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Major factors that cause recessions Major factors that cause recessions
by Joseph Gatt
2019-04-15 10:28:30
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Nine major factors that cause recessions, in no particular order.

Commercial value overestimation

If you overestimate the commercial value of a home or a product, and that it is done at a large scale, you're soon in for a recession. That happened with the overestimation of commercial values of homes during the 2008 recession, and with the overestimation of the commercial value of the Internet in the 2001 recession.

That is when a product is launched its value is always speculative. If I'm about to start selling cookies, I might find the right arguments to convince investors that my cookies are going to sell. But if the media goes crazy about cookies in general, calls cookies “the next big thing” and runs stories about cookie factory owners driving Ferraris, soon enough everyone's going to invest in cookie factories, but the problem is not that many people are going to buy cookies in the end.

The housing market is always tricky because when housing prices keep going up, people start building housing everywhere thinking it's going to sell at high prices. While housing in Manhattan or Gangnam or Tokyo or London might sell at decently high prices, housing in surrounding areas are probably not going to sell as much as expected. And the further you go from Gangnam or Manhattan, the less people are going to want to buy housing.

Same goes for the Internet. While some companies made billions from Internet operations, there's absolutely no guarantee that all companies that have something to do with the internet are going to have commercial value.

resses_400Income potential overestimation

Now you might overestimate the earning potential of housing or companies, you might also overestimate the earning potential of individuals. Remember when people said that you always find a job with a college degree, or that you're sure to find a high-income job if you graduate from Harvard, or that you're sure to make six figures if you graduate from a top-level French business school.

The problem with earning potential is no one is sure to find a job, much less to keep his job. Harvard graduates sometimes have as much trouble keeping their jobs as any other college graduate, often because they are not up to the task. French top-notch business school graduates were so convinced they were going to find jobs out of graduation that they drank themselves through college, and their employers did not want drunks.

Empire building

Every now and then you elect a President or a Prime Minister who wants to build an empire. Now those leaders want their country to lead the world in just about every indicator, and start forcing companies to launch grandiose projects, want companies to invest in just about every place you can invest, and focus their intelligence services on foreign investment rather than more pressing issues (such as North Korea).

The problem with empire building is overinvestment. Japan overinvested in the 1990s, thinking it would overtake the US. China is currently overinvesting and building an empire, while Qatar is also building an empire.

The problem with empire building is it's kind of like high stakes gambling. Your projects aren't always going to work, a lot of investment ventures might fail, and soon enough you get a recession. Remember those fancy mega retail shops they built in the 1990s in Japan or in the 2010s in China and South Korea? They are basically empty, and a lot of them have been torn down. Mega cities? Ghost towns. Mega farms? Low crop yield. Mega projects overseas? Ghost towns.

Capital flight

If people can't start a business in your country, they're going to start one abroad. That is as soon as  they make a little bit of money in your country, they are going to find ways to invest it overseas. Remember all those Israelis in the 1980s when faced with crushing bureaucracy to start a business, who all went to Canada or the US to start electronics shops. They could have opened electronics shops in Israel, just that you weren't allowed to sell color TVs until the 1980s, and you needed all kinds of paperwork to sell radios because of the belief radios posed a security threat.

Today thankfully it's a lot easier to start a business in Israel, but in a lot of countries, people will make a few thousands in your country and hope to make millions overseas. While the brain drain is a major issue, the main problem is the entrepreneurial drain. You end up in a country with no entrepreneurs, and soon collapse.

Security concerns

If people aren't sure they can go out in the streets without getting mugged they are not going to start a business. If hold ups are common people are not going to start businesses and are going to shut down their businesses. If people don't go out, the economy doesn't run smoothly.

Policy meddling

You can have security in your country, but if politicians constantly change laws to favor one business over the other, or change laws to welcome a business before the business regrets ever coming in, you get recessions.

Some countries are notorious for changing business laws frequently and with little consultation, forcing businesses to close down, people to lose jobs, and not to be able to find new jobs.

Inflexible labor policies

There's what I like to call “warm countries” and what I like to call “cold countries.” In “warm countries” (not necessarily related to the weather) people tend to treat each other with respect and have few fears of losing their jobs. If they do lose their job they can talk their way into getting rehired, or can get hired by another warm hearted folk.

In “cold countries” people tend to treat each other coldly, and when you get fired, you aren't always given a reason nor can you talk your way into keeping your job. So in “cold countries” people want job security to protect them from cold hearted bosses firing them for no obvious reason.

The problem in “cold countries” is that it's hard to find a job, it's hard to lose a job, it's also hard to keep a job, and it's even harder to find another job if you lose your job. But if people don't have jobs and aren't sure they can keep their jobs, they tend to save a lot of money, and tend to spend less, and also tend to make less money because they don't have jobs.


The problem with monopolies is when the company holding the monopoly prevents other companies to even start competing with them. Soon enough a black market emerges for alternative goods, or people drop the good altogether, or the company holding the monopoly engages in reckless deals, and if you have lots of companies with monopolies, the economy collapses.

Opaque social networks

Business is as much about financial capital as it is about social capital. Businesses need open access to a social network to find human resources, a network of distributors, advertisers, government officials and every person you need to come into contact with when you operate a business.

The problem is, in some countries, you can't find a plumber, you can't find an electrician, you can't find a qualified accountant, you can't reach the advertising company to advertise your product, you can't find engineers to come fix your machines, you can't get in touch with the packaging company, and the government official gives you the cold shoulder or refuses to deal with your patent application. Put that on a large scale and the economy can't work.

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