Defining recession is not an easy issue specially when there is no widely approved definition for recession. Newspapers and popular business tabloids suggest that recession is a period of general economic decline that causes and results in decline in the Gross Domestic Product of a country for two or more consecutive economic quarters of a financial year. The conventional associated indicators, causes or results of recession are considered to be a decline in stock market figures, dropping realty sector prices, and a steep rise in unemployment rate. Yet, the definition does not emphasize on any such consequences and hence it cannot be termed as a universal definition of recession. Furthermore, with this definition of recession that depends on two quarters of financial year, it is very difficult to mention the exact point of time of the beginning of recession and it is impossible to suggest what was the actual cause of recession. That is, recession remains a mystery.

Is USA is under recession?

Right since January 2008, a liquidity crunch was experienced by the non-financial companies and individuals and that resulted in job cuts. The average job loss of USA for the eight months was 81,900 job cuts per month by September 2008, during the last four months, it was 483,500 per month. Unemployment rate caused consumer spending to fell by 3.8% in the three quarters of 2008 and in fourth quarter it fell by 36% below the final quarter of 2007.Hence, the National Bureau of Economic Research’s Business Cycle Dating Committee declared that the US economy is in recession since January 2008¹ .

The mainstream economists and media pundits suggest that the cause of a recession is the tight money policies and raised interest rates by the Central government that results in liquidity crunch and causes job cuts, declining consumer spending and hence a recession² . They thus support that stimulating the economy with easy money, governmental loans, huge stimulus packages and lowering interest rates may help the economy in bringing the boom again. The idea suggests that the Market cycles of Boom and Burst originates from the central bank action of expanding the money flow in the market and contracting it. They suggest that proper stimulus packages and government spending over the common welfare programs can easily sooth the situation by allowing more currency to float in the market. Plus, they suggest that such common welfare spending also help in improving the life of standards of common populace.

Failure of Obama’s Stimulus Packages

The idea of mainstream economists is absolutely flawed and this can be easily seen with the failure of the economic stimulus given by the Bush government and supported by the new government of Obama.

It should be clear that a Burst or a recession occurs because there was a boom in market. A boom obviously is the period when an economic sector is unnecessarily provided easy loans, higher profits and more support by the authorities and central government to cause high rise in prices that creates a false demand in the market and causes inflation. That is, the downturn, or the depression or the recession is exactly because of the Central bank, not because it started tightening the financial sources, rather it is because of malinvestment initiated by previously created credit resulting from central bank³ . Mainstream economists also suggest that the market will recover and the prices will inflate again if further easy money is provided through government spending, ridiculously huge stimulus packages and other similar tactics. They believe that by doing so, the stock market will again start rising high. Yet, with all economic stimulus provided, stocks as a broad group are down since last ten years⁴ . That is, economic stimulus and credit policies of Central bank failed since last 10 years.

It is also important to understand the reason of liquidity crunch. A liquidity crunch occurs only when the present amount of money in the market, which is nothing but a means of exchange, is malinvested in those sectors that are facing false demand or boom. Since the money was malinvested in supplying the false demand, it gets trapped. Lenders don’t get their loan back and they suffer liquidity crunch. Thus, the reason of a recession is the easy credit policies by the government and central bank that causes Boom in the market. When the wrong policies of the government and central bank fail, the market suffers recession.

Recession is not the problem, it is the cure of the problems of Malinvestment

Thus, recession can be defined as a cure to the ill-policies of government and central bank that caused boom in certain sectors such as housing market. Because of that boom, easy credit policies, subsidies, easy lending and many other government and central bank caused factors, the prices soars to extreme high and causes inflation and money gets trapped in malinvestment. As the recession acts as a cure to this situation of extreme falsehood, it starts decreasing the extent of false demand and tries to bring the market to its actual true situation. The prices start declining and the economy starts recuperating from the illness of false heights.

Since recession itself is the cure of problems of malinvestment that were caused by the government and central bank’s ill easy money and credit policies, it cannot be cured by further stimulus. The stimulus will only sustain the recession for longer periods until all the malinvestment is not neutralised and the economy comes in a situation to achieve sustainable growth⁵ . The idea can also be substantiated with the expectations of Housing economists who expect that over the next 10 or 20 years, the prices in realty sector may start rising again on an average, but that rise won’t be as much as the average rise was during the past decade⁶ . Obviously, because of easy money and mislead credit policies caused a boom in housing market and created a false demand that consequently resulted in unsustainable boom. As a neutralising phenomenon, the market forces caused liquidity crunch to cure the malinvestment. Until the malinvestment will not neutralise, market will not gain sustainable growth. Stimulus package can only delay the time for achieving the sustainable growth. The stimulus also failed to provide any help in improving the job market, the unemployment rate is still 9.7% in the month of May 2010⁷ , while it was 6.9% in 2008⁸ .
Now with the problems of liquidity crunch still persisting, even the retirees are looking forward to find jobs⁹ . The situation shows that expensive stimulus may also push US towards the same fate that the Greece government and public are suffering right now.

Robert Lucas supported the idea of Ben Bernanke to reduce the interest rates¹⁰ . Every sane minded person will support the idea. In fact, the government or the central bank should not have the power to decide or dictate the interest rates. Interest rates should be decided by the free market proponents freely as per the time requires and permits. Yet, till how long will the central bank and government let the market enjoy the falsehood of stability on the basis of stimulus, what will happen when the central bank and Obama administration will look forward to take the stimulus back? Only then the market will again step forward towards curing the malinvestment caused by bad credit policies and only after that cure the market will be in a position to attain a sustainable growth.

1. William A. Strauss, 2009, Economic Outlook Symposium: Summary of 2008 results and forecasts for 2009, Chicago Fed Letter [↩]
2. John P. Cochran, Austrian Business Cycles, Plucking Models, and Real Business Cycles, Austrian Schollar Conference, Auburn, Alabama [↩]
3. John P. Cochran, 2001, Austrian Business Cycles, Plucking Models, and Real Business Cycles, Austrian Schollar Conference, Auburn, Alabama [↩]
4. E.S Browning, 2009,After the Collapse, Guarded Hope for ’09, The Wall Street Journal, January 2, 2009 [↩]
5. John P. Cochran, 2001, Austrian Business Cycles, Plucking Models, and Real Business Cycles, Austrian Schollar Conference, Auburn, Alabama [↩]
6. James R. Hagerty, 2008, The Future of Home Prices, The Wall Street Journal, December 2, 2008 [↩]
7. TradingEconomics, May2010 [↩]
8. William A. Strauss, 2009, Economic Outlook Symposium: Summary of 2008 results and forecasts for 2009, Chicago Fed Letter [↩]
9. Kelly Greene, 2009, There Goes Retirement, The Wall Street Journal, March 1, 2009 [↩]
10. Robert E Lucas Jr., 2008, Bernanke is the Best Stimulus Right Now, The Wall Street Journal, December 23, 2008 [↩]