The Great Recession
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Economic downturns are not a new phenomena for the the United States which has had numerous recessions and depressions over it 234 year history.  Here's a partial list from the National Bureau of Economic Research (nber.org):

http://www.nber.org/cycles/cyclesmain.html

Although there is no definitive definition, recessions typically entail two quarters of negative GDP growth and depressions involve a 10% top to bottom decline in GDP (great depressions, the worst of the bunch, typically involve a 25% top to bottom drop of GDP).

The Cause of Economic Downturns

Outside of such events as war, natural disasters, etc., the Austrian School of Economics ascribes downturns to the Boom/Bust Cycle.  How does the boom/bust cycle function?  Easy money (often through government involvement in the economy) causes an artificial boom of economic activity which often ends up being concentrated in one sector (i.e. housing or the internet).  At some point in time, the boom wears off and a busts follows that clears out the malinvestments.  According to the Austrians, you get a bust because of the artificial boom.

Can We Avoid Downturns?

Well, not really, especially if the downturn was the result of an easy money boom before the bust.  The bust functions as a clearing out process (usually of bad debt) and provides a new base upon which to build again.  If the boom involved a lot of leverage (as happened in the housing bubble of the 2000's), you'll see an  extended process of debt write-down.  Code words for the debt clearing out process are deflation or deleveraging.

Although well intentioned, government intervention may simply postpone or prolong the readjustment.  Even with all of government programs of the 1930's, the great depression still ran all the way through 1945 at which time the government lowered taxes and removed regulations.  Japan's downturn lasted well over twenty years even with repeated government intervention with the result being an increase of the government debt to close to 200% of GDP.

What to Expect in a Downturn

Types of Downturns

Modest / Moderate Downturns

Severe Downturns

05/23/2010