Recessions as discussed in the aforementioned paragraphs can be smartly avoided by implementing the right polices. However, the same is not applicable as far as oil prices are concerned. A decrease in aggregate demand increases output production and inflation to fall. Policy makers can thus boost demand without keeping tab of inflation as such. The choice rests between a longer recession and a higher inflation. (Seigal, n. p) The financial sector crisis is another important cause of recession. Though rare, crises on the finance side are virulent and contagious cause of recession.
The great depression and the subsequent Japanese experience in the 1990s firmly validate this notion. The finance sector holds immense importance because it circulates capital back and forth from the savers to the borrowers. A break down or an obstacle in this cycle can cause economic production to become inefficient, costly, difficult, and slow. Traditional monetary and fiscal expansions cannot be depended on completely to untangle a non –functional financial sector (Seigel, n. p. ). There are certain characteristics associated with a typical recession.
Historically, inventories have played a pivotal role as far as recessions are concern. A recurrent decline in sales, following a recession has been discussed in the aforementioned arguments. The subsequent inventory build up contributes a prominent part of our GDP and makes sure that consumer confidence is inculcated . The rise in inventories has to be brought down, and in the process, economic recovery is severely impeded. This is because, irrespective of the recovery in sales, new production cannot take place.
It is important, to sell away the excess inventories before resuming economic growth and the production process. Speculations have been rife over notions such as “just in time” production and computerized, more electronic ways of inventory management will make it less volatile during the recession. If this is effectively implemented and is true, recessions will become less deep and shorter. The theory can be substantiated by the decline in inventories, as measured by GDP was smaller than normal.
The current recession, however has seen an average decline in inventory levels. It has has been oft asserted that recession is markedly different because it stands concentrated in the investment sector. Consumption as mentioned before has seen an increase in most recessions. However, the following claim remains unproven so far. Investment has witnessed an alienable decline in almost every post war recession. Consumption, on the contrary has increased, and if stats are looked at, consumption has remained positive in at least five (5) of the ten (10) recessions in the past.
In abstract, this does not came as a surprise, because according to the life cycle model, output decreases more steeply compared to consumption during recessions, as people keep the longer term in perspective and chalk out their consumption patterns accordingly. Investment by contrast is expected to more sensitive to generate greater rates of return. Thus, recession as discussed so far is more of a curse than a boom. Our lawmakers and policymakers can reduce its effect if they act promptly and accordingly.
Policy makers should make sure that they take the right action at the right time. Any decisions taken should come into play, keeping in perspective maximum stakeholders. Moreover, it is also mandatory, that major policy changes be made in the light of all available information, thereby negating the possibility of any error. Recession can also be averted by taking care of supply and demand, inflation, deflation, and the financial sector in the right way.
Allan Sloan, http://www. washingtonpost. com/wp-dyn/content/article/2007/12/10/AR2007121001589. html Recession Predictions and Investment Decisions December 11, 2007 Chris Ciovacco http://www. ciovaccocapital. com/sys-tmpl/investingeconomicslowdown/ Housing Has A Strong Correlation To Stocks, September 19, 2006 David Leonhardt, http://www. nytimes. com/2008/03/08/business/08recession. html? bl&ex=1205125200&en=bff38e35cdd49324&ei=5087%0A Seeing an End to the Good Times (Such as They Were), March 8, 2008 Greg Kaza The Umpire Made the Right Call-The recession ended 20 months ago. Period, , July 24, 2003