when the country has a lot of debt as the debtors are the gainers in an inflation. Nevertheless, inflation produces false market signals that lead to a greater impact post the recession.

A recession is logically not necessary. However, the monetary policies and institutions adopted by the governments and the central banks determine the occurrence of the boom-burst cycle. And, as all modern economies include fractional reserve lending in their banking system that issue fiduciary exchange media under the control of the central bank, the cycle of boom – burst will repeat itself though there is no answer as to why the clusters of businesses and banks which go bankrupt with such regularity. With the present monetary institutions, fiscal policy, and political ideals, recession becomes nothing less than inescapable.

Robertia SaminathanWriting Mentorship, 2021


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