The Road to Recession

Debt.Default.Financial dip.Media spoke.Public panicked.Bankers panicked.People lost confidence.Bankruptcy.Rece$$ion.

Confusing ??? Well, initially it is, but a very simple concept indeed. I'll explain it in a gist. In common terms, recession is a period of reduced economic activity. It might last for a few months or even a few years. Or in true economist’s words it is a decline in a country's gross domestic product (GDP), for two or more successive quarters of a year. Now recession is different from depression, though many correlate both to be the same. Both these vary by the magnitude of economic decline. To be more clear, a depression is more like a severe recession. These recessions have been coming and going from a long time. They can be dated back from the First World war, when the economy was at an all time low. The GDP fell by 10.9%, which was a depression. Now the GDP is the Gross Domestic Product which is nothing but one of the widely used measures of finding a nation’s income. Its simply the sum of all expenditures made on the final products and services by a country in a year. Due to this not only the nation but you, me and everyone suffer from it. Even we are in a recession, since it affects our expenditure too. Companies reduce the employees pay and in turn, the total income in our houses reduces by X percentage, where X is something like the GDP of a country. Global Economic growth was nearly 5% per annum between 2004-2007, whereas in 2008 it has reduced by around 4% which is less than 1 percentage at present. Most of the Major foreign banks have eased their policies recently in response to the economic crisis. It is also predicted that 2009 is going to be the slowest year of global GDP growth since 1982.
Though the global economic growth has slowed this year, the developing world in general would probably continue to experience positive economic growth, albeit at a rate that is significantly slower than the average of the past few years. The main factors that I can attribute to this recession are :

The Global Oil Crisis & The Credit crunch

The Global Oil Crisis:
Crude oil exists in the upper strata of some areas of the Earth's crust. Crude oil is used mostly, by It is also one of the most integral sources for many chemicals, including solvents, fertilizers, pesticides, and plastics. If you were to walk through your home and office, you would become shortly overwhelmed by the thousands of items you use everyday that would not be available to you without our access to oil.
Crude oil which was around $20 per barrel in 2003 rose to historic heights of $147 per barrel in 2008. This not only led to high fuel rates but also led to drastic high food prices. Wondering how oil prices are related to food price hike? Well, this increase in oil prices further heightened the costs of fertilizers & chemicals used, food transport and in general, the industrial agriculture, which is how it lead to the drastic high food prices. It is estimated that the Earth was endowed with approximately three trillion barrels of recoverable conventional oil resources — of which only about one trillion has been produced to date. It took us roughly 200 years to extract this first trillion barrel of oil. And in 20 years it is said that the world will consume 40% more oil than today. Reason being that things have changed from the past. There are many factors behind this - The population, due to which the needs have increased excessively. Maybe at this rate, it might take just another 100 years or less for mankind to use up the remaining 2 trillion barrels, which is nearly double the rate of ueage.
Who knows, the earth might get destroyed in a few years or so. But we will still keep large stocks of each and every innovation made in safe underground warehouses to be used for generations. Whether earth will get destroyed or not, we have made sufficient replacements like, (i) an energy replacement for oil. It’s a kind of battery that never needs recharging by mixing hydrogen and oxygen in a fuel cell to produce an electric current is certainly not new. Scientists have been working on this capacity since the 1980's and while we know more now than back then about this type of energy system, the largest companies in the world involved with the research and development of hydrogen fuel cells have scaled back or reduced their staffs dramatically and after seeing their stock prices crash during the recession. This idea as such might take some time to come into commercial use due to its high costs involved and (ii) another revolutionary innovation called the “biofuel” which is a replacement for petoleum or any kind of fuel. But as such there simply is nothing equal to oil. But anyways I’m not getting into the end-of-earth subject now. One clear fact is that, energy will be one of the most defining issues of this century.

The Credit Crunch:
Credit Crunch is another crisis, wherein there is a shortage of the availability of loans. To explain it in a simple way - the main reason behind this is, when people who can’t afford to build a house get loans from banks and later do not repay or become repetitive defaulters, the banks in turn incur losses in terms of the money available for them to lend. Which means eventually they would not have enough money, if the defaulters increase day by day, making them ‘Bankrupt’. Once the banks become bankrupt, there starts the lack of trust in banks amongst everyone. Later, the companies would suffer lack of capital availability from banks, thereby slowing the growth of companies resulting in reduced salaries, zero appraisals and finally employee lay offs. At this situation obviously, consumers / citizens reduce their spendings resulting in decreasing demands in the economy. So when none is ready to spend on something which is produced in the same quantities as before, the manufacturing companies incur great losses in their margins. The end result of all this is most of what we face now called the “R e c e $$ i o n”.

Famous example : The Lehman Brothers bankruptcy - Lehman Brothers, an international bank went bankrupt last year, with debts over 700 billion dollars.

As populations grow and economies take off, millions in the developing world are enjoying the benefits of a lifestyle that requires increasing amounts of money and energy. Analysts all over the world have been studying a lot and have been forecasting the future. What most feel is that currently we're dealing with a cultural problem dealing with over 200 years of exponential growth culture. Rapid growth is and has always been a transient, temporary phenomenon. Its like a cycle. We are at the bottom of it now. Everything will revive. Each and every day we sleep peacefully hoping to see a better day.
Let’s pray for that day to come, hopefully by 2010.