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Eureka: What causes recessions?
by Jay Gutman
2016-12-02 11:05:58
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To understand how recessions work you need to know that there are basically three types of national economies worldwide: free market economies, socialist economies and nationalist economies. In free market economies, the government spends as little as it can, and leaves it up to investors to find consumers. In socialist economies, the government spends a lot of money, invests and pays consumers. When there’s a recession on free market economies, we talk about investment crisis or consumer confidence crisis, while in socialist economies we tend to talk about austerity.

reces01_400The third type of economy, nationalist economies, is a term few economists use and I believe I’m one of the first to mention. These economies were common in totalitarian regimes in Europe or in East Asia, and is an economy where the government joins hand with a few large conglomerates, and where there’s an obsession with being number one. There are those who play tennis because it’s fun, those who play tennis because they like competing, and those who want to be world number one at all costs. Nationalist economies tend to hide recessions and tend not to be comfortable with anything other than double digit growth rates. A lot of times, they cite genetic superiority coupled with cultural superiority, coupled with a God-given mission to rule the world, employing vague terminology in the process.

In free market economies, people save money, invest it by producing goods, people buy the goods, and the cycle repeats itself. Recessions happen when too many investments chase too few consumers or when too few investments chase too many consumers. If too many investments are made you get a financial crisis, if too few investments are made you get shortages. In a financial crisis banks shut down or inflation makes people lose their savings and in case of shortages you get high unemployment and long queues to buy goods.

Why would people invest too much or too little in any economy? Banks get an inflow of savings they are eager to use and give away for investment. When people save too much money too much is invested and those investments can’t find their consumers. That is if everyone runs on tight budgets to save for retirement, there’s a big possibility that banks can start giving away loans to people who don’t really have a tribe of consumers in mind. That’s when you get empty allies full of bars. The most affected countries by this scheme are Japan, South Korea, Taiwan and the People’s Republic of China, where the respective governments encouraged, almost forced, savings during the 2000s decade only to give away the savings to investors who wanted to build the next facebook or the next TGI Friday’s, leading to lots of phone applications no one uses and empty restaurants and pubs. Canada and Australia, watch out.

In socialist economies, the government mostly gets its income from a few government-owned companies and redistributes the income among the population. Such government-owned companies can have domestic consumption or exports in mind. When government-owned companies produce goods for the local population, those are usually funded by inflows of cash such as that of tourism or remittances.

When modern Greece, a country that blends free market with some socialist elements, built more tourism infrastructure than it needed for the 2004 Olympics and that Greeks were making ambitious investments believing the world would come running for Greek products following the surprise Euro 2004 victory of Greece, the government quickly realized it ran out of cash as a traditionally government-oriented economy started giving away funds for free market investments, but the consumers were not there.

The Greek experience is one that many socialist economies had when transitioning to a free market economy, that is the government puts investment money up for grabs, people open shops, not enough clients come in, or in some cases, people take the money for consumption rather than investment purposes.

In socialist economies, if the governments’ main source of income runs dry, or if the government has income but wants to transition to a free market economy and just gives it away, you get recessions. The government tends to be blamed, and the government calls for austerity measures, that is if you work for a government-owned company, you’ll have to accept a pay cut or getting your paycheck every three months instead of every month. In such cases the government will need to find alternative sources of income and call the IMF for help and assistance. The alternative sources of income include primary industrial products (agriculture) as well as secondary industrial products (finished goods) tertiary industrial products (leisure and services) and what are now called fourth industrial products (communication technology and virtual services).

As for nationalist economies, they blend socialist and free market elements, but children are taught early on in life that you have to be the best at everything, that you have to be number one. Such economies tend to overspend on “marketing” that is on trying to advertise and blatantly display wealth. Traditionally advertising expenses are reduced to a small percentage of the profits, but in such economies a lot more is spent on advertising. Such economies need to cut advertising costs, and need to give up the messianic belief that God ordered them to be number one. Such economies tend to reject foreign investment and place restrictions on imports while trying to get the best export deals, which means that if local finance runs dry, people get anxious around foreign investment, which further aggravates the case.  

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