Just like the human body the body polity or the country undergoes wear and tear followed by decay. Then out of the seed emerges a new chapter – akin to Nature renewing herself. Thus we have seen Economics admits that one upward cycle is followed by another. Regarding causes experts greatly differ about causes; the effects are there for all to see. Recession is said to be a decline in the GDP (Gross Domestic Product) of a country but when this happens for two or more consecutive quarters then it is termed recession. The exact definition differs from one school of economics to another.

Generally it negatively impacts on all the economic activities – investments, employment, profits etc. It is accompanied by sharp increase in price of goods and when the recession drags on for some time with acute pain it is named economic depression. Economic collapse is when the entire economy breaks down.
Broadly speaking a cocktail of dangerous factors leads to recession – it may be internal or external. The important ones are inflation, currency problems, speculation, national debt, war, price of oil (this being of vital importance in modern civilization) whims of the weather and or some other national calamity.

Lowering of interest rates fuels recession because it affects household savings – and thus the banks. Without savings the banks do not have funds to advance loans causing a credit freeze. Thus money supply plays a vital role in recession. Recession points to inflation, deflation as well as foreclosures and bankruptcies. Recession is nothing new to the economics of USA but what is unique about this is its depth, intensity and spread. It has been lingering for a long time and on a national scale. There are whispers about it being officially over but none can say so in a loud voice. There are fears that trouble will start again once the government withdraws its remedial measures.

The prime cause of the Great Depression that happened about 80 years ago, outlined in a general manner, is that people did not have enough money to spend. The banks failed and the money vanished. The market was saturated with goods and without people buying cars the factories shut down. When each person has a car then who will buy more? Sophisticated answers from experts pointed to gold standard, international debts etc. Underlying all this capitalism itself was being blamed. The very nature of capitalism creates bubbles and bursts.

These fears led to the American government taking many steps to forestall a repeat. For many years the going was good. This caused those who were favoring a free market economy to be a disadvantage against those advocating government to control spending and regulation. The cause for the free market advocates was taken by Milton Friedman who explained how capitalism could not be blamed for the Great Depression. He said that it was because of the Federal Reserve foolishly allowing the supply of money to shrink by one third from 1929 to 1933. Hence this lack of money triggered the crisis.

A sudden fall in money flow starts off certain forces that result in a crisis. Because GDP x their prices = money supply x turnover rate (velocity). Now if the velocity falls by a third then GDP will also fall by third. This will lead to deflation or fall in prices and output. The quicker prices adjust the quicker will the economy turn and start growing. But prices are rather sticky and do not always automatically change money flow conditions. Wages are even more stubborn. Workers refuse to accept pay cuts. And the government cannot expand the supply of money but reducing interest rates because when there is deflation requires nominal interest rate. But why should any bank led at a nominal rate? Thus the Feds were blamed and capitalism got off the hooks. But despite a good support for this again the government had to step in to save the economy. Still there are many who disagree with this and think that the government should not have done anything or at least done other things than what they did.

The belief is that the government should play a dominant role in encouraging growth at times of trouble. Government spending should compensate for the spending in the private sector during these cloudy days. The most important difference between the crisis of today and the Great Depression is that the deflationary pressure is a third of what it was previously and the government acted far more quickly and more timely than they did in the 30s.