Recession- What it means? Part II

(left to right)
Pic 01: You think this is tough, boy, wait until you reach ACCA level
Pic 02: Arrgghhh...This kids drive me up the wall.
Pic 03: To our happiness...Pic 04: Beautiful, Wonderful and Meaningful evening
Pic 05: President Obama's deficit spending is too little, too late

Recession Explained
Why do factories close down despite that high quality products are churned out? Why hardworking people are laid off from work, a waste of human talents that go unemployed? Why good location properties have few tenants? Puzzling as these questions are, but the economist will say it’s due to recession. Inspired and horrified by Economist Nobel Laureate Paul Krugman’s book – The Return of Depression Economics, allow me explain it in simple terms:

Romantic Couples and Babysitter Couples
Say in Singapore, there is this exclusive club where couples are of the upper middle income earners. These couples have children and they don’t trust hiring babysitters. This is inconvenient if couples want to spend romantic evenings out, we call them romantic couples. Since members are long friends and trust each other, they devise a system to help each other out. Each couple will be given fixed number of coupons. Romantic couples will use their allotted coupons to ‘pay’ babysitter couples. If romantic couples ran out of coupons, then they will have to offer other couples to babysit for them to earn their coupons. This system works fine if couples are regularly taking evenings out. One would expect it, if its Valentine Day, Anniversary Celebration, Engagement parties (normally wives have many ideas and occasions to celebrate).

What if couples decide that they need to accumulate the coupon by offering to babysit for others? The number is more than romantic couples? You will have more savings of coupons as fewer couples are taking romantic evenings. Since active romantic couples would quickly finish their coupons, then they need to stay home to offer to babysit. But since other couples in general are staying at home too, the coupons are not circulating. The frequency of evening out for romantic couples will fall as they are short of coupons. So they have to offer to babysit. Couples with surplus savings of coupons, seeing that there are fewer couples go out, may want to ‘conserve’ their precious savings and they too prefer to stay home.

We have most couples then staying home, causing a fall in frequency of romantic outings. There is a marked drop in demand for babysitting coupons even though couples are offering to babysit. This fall in demand compared to previous period is an output level receding, thus a recession.

Paradox of Savings
Here is the paradox, the more couples ‘save’ coupons the less the coupons are circulated, the lower the demand for babysitting services. However, the opposite is true, say each couple on average takes 4 times romantic outings to 9 times a month, then the coupons will circulate around from 4 to 9 times, creating more opportunities for couples to take evenings out.

The exclusive club may issue new coupons to ‘stimulate’ demand but the figure may be deemed too small to match babysitting couples.

Recession hits an economy, when spenders i.e. consumers, investors and government decide to spend less which translates to aggregate fall in demand. Even if McDonalds, Coca Cola and Steven Spielberg movies offer fantastic products or services, they will still have deteriorating business. Worst scenarios are once healthy firms face shut down risks. The speed of spending as dropped significantly causing less demand for goods and services.

In other words, we have healthy factories, hardworking people and good infrastructures, but a slow down in spending could not justify the use of these resources, causing unemployment and suplus resources.

Point to note is governments worldwide like America is issuing new ‘coupons’, by increasing money supply to boost demand. How? Allowing banks more fund to extend loans, credit and hire purchase. But there are few borrowers and spenders to use the new funds. Not giving up, President Obama led the spending by committing USA Government to projects worth US$797billion. This large in itself but is paltry compared to the trillions of dollars lost due to reduced spending from consumers and investors.

Malaysian Government pledged to spend RM1bilion (US$1=RM3.50) a month but compared to the size of loss output due to fall in demand or speed in spending, again its insignificant. Already Multi Nationals firms are announcing job cuts, investment postponements and cutting costs all of which worsen the already weakened demand.

Bright light at end of tunnel?
Like all recessions, they recover to healthy growth. Why not consider investing in upgrading?your qualifications? Buy good robust properties? Invest in businesses? all in anticipation of returning days where couples go out for romantic evenings.

In my next article, i will post analysis by renown economists who predicted darkening economic days ahead.