What is a Recession?

Video explains what a recession is, the basic economic terms, and the psychological factor that often fuels a recession.

Welcome to WatchMojo.com, I’m your host Ashkan Karbasfrooshan and today, we discuss the dreaded “R” word, Recession. Now, recession is basically any downward trend in the business cycle which usually leads to a decline in production and employment. And that usually leads to lower income for households, which means that they consume less, which in turn then creates a vicious cycle where companies produce less. Another way economists measure whether or not we are in a recession is that they look for two consecutive quarters with negative GDP growth. Sometimes they don’t even look for two consecutive back to back quarters. They just look for two quarters in a given year and that’s enough to trigger the fear of a recession. Now, the term fear is very important here because recessions usually have an important psychological factor. If you think that the economy is going to slow down, you’re not going to be consuming as much, and that means that companies aren’t selling as many goods. In turn, what happens is that they need to produce less and thus, hire less people. It basically becomes a downward vicious cycle. Now, you might be asking, “Well, what are some of the causes of a recession?” Well, those include speculation, national debt, inflation, devalued currency, and the use of derivatives which sometimes can get out of hand. And some of the effects, well there are pretty much bad signs such as unemployment, foreclosures, bankruptcies, banks aren’t lending as much money, the stock market takes a nailing and ultimately all of these leads to inflation. So you’re now in recession, that’s sucks. What do you do to get out of it? There are many schools of thought and they’re basically different but all of them try to accomplish the same thing, which is getting back on the road to recovery. The first one is the Keynesian School of Thought which basically advocates deficit spending. That way, the government basically invests and sparks economic growth. The second one is the supply side economic belief that says you need to cut taxes to get businesses to invest higher. And if they do that, then basically consumers have more money in their wallets to kick start the economy again. And the third one is actually the one that is the most capitalistic one, which basically is, let’s say fair capitalism. Just let it be. Let the market correct itself. Let the market’s invisible hand come in and do what it needs to do.