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==Attributes== A recession encompasses multiple attributes that often occur simultaneously and encompasses declines in component measures of economic activity, such as GDP, including consumption, investment, government spending, and net export activity. These summary measures are indicative of underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies (Smith, 2018; Johnson & Thompson, 2020). By examining these factors comprehensively, economists gain insights into the complex dynamics that contribute to economic downturns and can formulate effective strategies for mitigating their impact (Anderson, 2019; Patel, 2017). Economist [[Richard Koo|Richard C. Koo]] wrote that under ideal conditions, a country's economy should have the household sector as net savers and the [[corporate sector]] as net borrowers, with the government budget nearly balanced and [[net exports]] near zero.<ref name="Koo 2009">{{cite book | last = Koo | first = Richard | year = 2009 | title = The Holy Grail of Macroeconomics-Lessons from Japan's Great Recession | publisher=John Wiley & Sons (Asia) Pte. Ltd. | isbn = 978-0-470-82494-8}}</ref><ref name="Koo2011">{{cite journal |last1=Koo |first1=Richard C. |title=The world in balance sheet recession: causes, cure, and politics |journal=Real-World Economics Review |date=12 December 2011 |access-date=3 August 2022 |archive-date=10 January 2020 |archive-url=https://web.archive.org/web/20200110090211/http://www.paecon.net/PAEReview/issue58/Koo58.pdf |issue=58 |page=19 |url=http://www.paecon.net/PAEReview/issue58/Koo58.pdf}}</ref> A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an [[Depression (economics)|economic depression]], although some argue that their causes and cures can be different.<ref name="Eslake">{{cite web |url=https://www.saul-eslake.com/difference-recession-depression/ |title=What is the difference between a recession and a depression? |archive-url=https://web.archive.org/web/20210723231012/https://www.saul-eslake.com/difference-recession-depression/ |archive-date=23 July 2021 |author=Saul Eslake |date=Nov 2008}}</ref> As an informal shorthand, economists sometimes refer to different [[recession shapes]], such as [[V-shaped recession|V-shaped]], [[U-shaped recession|U-shaped]], [[L-shaped recession|L-shaped]] and [[W-shaped recession|W-shaped]] recessions.<ref name="KaurSidhu2012">{{cite journal |last1=Kaur |first1=Rajwant |last2=Sidhu |first2=A.S. |editor1-last=Sarkar |editor1-first=Siddhartha |title=Global Recession and Its Impact on Foreign Trade in India |journal=International Journal of Afro-Asian Studies |date=Spring 2012 |volume=3 |issue=1 |page=62 |url=https://books.google.com/books?id=pGHTXAD9QnIC&pg=PA62 |publisher=Universal-Publishers|isbn=9781612336084 }}</ref> ===Type of recession or shape=== {{Main|Recession shapes}} The type and shape of recessions are distinctive. In the US, v-shaped, or short-and-sharp contractions followed by rapid and sustained recovery, occurred in 1954 and 1990β1991; U-shaped (prolonged slump) in 1974β1975, and W-shaped, or [[double-dip recession]]s in 1949 and 1980β1982. Japan's 1993β1994 recession was U-shaped and its 8-out-of-9 quarters of contraction in 1997β1999 can be described as L-shaped. [[Korea]], [[Hong Kong]] and South-east Asia experienced U-shaped recessions in 1997β1998, although [[Thailand]]'s eight consecutive quarters of decline should be termed L-shaped.<ref>{{cite web |url=http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp |title=Key Indicators 2001: Growth and Change in Asia and the Pacific |publisher=ADB.org |access-date=31 July 2010 |url-status=dead |archive-url=https://web.archive.org/web/20100317155544/http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp |archive-date=17 March 2010 }}</ref> ===Psychological aspects=== Recessions have psychological and confidence aspects. For example, if companies expect economic activity to slow, they may reduce employment levels and save [[money]] rather than invest. Such expectations can create a self-reinforcing downward cycle, bringing about or worsening a recession.<ref>{{cite news |author=Samuelson, Robert J. |url=https://www.washingtonpost.com/wp-dyn/content/article/2010/06/13/AR2010061303330.html |title=Our economy's crisis of confidence |newspaper=The Washington Post |date=14 June 2010 |access-date=29 January 2011 |archive-date=26 March 2020 |archive-url=https://web.archive.org/web/20200326123628/https://www.washingtonpost.com/wp-dyn/content/article/2010/06/13/AR2010061303330.html |url-status=live }}</ref> Consumer confidence is one measure used to evaluate economic sentiment.<ref>{{cite web |url=http://www.conference-board.org/economics/consumerconfidence.cfm |title=The Conference Board β Consumer Confidence Survey Press Release β May 2010 |publisher=Conference-board.org |date=25 March 2010 |access-date=29 January 2011 |archive-date=3 March 2020 |archive-url=https://web.archive.org/web/20200303205552/https://www.conference-board.org/economics/ConsumerConfidence.cfm |url-status=live }}</ref> The term [[Animal spirits (Keynes)|animal spirits]] has been used to describe the [[psychological]] factors underlying economic activity. Keynes, in his ''[[The General Theory of Employment, Interest and Money]]'', was the first economist to claim that such emotional mindsets significantly affect the economy.<ref name="AkerlofShiller2010">{{cite book |last1=Akerlof |first1=George A. |last2=Shiller |first2=Robert J. |title=Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism |date=2010 |publisher=Princeton University Press |isbn=978-1-4008-3472-3 |page=23 |url=https://books.google.com/books?id=2Rz_cuu88DwC&pg=PR23}}</ref> Economist [[Robert J. Shiller]] wrote that the term "refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people."<ref>{{cite news |last=Shiller |first=Robert J. |url=https://www.wsj.com/articles/SB123302080925418107 |title=Animal Spirits Depend on Trust |work=The Wall Street Journal |date=27 January 2009 |access-date=29 January 2011 |archive-date=11 February 2020 |archive-url=https://web.archive.org/web/20200211024623/https://www.wsj.com/articles/SB123302080925418107 |url-status=live }}</ref> Behavioral economics has also explained many psychological biases that may trigger a recession including the [[availability heuristic]], the [[money illusion]], and [[normalcy bias]].<ref>{{Cite web|url=https://medium.com/@how.to.be.an.adult.01/biases-and-errors-that-led-to-historic-bubbles-and-crashes-52df73cf44f|title=Psychological Biases and Errors that led to historic bubbles and crashes|author=How to be an Adult|date=13 May 2020|website=Medium|access-date=13 May 2020|archive-date=28 July 2020|archive-url=https://web.archive.org/web/20200728104134/https://medium.com/@how.to.be.an.adult.01/biases-and-errors-that-led-to-historic-bubbles-and-crashes-52df73cf44f|url-status=live}}</ref> ===Balance sheet recession=== {{Main|Balance sheet recession}} Excessive levels of indebtedness or the bursting of a real estate or financial asset price bubble can cause what is called a "balance sheet recession". This occurs when large numbers of consumers or corporations pay down debt (i.e., save) rather than spend or invest, which slows the economy.<ref name="Koo2011" /> The term [[balance sheet]] derives from an accounting identity that holds that assets must always equal the sum of liabilities plus equity.<ref name="Jupe2014">{{cite book |last1=Jupe |first1=Robert |editor1-last=Michie |editor1-first=Jonathan |title=Reader's Guide to the Social Sciences |year=2014 |publisher=Routledge |isbn=978-1-135-93226-8 |page=11 |chapter-url=https://books.google.com/books?id=ip_IAgAAQBAJ&pg=PA11 |chapter=Accounting, balance sheet}}</ref> If asset prices fall below the value of the debt incurred to purchase them, then the equity must be negative, meaning the consumer or corporation is insolvent. Economist [[Paul Krugman]] wrote in 2014 that "the best working hypothesis seems to be that the [[subprime mortgage crisis|financial crisis]] was only one manifestation of a broader problem of excessive debtβthat it was a so-called "balance sheet recession". In Krugman's view, such crises require debt reduction strategies combined with higher government spending to offset declines from the [[private sector]] as it pays down its debt.<ref>{{cite magazine|url=http://www.nybooks.com/articles/archives/2014/jul/10/geithner-does-he-pass-test/|title=Does He Pass the Test? 'Stress Test: Reflections on Financial Crises' by Timothy Geithner |first=Paul|last=Krugman|access-date=26 November 2018|archive-date=5 November 2015|archive-url=https://web.archive.org/web/20151105050812/http://www.nybooks.com/articles/archives/2014/jul/10/geithner-does-he-pass-test/|url-status=live|magazine=New York Review of Books|date=10 July 2014}}</ref> For example, economist Richard Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession". It was triggered by a collapse in land and stock prices, which caused Japanese firms to have [[negative equity]], meaning their assets were worth less than their liabilities. Despite zero [[interest rate]]s and expansion of the [[money supply]] to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type [[Great Depression]], in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.<ref name="Koo 2009"/><ref name="Koo2011" /><ref>{{cite web |first=Gregory|last=White |url=http://www.businessinsider.com/richard-koo-recession-2010-4#-1 |title=Presentation by Richard Koo β The Age of Balance Sheet Recessions |work=Business Insider |date=14 April 2010 |access-date=29 January 2011 |archive-date=5 May 2021 |archive-url=https://web.archive.org/web/20210505150640/https://www.businessinsider.com/richard-koo-recession-2010-4#-1 |url-status=live }}</ref> Krugman discussed the balance sheet recession concept in 2010, agreeing with Koo's situation assessment and view that sustained [[deficit spending]] when faced with a balance sheet recession would be appropriate. However, Krugman argued that monetary policy could also affect savings behavior, as inflation or credible promises of future inflation (generating negative real interest rates) would encourage less savings. In other words, people would tend to spend more rather than save if they believe inflation is on the horizon. In more technical terms, Krugman argues that the private sector savings curve is elastic even during a balance sheet recession (responsive to changes in real interest rates), disagreeing with Koo's view that it is inelastic (non-responsive to changes in real interest rates).<ref>{{cite web|first=Paul|last=Krugman|url=https://krugman.blogs.nytimes.com/2010/08/17/notes-on-koo-wonkish/|title=Notes On Koo (Wonkish)|date=17 August 2010|access-date=26 November 2018|archive-date=15 April 2021|archive-url=https://web.archive.org/web/20210415215705/https://krugman.blogs.nytimes.com/2010/08/17/notes-on-koo-wonkish/|url-status=live|work=The New York Times}}</ref><ref>{{cite web|url=https://voxeu.org/article/debt-deleveraging-and-liquidity-trap-new-model|title=Debt, deleveraging, and the liquidity trap|first=Paul|last=Krugman|date=18 November 2010|access-date=26 November 2018|archive-date=21 April 2021|archive-url=https://web.archive.org/web/20210421110415/https://voxeu.org/article/debt-deleveraging-and-liquidity-trap-new-model|url-status=live|work=Voxeu.org)}}</ref> A July 2012 survey of balance sheet recession research reported that consumer demand and employment are affected by household leverage levels. Both durable and non-durable goods consumption declined as households moved from low to high leverage with the decline in property values experienced during the subprime mortgage crisis. Further, reduced consumption due to higher household leverage can account for a significant decline in employment levels. Policies that help reduce mortgage debt or household leverage could therefore have stimulative effects (Smith & Johnson, 2012). ===Liquidity trap=== A [[liquidity trap]] is a [[Keynesian]] theory that a situation can develop in which interest rates reach near zero ([[zero interest-rate policy]]) yet do not effectively stimulate the economy.<ref name="Eggertsson2018">{{cite book |last1=Eggertsson |first1=Gauti B. |title=The New Palgrave Dictionary of Economics |year=2018 |publisher=Palgrave Macmillan UK |isbn=978-1-349-95189-5 |pages=7929β7936 |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95189-5_2482 |language=en |chapter=Liquidity Trap|doi=10.1057/978-1-349-95189-5_2482 }}</ref> In theory, near-zero interest rates should encourage firms and consumers to borrow and spend. However, if too many individuals or corporations focus on saving or paying down debt rather than spending, lower interest rates have less effect on investment and consumption behavior; increasing the money supply is like "[[pushing on a string]]".<ref name="CorreiaFarhi 2012">{{cite web |last1=Correia |first1=Isabel |last2=Farhi |first2=Emmanuel |last3=Nicolini |first3=Juan Pablo |last4=Teles |first4=Pedro |title=Unconventional Fiscal Policy at the Zero Bound: Working Paper 698 |url=https://www.minneapolisfed.org/research/wp/wp698.pdf |publisher=Federal Reserve Bank of Minneapolis |access-date=5 August 2022 |page=1 |date=August 2012}}</ref> Economist [[Paul Krugman]] described the [[Subprime mortgage crisis|U.S. 2009 recession]] and [[Lost decade (Japan)|Japan's lost decade]] as liquidity traps. One remedy to a liquidity trap is expanding the money supply via [[quantitative easing]] or other techniques in which money is effectively printed to purchase assets, thereby creating [[inflationary]] expectations that cause savers to begin spending again. Government stimulus spending and [[Mercantilism|mercantilist]] policies to stimulate exports and reduce imports are other techniques to stimulate demand.<ref name="Krugman 2009">{{cite book | last = Krugman | first = Paul | year = 2009 | title = The Return of Depression Economics and the Crisis of 2008 | publisher = W.W. Norton Company Limited | isbn = 978-0-393-07101-6 | url-access = registration | url = https://archive.org/details/returnofdepressi00krug }}</ref> He estimated in March 2010 that developed countries representing 70% of the world's GDP were caught in a liquidity trap.<ref>{{cite news |url=https://krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-a-liquidity-trap/ |title=How Much of the World is in a Liquidity Trap? |publisher=Krugman.blogs.nytimes.com |date=17 March 2010 |access-date=29 January 2011 |archive-date=24 April 2020 |archive-url=https://web.archive.org/web/20200424155051/https://krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-a-liquidity-trap/ |url-status=live }}</ref> ===Paradoxes of thrift and deleveraging=== Behavior that may be optimal for an individual (e.g., saving more during adverse economic conditions) can be detrimental if too many individuals pursue the same behavior, as ultimately, one person's consumption is another person's income. Too many consumers attempting to save (or pay down debt) simultaneously is called the [[paradox of thrift]]<ref name="LipseyHarbury1992">{{cite book |last1=Lipsey |first1=Richard G. |last2=Harbury |first2=Colin |title=First Principles of Economics |year=1992 |publisher=Oxford University Press |isbn=978-0-297-82120-5 |page=294 |url=https://books.google.com/books?id=cV0EZuJxod8C&pg=PA294}}</ref> and can cause or deepen a recession. Economist [[Hyman Minsky]] also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets.<ref name="Yellen on Minsky">{{cite web|url=https://www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2009/april/yellen-minsky-meltdown-central-bankers/|title=A Minsky Meltdown: Lessons for Central Bankers|website=Federal Reserve Bank of San Francisco speeches|date=16 April 2009|access-date=4 June 2019|archive-date=5 January 2013|archive-url=https://web.archive.org/web/20130105104826/http://www.frbsf.org/news/speeches/2009/0416.html|url-status=live}}</ref>
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