March 29, 2024

News Cymru

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Recession Definition – Recession Causes – Recession Reasons

I wrote on article which referred to the Bank of England’s decision to continue to print money. That article grew from explaining how these actions actually effect people to explaining what a recession is and what causes one

The link above takes you to the original article that inspired this article. So continuing on from that article….

Going back to what the Bank of England said, they are going to print more money because the recovery is faltering.

Let’s look at why the economy had a recession in the first place. A recession is when the amount of money in the economy declines. There are many symptoms of a recession but the cause is the same. There is less money in the economy.

Okay, so why does money suddenly disappear from the economy? Well given all money comes from the banks and ultimately the money centre banks it must be because these banks are no longer lending so much money. The reasons why these banks start to lend less is not clear. To show how important these money centre banks are, ie the banks that deal with the Bank of England directly, they are the source of 95% of all the cash in the UK economy.

So to recap, the recession was caused by banks lending less money and because the recession is only slowly recovering and may actually be going into recession, the Bank of England is going to reduce the purchasing power of the people. To help stimulate the economy.

This sounds a bit absurd so it is worth looking at why the money centre banks stop lending so much.

One reason is that there is less demand for loans. People do not feel confident to take loans.

The second reason is that people cannot get loans even though they want them. Reasons for this? The banks have bad loans and need to recoup some of the money from their outstanding loans. And/or the banks have possibly some motive to create a recession.

Thirdly people stop spending so much and prefer to save their money.

Well if we look at reasons two and three they cannot both be happening. If people were not spending and were saving the banks would have money to lend. So it must either be one or the other. Unless of course it is a strategic decision by the banks not to lend money and not an operational decision.

Reason one is independent of reasons two and three.

So what have these reason got in common? Well the most obvious thing would be that reasons one and three require millions of people to be acting and thinking in the same way at the same time. This is highly unusual. I cannot think of another example where so many people think and/or do the same thing at the same time.

The closest example who be something like a general election but this only happens for one day, only about half the population turns out and of the people that turn out the vote is split around three different ways.

So going back to reason one, people not feeling confident to take loans, is it reasonable to predict that 50% of the people who want a loan don’t apply for loan? I suppose it is possible for a short period of time say a month or two if it is simply down to people’s opinion, anything longer than this then there must be an actual environmental condition that tells people this is the correct decision to make, ie to not take a loan.

Looking at reason three, people prefering to save money than to spend it. Again could 50% of people have this opnion? Yes sure for a short period of time say a month or two. Again, as I mentioned above anything longer than this then it must be environmental conditions dictating people’s behaviour rather than people simply having an opinion on what they think are the environmental conditions

So looking at reason two, the banks not making loan, either because they need the money themsleves or they simply make a strategic decision to stop making loans.

If we look at the first part, banks needing the money, this would imply that all the banks have made bad loans decisions at the same time and for the same duration of time. Is this a reasonable explanation? I would say no. For 100% of banks to all make bad loan decisions at the same time and for the same duration of time is extremely unlikely.

This is like saying that 5 major manufacturing companies all made the mistake of issuing credit to too many customers who could not pay their biils and they all did this at the same time and the bad credit effected all the companies for roughly the same duration of time. Is this likely?

In short no, unless there are envionmental conditions which could prolong people’s opinion.

What environmental conditions could cause these unusual conditions ie the majority of the population having the same opinion for a prolonged period of time. Well the most obvious is reality. If times genuinley are tough and people do actually have less money then this would cause this mass effect. Apart from reality is there anything else that could effect the mass consciousness?

The most obvious is the media and more specifically the mainstream media. In other words the TV, Radio and Newspapers and to a lesser extent mainstream movies. Can the mainstream media give the majority of people the same opinion about the economy if their message differs from what people actually see, especailly over a prolonged period of time?

I suppose it is possible for the short term but for the long term I think it is unlikely, unless heavy doses of propaganda are pumped out by the mainstream media to reinforce the illusion.

If the mainstream media can have a large effect on the mass consciousness then so can the government. This is soley down to the fact that government contributes to the vast majority of the mainstream media’s news content.

But again, could the government distort people’s perception of reality for long periods of time. Of course it is possible but I do not believe government propaganda which has a long term effect on the population can chop and change. The message must be consistent for it to be believable. So booms and busts would not be suited to long term government propoganda.

So in short it is possible for the media to effect people’s opinion but I think it is unlikely it can do this for a long periods of time to the majority of the people, if the reality is different.

So to summarise these points above. Reasons one and three are plasuible reasons for a short recession but they are not plausible reasons for causing long recession, ie more than 3 months.

Part one of reason two is also unlikely to cause a rescession of any form. Although the chances of all the banks making errors with loans is more probable than the population having the same opinion of the economy and being wrong.

So the point I am trying to make is that it is more likely that all the banks made a mistake rather than the majority of the population. Although it would be unusual for a group of companies to all make the same mistake at the same time as explained in the example above.

So a long term recession would have to be caused by an actual shortage of money, an actual reduction in loans rather than people’s opinion or a group of people making the same mistakes at the same time of the same magnitude ie banks making bad loans.

So the only remaing cause for a recession is the deliberate withholding of loans by banks and specifically the money centre banks, ie the banks that deal directly with the Bank of England.

Now at this point economists will be using the word “contagion” and “domino effect”. Okay is it possible that when one bank runs into difficulty it could have an effect on other banks and so on and so forth?

Lets look at it another way, if an oil company started reducing the amount of petrol it was selling in a deliberate fashion, is it possible that this would have a knock on effect on other oil company petrol stations?

The answer is yes, but only in a positive way, if BP for example decided to limit the amount of petrol it was selling, then people would go to Shell or Total or other companies to get their fuel. People would not go without fuel, they would simply get the fuel from other companies.

So again, this points to a controlled decision by the money centre banks as a group to stop lending.

Petrol is on a large scale which you could argue is quite close to an oligopoly. Let us look at an industry that is more fragmented. Fishing for example. If a trawler decided it was going to limit the amount of fish it would catch and sell, would this cause “contagion” or a “domino effect” to other trawlers. Again yes but the effect would be much smaller and it would be a positive effect on other trawlers because there will be slightly more demand for their fish.

So another conclusion we can draw from the petrol and fish example is that the smaller the business the less effect on the economy. The main conclusion being that if one company suffers it is beneficial for the other companies in the same industry NOT a drawback.

So to summarise this entire article, the only likely reason for recessions is that banks stop lending in a co-ordinted fashion.

But what reasons do banks have to create recessions? I am not exactly clear but here is one reason which came to me.

Let us look at what leads up to a recession, a boom. What fuels a boom? Cheap credit or in other words banks making loans easily and/or making loans with low interest rates to make borrowing more attractive.

So what effect does this borrowing have? When the loans are to business it creates factories, infrastructure, commercial property and so. When loans are to people it creates a boom for housing, land development for housing, it also creates a boom for businesses because sales are up and they can finance expansion.

And remember when a bank makes a loan this money is coming out of fresh air, it is simply creates on the banks balance sheet (nothing wrong with this). So in summary the effects of a boom is that there is a lot more infrastructure built whether it be civil or commercial. When the booms ends, when the recession begins, this infrastructure can be reclaimed buy the banks who have made the original loans which have gone bad.

So coming out of a reccesison the balance sheets of banks should look healthier with these assets.

So in conclusion the most likely reason for recessions is that they are deliberately induced by banks so they can accummulate hard assets during the following recession.

What is the solution? Power over the money supply should definitely be spread out amongst more banks. At the moment a small number of money centre banks control the money supply in the UK, (as little as 4 or 5 banks) and this makes the UK economy extremely vunerbale to mistakes made by these companies and it also opens the UK up to massive manipulation of its economy because power is concentrated in so few hands.

The Bank of England ultimately controls the banking sector so it would be up them to more evenly distribute power.

Ultimately consolidtation of power is always bad wherever it happens. Whether it be from a stability point of view, ie when power is concentrated a fewer number of people have to make a mistake to effect the population. And giving power to a small group of people always open up the possibility of abuse of power. Some people would say it guarantees the abuse of power

Power corrupts, absolute power corrupts absolutely

So in conclusion the control of the money supply should be in as many hands as possible to create stability and to limit abuse of power.

Either money should be controlled by the government directly, which would eliminate the need for governments to pay interest on it’s debts, or the power to issue currency could be put in the hands of anyone who wants to open their own bank.

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