This article looks into the possibility of a looming recession that people are worrying about since the "indexes in Asia and Europe have fallen more than 20%." We have learnt in our classes that recessions are hard to predict, and the same thing is repeated in this article when they cite the fact that sometimes we cannot even recognize it till it is too late.
The author of the article seems to believe that even if a recession were to take place it would be the faults of the markets themselves for being so nervous. I thought his description of how recessions progress through this was very well explained. He essentially said that if asset prices fall, then consumer spending will decrease, which we know from our class will lead to lower aggregate demand which will discourage economic activities in the short run, so it might lead to devaluation of currencies to be at a good rate of inflation. Except during a recession this becomes a downwards spiral of rising inflation.
The author also said that this fall in the currency could lead to a sort of "destabilizing credit event." This in turn makes less developed countries compelled to raise interest rates to put a stop to this, which really does not help.
The main point discussed in the article is that most governments around the world will not be able to deal with a recession of staggering standards if it were to hit. So a self-induced recession would not be a good thing for anyone seeing as the Fed or the policymakers in the other countries do not really have the ability to help out as much.
I think in the context of the free-market, globalized economy the repercussions of a recession are even scarier because none of these recessions can be contained within national borders and will somehow impact the rest of the world economy as well (ref- Eurozone Crisis and Sub-Prime Mortgage Crisis). Despite the empirical nature of economics, its accuracy in prediction has always been questioned, by those studying and not studying the discipline.(http://www.economist.com/news/finance-and-economics/21688885-ideological-divisions-economics-undermine-its-value-public-all-sea)
ReplyDeleteDo you think the responses of developing and developed countries should/would be different in trying to avoid recession (to whatever extent possible)?
I think the responses would have to be different seeing as developing countries would not have the ability to employ policies of similar scale to counteract the effects of recession.
ReplyDeleteIn a world where supposedly "developed" countries like Russia are struggling to stabilize after taking a hit to the economy (dependency on oil aside) it really seems improbable for any developing economy to push the same kind of policies in response to recessions since it might deter economic growth too much.