Why Is It So Difficult To Avoid A Recession?

Recession generally refers to overall slowdown of economic activity over a period of time or a business cycle contraction. Officially, it is defined as two successive quarters of negative economic growth. During this period, many macroeconomic variables coincide in similar ways. National output (GDP), employment, household spending, investment spending, capacity utilization and corporate profits will all fall

In some circumstance, economists often associate recession to alphabetical shapes. We have ‘V-shaped’ recession, a period where short and sharp contraction is followed by a fast and sustained recovery. ‘U-shaped’ is where the recession is prolonged. If serious it may lead to economic depression. Then we also have ‘W-shaped’, the double-dip recession and ‘L-shaped’ is where a continuous 8-9 quarterly GDP contraction before bottom out.

Which ever type of recession we are talking about, they have something similar in nature and that is INEVITABILITY

Reasons:

(1) Human nature. This is what we are. Even long ago during the Great Depression, Keynes in his masterpiece (The General Theory of Employment, Interest and Money) had warned us about the ‘dark animal spirits’ that each of us have. It is undeniably the mindset and self-soothing believes that all economic prosperity will last ‘forever’. As such, majority of investors jump into the stock market when it is already at its all time high and rush into buying assets in strategic location when the price is fast becoming unsustainable. Bankers on the other side, relaxed certain lending rules to fatten their profit margin at all cause. Regulators became complacent and lazy to run new numbers. Real estate agents only care about their personal commission. AIG and other insurers were blinded by instant profits, hence lazy to really find out what they are actually insuring. By the time they realize, it is too late since the bubble had burst

(2) Lag effect of a policy. One main problem with fiscal policy (especially in US) is that the decision-making process can be long and unpredictable. Once an executive branch proposes a solution, it must go through various stages of debate on the floors of House and Senate. To make things worse, there are often last minute alterations to the President’s original proposal either by economic principal or vested interests. If the legislative branches are in ‘good mood’, the process may be fairly quick. However if there are any conflicts, as it used to have, a simple process which usually takes months may be dragged to years. By the time the policy is put into action, recession may have begun or worsened and the economics antidote could turn into poison

(3) Overdependence. Early 2000s, banks in US were too generous. They lend money to anyone who wished to own a property without checking their creditworthiness. Banks through their creativity bundled the loans into some form of securities which were then sold to many other investment bankers (IB) and financial institutions (FI) in US. With the money raised from selling these securities, banks’ liquidity further increased and the vicious cycle repeated itself. Many of these investment banks who hold the toxic assets at the same time, have investment in other nations through direct investment or share market of the nation. When default in loan repayment started, these IB, FI and many other rich investors who thrown their life savings into these securities began to feel the crunch and withdraw from capital market worldwide. This explained the nose-diving performance of share market in South Korea, Japan, Singapore and many other developing nations. Companies are reporting heavy losses and begin to shed workforce. The larger the exposure, the greater will be the effect. This is one of the disadvantages of globalization in capital market

There is another way of contamination. Some export driven economies such as Singapore is said to be largely dependent on rich Western economies like US. Its economy depends a lot on exports and the manufacturing sector is more than 25% of her GDP. Most of the exports are high-tech capital equipments. It is not difficult to see the logic. A collapse in large economies implies that businesses will slow down markedly and demand for capital equipments will therefore collapse. Germany is not spared from this too. However, the Chinese economy once again exhibit miracle being able to escape the wrath of recession

(4) Banks not learning the lesson. Despite a close shave due to the unthinkable financial blowout, top banks still seem to be hard-headed. With the abysmal performance reported last year, they still pay out billions of dollars in the form of fat bonuses, most which I believe go to the pocket of top executives. The original nine banks that received TARP (Troubled Asset Relief Program) were reported to have paid out bonuses that are nowhere near to their overall yearly performance. Citigroup, for example suffered more than $27 billion losses last year, amazingly able to grant $5.3 billion worth of bonuses in the same period. Some like Goldman Sachs was paying out of their coffer. Despite earning of $2.3 billion, they distributed $4.8 billion worth of bonuses

Why is this so? I believe that the answer is banks are too large to fail. They know that the government will not allow the banks to collapse. It will be a hefty price to pay for seeing the whole financial system melts down just like that. Indirectly, US government is being held ransom. So they take things for granted. Some quarters therefore suggested the ‘‘clawback’’ provisions, which would reclaim pay from employees whose actions may damage the firm’s long term financial health. Personally, I think that these banks are closely regulated just for now. Once recovery takes place, regulators again will become lax. Banks with their creativity will play around with the loopholes in the new system

(5) Inheriting flawed policies from predecessor. These days, everyone seems to want a piece of Greenspan. He is said to be the main culprit behind the asset bubble. During his tenure as the boss of Fed, he implemented a series of expansionary monetary policy and interest rates were set at low level for a considerable period of time. Because the Fed rates stayed at that level longer than necessary, too many people had rushed into the asset craze thereby creating a bubble. Banks in market economy further relax lending policies to harp more profits. The wealth-effect soon spread into the economy. When new boss, Bernanke took over he is trying to cool down the overheating economy. So rates were raised causing some people to default. The bubble burst began. In such case, there is nothing much that can be done to prevent the recession time bomb. Only the aftermath can be minimized

Should UK Reduce Public Spending To Bring Fiscal Deficit Under Control?

To some extent, it does makes sense for the urge by some veteran politicians like David Cameron to end all those ‘unjustified’ spending within the British economy. The ‘unnecessary’ spending that he pledged to end when Tories come into power are like subsidised alcohol and food for ministers, number of MPs in Common House, ministerial pay cut, slashing number of ministerial cars, prices of food and drink in Houses of Parliament will be raised and various forms of allowances for public servants will be axed. If the Conservative walk the talk, £120 million will be saved a year from administration

On top of that, public spending will come to a temporary halt or scrapped at all costs. It is not difficult to understand why such drastic and desperate measures are announced. The critical problem here is the unsustainable fiscal deficit and national debt that UK is currently facing. Like it or not, UK is perhaps now the most indebted nation on earth.

Earlier this year UK’s national debt (includes current and near future obligations) was standing at £1.3 trillion and as a percentage of GDP, the figure is about 105%. Although US was having a debt of $10.6 trillion, as a percentage of GDP is only 69%. This is seriously something to be concerned of

Despite such debt crisis, personally I couldn’t find myself in agreement with David Cameron.

Reasons:

(1) Offsetting the fall in other spending components. UK is a consumption driven economy and before the recession, private spending contributed to about 67% of UK’s GDP. Now with the new era of frugality ‘thanks’ to pessimism in labour market, the spending pattern has changed dramatically. More people are spending time at home rather than outside. Private savings rate are increasing as Britons are expecting the worse to come. The equivalent explanation goes to investment. Firms have cut all forms of spending such as purchase of capital equipments, R&D, expansion etc due to the losses made

Collapse in consumption (C) and investment (I) will contract the economy. Since two biggest component of AD have collapsed, it is therefore vital for public spending (G) to increase by a large momentum to offset the fall in these two, thus reviving the British economy. In short, we can’t save but must spend ourselves out of recession

(2) UK’s debt is not the highest. Earlier, ONS (Office of National Statistics) expects to have to add between £1 to £1.5 trillion to the public sector debt figure, thereby taking it to the unprecedented level of £ 2.2 trillion. This means UK’s debt is standing about 150% of her GDP. However, I have to disagree upon two reasons. First, analysts are most of the time overly pessimistic in their forecasting. They often incorporate many factors which may not materialize, like those with slimmest chance of occurance. Second, this figure is inclusive of all public sector pension liabilities which the government is not spending now. As such there is no need for the borrowing to be made at the present

Also, oppositions like David Cameron normally inflate sensitive figures like potential national debt and tax liable per person above the officially announced rate to persuade Britons to overthrow the Labour government. This happens as national debt and tax are complicated discipline and there are just too many ways to manipulate the figure. I strongly believe that this will be his key pre-election agenda. Stating this doesn’t mean that I’m a great fans of Mr. Brown. It is a norm in all power struggles. It happens in Malaysia too

(3) Recession to depression. Slash in public spending should remind us of the paradox of thrift. When people think that tightening their belt during recession will do them good, it will actually lead to a vicious cycle that eventually reduces their savings. Fall in private spending will cause the economy to shrink. GDP per capita will fall. It also can be explained via negative multiplier effect. When a company makes losses due to fall in demand for their goods and services, it will be forced to slash number of employees

As from the country perspective, fall in public expenditure while can help to resolve debt issue in a very short run, proves to be more detrimental in long run. Contraction of national output will cause fall in tax receipts, putting government in a tighter position. Therefore, desperately it will have to confront another round of spending cut to meet debt obligations. Perhaps, David Cameron is assuming that increase in C and I can help to offset fall in G. However for this to work, government will have to assist companies and the public to stand on their feet

In a nutshell, while bitter to swallow, Britons must be prepared to embrace the worst. It is worth to make a small sacrifice now than to allow the entire future generations to be saddled by debt. The damage has been done. The only way is to look forward and that is spending out of recession.

Why Do I Choose Teaching? Why Economics?

Every term without fail, I receive this popular question from my fellow students. Some even thought that with the knowledge and experience I possess, I should strongly consider exploring corporate field and taking up positions like economist and financial analyst. Besides, these jobs are considered as more financially rewarding.

Here are my answers:

(1) Noble profession. I truly enjoy the feeling of sharing my knowledge with others. Besides there is ‘nothing’ in the world that can defeat the joy and sensation of watching how your disciples are groomed and scored brilliantly in examination

(2) Flexible hour. I’m not that sure about the culture practised in some other colleges in Malaysia, but in my college working hour is so flexible. Everyday on average each lecturer will be required to teach of not more than six hours. Certain days some of us have no lecture or a minimal of two hours lesson. After that we can sign out or even opt to stay back

(3) Break. In between term, there are many breaks. For instance there will be no classes between end of December and the whole month of January. Also strategic months are like May and June. That is because the students are sitting for examination somewhere in between those periods. In August there is another three weeks of term break. For someone who stresses on leisure like me, this should be the first choice of career. However, most of the time I do take the opportunity to conduct several revision or additional classes to prepare my students better. This is a privilege not available to those in the corporate world

(4) Financially rewarding. Although my full time job is lecturing in college, the flexibility provided does allow me and my colleagues to take up a second or even third part time job elsewhere. For instance I’m selling some stuff in e-bay. Other than that, I work as personal assistant (PA) to the kids from a royal family. Some of my colleagues conduct tuition classes outside. Several even earn up to RM 30, 000 (£5,500) a month and that is fat money for an average Malaysian

(5) Meeting new people. Naturally I would like to meet up with new people all the time but I dislike doing sales. Again this job provides the kind of satisfaction I’m looking for. On top of that, each student and class has a unique profile. Lessons must be conducted in a way that suits the atmosphere of that class. I need to create the right ambience which may not be easy but will definitely be an interesting one

(6) Economics is fun. There are so many new things to explore. While the principles and theories hold, it may not work all the way we desire (due to assumption of ceteris paribus earlier). This is where the role of evaluation sets in. Also the subject by nature is very dynamic. There is plenty of news to be digested each day and if possible adopted and assimilated into lessons. As with Math which I previously taught, I find that numbers are static. More or less it deals with our algebraic skills and the ability to manipulate formulas. Questions in examination are highly predictable and same things are taught over and over again which lead to boredom

(7) Do things my way. Being a lecturer, I have full control of how things are done. For instance, I need to ensure that my students love the subject as much as I do (although not all) and therefore employ the proper mechanism to create such interest. I’m in full control in many other aspects such as number of assignments to be given, whether to conduct revision workshop during the holidays or not, how many past year questions to discuss, speed of lesson in each class etc. In corporate one is taking orders from upper management and is highly unlikely I have such vast influence on how things are done. For instance, when I was working in a private bank, there are some standard procedures to process a legal document. Not to forget that all workers have to face ridiculously tight deadlines e.g. turnover of documents in two days and there are so many follow-ups

(8) Recession proof industry. Education is one of the very few industries out there that is constantly facing an upward trend in demand. In developing countries like Malaysia, private education is an integral part of the economy. Increasing number of parents are now aware of the importance of obtaining quality education and therefore ready to pay high sum of money sending their kids to private institution. Upon the completion of pre-U programme such as the A-Levels, many will pursue their tertiary study in top institutions from UK, US, Australia and Singapore. In recession, demand is even greater. Both working and retrenched executives are considering to further their studies to increase their marketability. As such I strongly feel that I landed in the ‘perfect’ job