Why do economic recessions occur?
A recession is a downward economic spiral catering stress and chaos to a country’s population. The consequences of this plummet can be detrimental: businesses shut down; unemployment rates rise; poverty spikes; suicide and alcohol/drug abuse rates skyrocket. Some of the most famous recessions in history are the “Great Depression” and “2008 Market Crash.” One question that arises in many heated debates among economists is “What are the primary drivers that lead to a recession?”
A recession occurs when there is a negative distribution to the balance of supply and demand. There is inequality between the number of goods people wish to purchase, the quantity of products producers can offer, and the prices of the goods are services available, which would prompt an economic decline. Supply and demand are reflected in a country’s inflation and interest rates. Inflation occurs when the prices of goods and services increase, and consequently, the value of money decreases. Inflation is not predominantly a “bad thing.” In some cases, it can lead to the encouragement of more economic activity. However, high inflation matched with low demand rates leads the economy into the deep dark path of a recession. On the other hand, interest rates reflect the cost of taking up debt for individuals and corporations. An interest rate is typically an annual percentage of a loan that borrowers pay to their creditors until the loan is paid back. While lower interest rates yield more accessibility for companies and people to acquire a loan, a higher interest rate increases the costs for producers and consumers, which prompts slower economic growth. Fluctuations in inflation and interest rates give the public insight into the state of the economy.
What caters these fluctuations to occur can be anything from natural disasters to shocks, such as war. For example, a tornado could destroy a farm, therefore forcing the supply side of the economy to charge more for certain crops, discouraging demand, and potentially triggering a recession.
Nonetheless, recessions do not only occur in times of failure. Economic prosperity can prompt a recession due to a market’s expansion whose business activity reaches an unsustainable level. A prime example could be when corporations take out large loans assuming that future economic growth will support the burden of that loan, disregarding that sometimes the economy does not meet the positive expectations of the corporation. When the economy fails to prosper at the expected rate, corporations who took out loans will fall into a rabbit hole of debt. To flinch off the debt, corporations must reorganize their funds, which most likely leads to the unfortunate route of laying off staff and decreasing wages, which spikes the unemployment/poverty rate. The lowered wages and raised unemployment rate make it so the average person will have a harder time purchasing goods, which leads to lower demand rates.
In conclusion, a recession is a gateway to hard times. It is a tricky hole to climb out of, but it has been done multiple times. We, as members of the global economy, can only hope for the best and prepare for the worst.