Recession - Necessity of a healthy economy

RECESSION- THE NECESSITY OF A HEALTHY ECONOMY

When it comes to Economics there is nothing more to talk about other than RECESSIONS. This has been the most talked about topic in the recent days. This Article is an attempt o have a closer look on Recession. This Article is more in a Q/A format. So the first question

What Is Recession?

In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least two quarters. The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction. The GDP is assumed to be in negatives. This definition is somewhat unpopular with many economists as it does not take into consideration changes in other economic variables such as current unemployment rates or consumer confidence and spending levels.
To be Precise The United States-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."
2nd most important question:

What causes Recession?

A recession is primarily caused by the actions taken to control the money supply in the economy. The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When The Federal Reserve loses balance in this equation, the economy is forced to correct itself. The Feds monetary policy of injecting tremendous amounts of money supply into the money market has kept interest rates lower while inflation continues to rise. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller is the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt.
In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. As individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.
These circumstances coupled with relaxed policies in lending practices making it extremely easy to borrow money can result in unsustainable economic activity and the economy coming to a near halt.
It is also said that recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war. However, these are mostly short term in nature and tend to correct themselves in a quicker manner than the full blown recessions that have occurred in the past.

Effects of Recession

An economic recession can usually be spotted before it happens. There is a tendency to see the economic landscape changing in quarters preceding the actual onset. While the growth in GDP will still be present, it will show signs of sputtering and you will see higher levels of unemployment, decline in housing prices, decline in the stock market, and business expansion plans being put on hold. When the economy sees extended periods of economic recession, the economy can be referred to as being in an economic depression.
About the only good thing about a recession is that it will cure inflation. The balancing act the Federal Reserve must pursue is to slow economic growth enough to prevent inflation without triggering a recession. Currently, it must do this without the help of fiscal policy, which is generally trying to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring current account deficits.

HISTORY OF RECESSIONS:

The United States has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. Recession has a history of 1700’s. The great Depression is one among the most noted Recession.
The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in modern history, and is used in the 21st century as an example of how far the world's economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday.
The Great Depression:
The Great Depression was triggered by a sudden, total collapse in the stock market. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.
The Great Depression ended at different times in different countries

1970’s Oil Crisis:
In October of 1973 OPEC stopped exports to the US and other western nations to punish the support of Israel, they realized the strong influence that they had on the world through oil. The immediate results of the Oil Crisis were dramatic. Prices of gasoline quadrupled, rising from just 25 cents to over a dollar in just a few months.

1990’s Recession:
Recession of the early 1990's was due to a drop in demand caused by a debt buildup in the 1980's by individuals, businesses, and the federal government. Apprehension caused by high structural unemployment of both blue and white collar workers slowed the recovery.
On October of 1987, later dubbed "Black Monday" the Dow Jones Industrial Average suffered an unprecedented loss of 22%. The collapse (larger than that of 1929) was handled surprisingly well by the economy and the stock market began to recover.

Early 2000’s Recession:
The Early 2000s recession was felt in mostly Western countries and had been predicted by economists for years, since the boom of the 1990s, which was accompanied by both low inflation and low unemployment. The collapse of the dot-com bubble, the September 11th attacks, and accounting scandals contributed to a relatively mild contraction in the North American economy.

Late 2000’s Recession (2008):
In 2007 the possibility of an economic crisis was suggested by several important indicators of economic downturn worldwide. High oil prices, which led to both high food prices (due to a dependence of food production on oil production) and global inflation; a substantial credit crisis leading to the bankruptcy of several large and well established investment banks and increased unemployment lead to a global economic recession.
There has been speculation about the present Recession to be ending by June 2009 but still a lot has been to seen.

BENEFITS OF RECESSION
In general, recessions are painful. Unemployment surges. Assets, such as stocks, plummet. People see their retirement nest eggs evaporate in front of their eyes. The benefits of a recession are long-term. It is mainly that a recession is a cleansing period that exposes and gets rid of much societal inefficiency.
For example, let’s take our current recessions. The investment banks like Lehman Brothers and Bear Stearns have been destroyed by the credit collapse. While many people were laid off of work, those people’s labor was essentially be put towards an unproductive purpose. Those companies were taking excessive risk and leverage for unprofitable activities. It took awhile, but the deck of cards finally collapses. Now those laid off can find work in businesses where their work goes towards productive use.
In general, the white collar labor world has been filled with inefficiency. Rarely is the bus boy at a restaurant or the factory worker (unless he works for the UAW) grossly overpaid for inefficient tasks. But this has persistently been the case in the white collar world.
But with the current recession and the cost cutting that is necessary for businesses to survive, they take a hard look at their work force and see what is going on. Companies cannot afford to pay their CEOs $20 million a year if the CEO is really not adding that much value that a replacement CEO would bring for $1 million a year. Fresh out of college kids are often not worth paying $120k a year to have them do a bunch of meaningless research.
Recessions need to not let be spun out of control. We cannot allow for a deflationary spiral where perfectly good businesses are laid to waste because of short-term credit needs. Nevertheless, bubbles inevitably burst.
The tech bubble’s burst proved that you cannot just build a website and hope it will make millions eventually. Labor and capital was shifted out of the tech sphere and put towards more productive uses. Likewise, we have seen a huge bubble in credit-driven industries, which are primarily comprised of white collar labor. As these businesses get flushed out, many employees in these industries will have to find a new line of work that actually provides value to companies and society.

Conclusion:
Every event in history has a lesson in store for the mankind and so are these Recessions. These Recessions make us aware of the bubbles that we create in the market and are in fact a measure to create a stable market. The capital inflow in a market needs to be regulated. There is nothing malicious about the meltdown. Recessions are necessary as a cleanup activity. Same is the case with the computer programs which clean the garbage activity of the computer system ya antivirus programs which deletes some of the file but prevent our system to be affected by the dangerous virus Programs.