Saturday, July 23, 2011

Let's Talk About Recessions!

This week I want to talk about recessions. I have been increasingly curious about previous recessions since it seems the one we are in will not let up. So I did a little research and the top 3 recessions I deem rememberable aside from the one we are currently in are the following:

1. Tulip Mania!

This is a Dutch Recession that happened in the 1630s. People were going nuts about tulips and the price skyrocketed and then all the sudden dropped off. The thing that hurt the most is the bubble got so big that people were selling all their belongings and even houses to purchase tulip bulbs. Some bulbs being purchased were still in the ground. And even further, toward the end of 1636, a lot of bulbs were being traded without the actual physical bulbs present- basically trading debt. And in about February of 1637, the market crashed and contract prices plummeted causing everyone heavily invested in the bulbs to go broke, the people that sold their house to be homeless, and the Dutch economy suffered for sometime afterward.

2. Post WW1

In 1920 and 1921 we had a deflationary recession... deflation is bad because when people expect prices of items to decrease, they stop spending and when people stop spending, businesses collapse and when businesses collapse so does the economy. Along with the decrease in prices of goods, the pay for workers decline as well. Not a good deal. The deflation experienced during this particular recession was about 18%. That's a lot. And the Recession lasted about 18 months, and even though that's not terrible in terms of time of recession the effects of the 18% deflation in such a small amount of time had catastrophic effects. One theory on the cause of this recession, in addition to the changing of monetary policy around 1919 was all the soldiers coming back rapidly filling up the civilian workforce. (One might wonder if the administration is worried that a complete recall from the Middle East could cause further economic turmoil in today's wartime. With a 'real unemployment rate of close to 11%, I can't imagine what we would look like if we flood an already tumultuous civilian workforce.-- but I'm not economist.)

3. The Great Depression  

This one is worldwide and most people are educated on the basics. The timing was varied depending on what country you lived in, but it was generally around 1929-1930. It lasted all the way to the late 1930s and in some countries the early 1940s. It was one of the saddest times for world humanity. It started in the US and really went international on October 29th, 1929 aka Black Tuesday. Unemployment in the US reached 25% and nearly all prices dropped off including crops which fell off 60%. The exact cause of The Great Depression is many, but ultimately it comes down to the fact that we mismanaged avoiding a recession. The reason we set interest rates and toy around with monetary policy is to cause inflation. We don't want to cause too much inflation but we also don't want to have negative inflation aka deflation because of reasons described earlier. But the problem is that the machine is too complex to completely control and when they realize there is a problem, it's too late. Then soon after we recovered from the Depression the US was introduced to WW2. Definitely a rocky time in US history.

SO... We have had other recessions and depressions. We had the Internet Bubble not too long ago, but there is no getting around the fact that the current economic situation is not ideal. I have so many friends that have the hardest time finding a job and I want so much better for every one. But ultimately, if we can learn anything from history... especially The Great Depression... it's that we will correct and life will go on.

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