How does a recession start?

A recession can be defined as “a significant decline in economic activity spread across the economy, lasting more than a few months” (http://www.investopedia.com/ask/answers/08/cause-of-recession.asp).While many different elements contribute to causing a recession, one of the prime sources is inflation. Inflation occurs when products and services become more and more expensive as time goes on. When inflation is high, individuals and businesses stop spending as much and start saving more. If this goes on for a long period of time, then businesses might be forced to layoff workers (since consumers aren’t buying their products). All of this contributes to the beginning of a recession.

People freak out and a downward spiral takes hold. It’s all in the mind. It really is. Recessions are symptoms of a lack of confidence. Restore confidence and the recession ends. Yes, it seems harder in practice but that is really what it boils down to. At present in the US, for example, financial institutions and corporations are sitting on unprecedented amounts of cash. They are unwilling to invest the money in a manner that can positively impact the economy. Why? They are risk averse. They also seem unaware of fundamental changes in the nature of the economy. Developed country governments typically do not have money anymore. They run on debt. Corporations have the money and therefore should recognize their role as instigators of the economy. If they sit on the sidelines waiting for government to move, malaise sets in.I could go on………..

It’s mostly because of shrinking credit. Businesses use credit to produce things (cars, houses, phones, etc). People work for businesses and get salaries which they can spend on those produced things. Businesses make profit and repay their debts and because times are good taking new ones to expand. Due to credit money supply is expanding so there are more products and services and more money around. This is boom stage. Ultimately for some reason opposite cycle starts up. Maybe simply economy stops innovating and there are large inventories of stuff so there is oversupply (you can buy only so much houses or cars or phones). Companies needs to cut production, that means cutting wages and firing people. Then those people can’t buy stuff which might hurt even more companies etc. In extreme cases bankruptcies happen which means even more credit (and money supply) disappears which puts even more pressure on economic activity.

Thanks for the A2A, A recession occurs when a resource such as land, labor or capital is debased: land: agricultural decline due to soil salinization (ancient Mesopotamia) or climate change (Carthage) or ecological collapse (Easter Island) etc. labor: population gets sick due to a plague, loses interest in working due to ideology or religion, or other more competitive neighbors out-compete them. capital: capital is badly invested in ventures that seem good at first but turn out to be counterproductive, such as the Dot Com bubble or tulips in 1637’s Netherlands. Government intervention might help, but often makes things worse, for example: land: by messing up with land usage laws, ownership titles and subsidies, the government can harm the agricultural sector, such as in present-day Venezuela; labor: by enforcing crazy anti-competitive labor laws (Detroit and EU); capital: almost every country is rich in examples. by messing with interest rates the government encourages immediate consumption with low interest rates - that is, instead of saving and generating capital, the society starts to consume its capital. the government encourages crazy investments - that is, with low or negative interest rates investors will put their money in almost any investment, that ought to be more productive. with too high interest rates the government makes the opposite: encourages investors to lend money to it, instead of investing in productive businesses. by messing with the regulatory framework the government introduces “moral hazard” - that is, institutions that are “too big to fail” make bad investments counting on the government to support them. the government enforces a draconian framework, scaring off investors that see the country as too burdensome to invest. To dutifully analyze a recession, one ought to look first and foremost at the variations that occur in the factors of production: land, labor and capital. If one looks carefully at those, no recession will ever appear otherworldly.