There have been hundreds of economic recessions since the Roman Empire due to numerous reasons. Below is a picture of the last six most notable recessions.
The Great Depression
The stock market crash of 1929, or the “Great Depression” was the most devastating stock market crash in the history of the United States, when taking into consideration the full extent and duration of its aftereffects.
The American economy entered an ordinary recession during the summer of 1929, as consumer spending dropped and unsold goods began to pile up, slowing production. At the same time, stock prices continued to rise, and by the fall of that year had reached levels that could not be justified by anticipated future earnings.
To briefly explain what caused this recession, we’ll start with the fact that By 1929, companies had expanded to the bubble point. Workers could no longer continue to fuel further expansion, so a slowdown was inevitable. While corporate profits, skyrocketed, wages increased incrementally, which widened the distribution of wealth.
Furthermore, the richest one percent of Americans owned over a third of all American assets. Such wealth concentrated in the hands of a few limits economic growth. The wealthy tended to save money that might have been put back into the economy if it were spread among the middle and lower classes. Middle class Americans had already stretched their debt capacities by purchasing automobiles and household appliances on instalment plans.
The unprecedented prosperity of the 1920s was suddenly gone, the Great Depression was upon the nation, and breadlines became a common sight.
There were also fundamental structural weaknesses in the American economic system. Banks operated without guarantees to their customers, creating a climate of panic when times got tough. Few regulations were placed on banks and they lent money to those who speculated recklessly in stocks. Agricultural prices had already been low during the 1920s, leaving farmers unable to spark any sort of recovery. When the Depression spread across the Atlantic, Europeans bought fewer American products, worsening the slide.
On October 24, 1929, the stock market bubble finally burst, as investors began dumping shares en masse. A record 12.9 million shares were traded that day, known as “Black Thursday.” Five days later, on “Black Tuesday” some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely.
The Great Recession was the worst since the 1929 Depression. It was also the longest since the Depression, lasting 18 months (December 2007 – June 2009). The Subprime mortgage crisis was the trigger. That created a global banking bank credit crisis.
In short, the subprime mortgage crisis occurred when banks sold too many mortgages to feed the demand for mortgage-backed securities. When home prices fell in 2006, it triggered defaults. The risk spread into mutual funds, pension funds and corporations who owned these derivatives, and thus, triggered the 2007 banking crisis, the 2008 financial crisis, and the 2009 great recession.
The economy shrank in five quarters, including four quarters in a row. Two quarters contracted more than 5%, including Q4 2008 which fell a whopping 8.2%, more than any other recession since the Great Depression. The recession ended in Q3 2009, when GDP turned positive, thanks to the economic stimulus package.
The Bureau of Economic Analysis BEA revises its GDP estimates as it gets new data. It often recalibrate its estimates in June of each year. Here’s the final estimate (made in June 2014) followed by the initial estimate (made one month after the quarter ended). This helps shows how difficult it is to correct a recession until it’s already started. It also reminds you how difficult it is to time the market with your investments.
- Q1 The economy shrank 2.7%. Initially, the BEA thought it grew 0.6%.
- Q2 The economy rebounded 2.0% The initial release said it grew 1.9%. Everyone thought the Fed’s rescue of Bear Stearns ended the threat to financial markets.
- Q3 The economy shrank 1.9%, much more than -0.3% initial estimate.
- Q4 The economy collapsed, shrinking 8.2%. The BEA initially said it only shrank 3.8%, although that was bad enough.
- Q1 The economy shrank 5.4%. The initial estimate said it shrank 6.1%.
- Q2 GDP growth was -0.5%, better than the initial estimate of -1.0%.
Will We Go Into Another Recession In The Future?
Now that we have a base level understanding of recessions, it’s important to note that it is a normal part of an economic cycle to enter in and out of recessions every couple of years or decades.
Note that some of the main causes of recessions are:
High interest rates are a cause of recession because they limit liquidity, or the amount of money available to invest.
Another factor is increased inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. As inflation increases, the percentage of goods and services that can be purchased with the same amount of money decreases.
Reduced consumer confidence is another factor that can cause a recession. If consumers believe the economy is bad, they are less likely to spend money. Consumer confidence is psychological but can have a real impact on any economy.
Reduced real wages, another factor, refers to wages that have been adjusted for inflation. Falling real wages means that a worker’s paycheck is not keeping up with inflation. The worker might be making the same amount of money, but his purchasing power has been reduced.
Above is a picture of your average business cycle. Taking into account the above causes of a recession, we can fully expect the economy to enter periods of decline or slow growth, but just remember that the economy is always on an upward trend and will continue on this trend as long as humans are around.
Also published on Medium.