Have you ever wondered how the government knows whether the economy is growing or in a recession? A group called the National Bureau of Economic Research has defined a recession as “two consecutive quarters of negative economic growth.” In other words, if Gross Domestic Product (a measure of national income) goes down for 6 months, we have a recession. If GDP goes down for more than two consecutive quarters, according to the NBER, we have a depression.
The thing is, government economists don’t want to say the word ‘depression’, because to them it conjures up memories of the Great Depression of the 1930s. As all government economists are essentially Keynesians, they believe that ‘animal spirits’ move the markets and the economy. According to WikiPedia:
“Animal Spirits” is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence.
Government economists don’t want to ‘spook the cattle and cause a stampede’ as they feel that people will panic and stop buying. To Keynesians, that would be bad for the economy.
So, the new convention has been to call the decrease in GDP at the end of 2008/beginning of 2009 “The Great Recession”. Unemployment doubled, GDP fell, and the economy slowed to a crawl. According to the NBER, there were four consecutive quarters of falling GDP. And according to their own definitions, the economy was in a depression, not a recession.
As the economic malaise (thanks, Jimmy Carter), or Great Recession has continued, government economists are trying to come up with new ways to ‘stimulate’ the economy. Some of these ways would include:
- Lower interest rates. What this means is, more inflation. The reason why this wouldn’t seem to work to get us out of the Great Recession is that the Federal Reserve has lowered interest rates almost to zero already. If you don’t believe me, go to your bank or credit union and ask them what the interest rate is for a savings account. The money in my account makes me 0.25% annually. That’s a whopping 25¢ on every $100 in my account. Let the good times roll!
- Quantitative easing. The Fed ‘prints’ money and uses it to buy government debt. Once again, this means more inflation. From my personal experience, prices have gone up at least 30% in the last 3-1/2 years. The Fed has done two rounds of Quantitative Easing already: QE 1 increased the money supply by $1.8 trillion dollars by the end of 2009. QE 2 took place in 2010, with the Fed increasing the money supply by another $600 billion. In total, the Fed increased the U.S. money supply by about 33%. One problem with quantitative easing: it transfers real resources from taxpayers to the financial markets. But wait there’s more: QE3
- Negative interest rates. Possibly my favorite option. A negative interest rate would mean that banks would pay you to take out a loan. You read that right, you would borrow money and the banks would pay you! Sweet Count of Monte Cristo, what a deal! According to the column linked below, the problem is that this would result in banks not lending any money to anyone, at least as long as an alternative to digital money (a physical currency) still exists. You don’t get rich in banking by giving money away, which is essentially what would happen if the banks were stupid enough to go for this. Unless, of course, we get rid of that pesky currency that people carry in their wallets. Once money is purely digital, the banking system is free to do whatever it wishes.
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