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Tag: Economic Recession

  • What Triggers Economic Recession: Definition, Causes, and Impact on Society

    What Triggers Economic Recession: Definition, Causes, and Impact on Society

    In measuring the development and progress of a country, of course the main reference or indicator is how much economic growth is.

    Meanwhile, the level of economic growth can be seen from the value of the Gross Domestic Product (GDP) in the country.

    If the GDP is low and continues to decline for months, it can trigger an economic recession . What is an economic recession?

    Understanding Economic Recession

    A recession or slump is a condition marked by a decline in the wheels of the economy due to the weakening of the value of Gross Domestic Product (GDP) for six consecutive months in the same year.

    A recession is marked by a significant decline in economic activity that lasts for several months. An economic recession can also be defined as a major slowdown or contraction in economic activity.

    Recession is marked by the value of economic growth reaching 0% and can even reach minus in its worst condition. This condition can certainly disrupt the economic system and threaten the survival of the community.

    A recession can be characterized by high unemployment , falling retail sales, and a prolonged contraction in manufacturing earnings.

    Characteristics of an Economic Recession

    This economic disaster certainly has certain characteristics, the following are the characteristics:

    1. Gross Domestic Product (GDP) continues to decline.
    2. The real income of the people is decreasing.
    3. The decline in sales and manufacturing production , many goods are not sold and piled up in factories.
    4. The unemployment rate is getting higher, while there are fewer jobs.
    5. People’s purchasing power or consumption is low.
    6. Economic growth has slumped for two consecutive quarters.

    Causes of the Economic Recession

    This decline in economic conditions and GDP is certainly caused by many factors, including:

    1. Inflation

    Inflation is a condition in which the price of goods increases continuously. This is actually not a bad thing, but if this price increase occurs excessively or significantly, it will certainly have an impact on society and cause a recession.

    If the price of goods for public needs continues to soar to the point where people are unable to carry out consumption activities and cannot fulfill their needs, then this can be a disaster for the country.

    2. Deflation

    The opposite of inflation, deflation is a condition in which the price of goods continues to experience a significant decline. This will have a similar impact, because if production prices fall, wages will also fall and suppress market price stability.

    Deflation has more of an impact on business owners. If this condition continues, many companies will not be able to continue their business and lead to bankruptcy. This will certainly have an impact on the destruction of the economic system.

    3. Asset Bubble

    An asset bubble is a situation where the impact can be enormous. This condition occurs because there are many investors who are competing to buy shares when the value is high, and competing to sell them when the economy is in disarray.

    Another name for this situation is irrational excitement. This joy comes when investors make decisions to buy stocks and real estate when the economy is good. It’s that fun that inflates the stock market and residential assets.

    Until in the end the bubble burst because the economy was in a downturn, then they would destroy the market by selling all the assets they had. This then triggers a recession.

    4. Economic Shock

    This condition can be many things. Starting from a pile of individual debt, to companies. The more debt you have, the higher the repayment fee will be. In fact, this can get to the point where the debtor is unable to pay off the debt.

    Economic shocks can also occur due to natural disasters , political and social instability, terrorism , war , or in times of pandemics such as those that have occurred since 2020 until now.

    5. High Interest Rates

    High interest rates can also cause prolonged economic problems . A high nominal can indeed protect the value of the currency, but it can also burden the debtor and cause credit faltering. If this problem occurs continuously, it is not surprising that many banks close and collapse.

    6. Loss of Investor Confidence

    In economic development, investment is the key. Therefore, it is necessary to have a conducive and safe climate so that investors are interested and believe in pouring their money.

    If many investors lose confidence and withdraw their investment, then the economy will be weak, production will decrease, unemployment will increase and of course the country will experience an economic recession.

    7. Imports are Bigger than Exports

    When countries bring in more of their basic needs from abroad and are not matched by sales of domestic products to foreign countries, this will trigger a recession.

    It is clear that the expenditure for obtaining imported goods is greater than the income from selling local products to foreign countries. This will of course lead to a deficit in the state budget.

    Impact of the Economic Recession

    The economic recession will certainly have a big impact on all. At least this impact will be grouped into 3 groups, namely:

    1. Government

    An economic recession can cause a reduction in the state budget that comes from taxes and non-taxes. This is because people’s income and property prices have decreased.

    Not only that, the recession also causes high unemployment rates. Of course, the government must find ways to open up the widest possible employment opportunities for those in need.

    Not surprisingly, this condition can make countries apply for loans to foreign banks and increase the amount of state debt.

    2. Company

    Recession is one aspect that can lead to business bankruptcy . When the company is not strong enough to face losses and economic problems that hit the market, the solution is to go out of business.

    Of course, that’s not a good way out. Because this causes massive layoffs that lead to low economic activity in the community due to poverty.

    3. Workers

    They are the worst affected in the event of a recession. Workers will be threatened with losing their jobs and having difficulty meeting their daily needs. If their income is nil due to layoffs, then the impact will no longer only be on the economy, but will also spread to social problems and so on.

    Example of an Economic Recession

    The world has changed dramatically in the three months since our last update of the World Economic Outlook in January. A rare disaster, a coronavirus pandemic, has resulted in a tragically large number of human lives being lost. As countries implement necessary quarantines and social distancing practices to contain the pandemic, the world has been put in a Great Lockdown. The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes.

    source : imf.org

    Difference Between Recession and Economic Depression

    In addition to the economic recession that threatens the survival of the community, there is also the term economic depression. Here’s the difference:

    • Scale. The occurrence of a recession is usually limited to one country, while an economic depression affects the global economy. An economic depression is a much more severe condition of the economy and its effects are worse than a recession.
    • GDP levels. The level that marks the onset of a recession is that its GDP fell in the range of minus 0.3-5.1%. While depressed, its GDP was at minus 14.7%-38.1%.

    Period of time. A country is considered to be in a recession when its economy has deteriorated for 6 to 18 months in a row. In depression, the effects are much more severe and long lasting. The slump in economic conditions in the economic depression can last for more than 18 months.

  • What Are Economic Bubbles, How To Avoid Them?

    What Are Economic Bubbles, How To Avoid Them?

    The term economic bubble or often also referred to as a speculative bubble or financial bubble. This is one thing to watch out for, especially when you invest.

    Determining investment instruments is not an easy thing. Of course, everyone hopes that the chosen investment instrument can increase in price so that it will provide benefits in the future.

    There are many things that must be considered so that you are not wrong in choosing an investment instrument. One thing that is quite important and needs to be watched out for is the phenomenon of the economic bubble.

    Because this phenomenon can make the value of the investment instrument you choose fall very deeply. So instead of getting a profit, you will actually experience a large amount of loss.

    Understanding the term bubble economy

    The phenomenon of economic bubbles has occurred in many countries and has a long history. The occurrence of this phenomenon makes many people suffer losses in very large numbers.

    The term economic bubble itself refers to the condition of rising asset prices to become unrealistic. Furthermore, the price of these assets experienced a sharp decline in a very fast time.

    So that people who have bought assets at high prices, suffer losses due to the decline in prices. This phenomenon can occur in various assets such as stocks, property and other types of assets.

    The naming of this phenomenon takes from the reality of bubbles that easily rise to the top. But at a certain point, the bubble will burst very quickly.

    This illustrates how the price of an asset can soar to the point of being unrealistic. Until in the end the value of the asset broke and the price fell to a very low level.

    The term economic bubble has been known by economists as something to be wary of. Because the occurrence of this phenomenon will have an influence on macroeconomic conditions.

    There have been many examples of economic crises caused by the economic bubble phenomenon. One of them is the housing bubble that occurred in 2005 – 2008 in the United States.

    In that year, house prices in the United States experienced a very high increase. Until finally in 2008, the bubble burst and caused an economic crisis.

    Until finally the American government had to bail out or provide bailout funds to help some companies keep operating. Without the bailout funds, there will be massive layoffs.

    Understanding Some of the Causes of Economic Bubbles

    In general you have understood the term bubble economy. In fact, this phenomenon refers to the movement of the price of an asset that increases and then at some point will break.

    Economists still do not know the exact cause of this phenomenon. However, there are several things that may be the cause of this phenomenon, namely as follows.

    Excessive Liquidity in the Financial System

    The first thing that may be the cause of an economic bubble is excessive monetary liquidity in the financial system. Simply put, the ease of getting a loan can be the cause of an economic bubble.

    Again remember that the term bubble economy refers to a condition in which asset prices increase to the point where it becomes unrealistic. The ease of getting a loan is one of the causes of this.

    With the ease of getting a loan, the purchase of an asset will increase. According to the law of supply-demand, more demand will make the price of an asset increase.

    At a certain point, the price of the asset becomes unaffordable so it cannot be sold. As a result, the owners of assets will make sales at low prices.

    This is done so that they still get income even though they have to suffer losses. Because on the other hand, they still have debts that have the potential to default.

    Investors’ Speculative Behavior

    One of the possible causes of the economic bubble phenomenon is the speculative behavior of investors. Because it refers to the term economic bubble, that in fact an increase in asset prices is an expected thing.

    The higher the potential increase in the price of an asset, the more attractive it will be. Because these assets are predicted to be able to provide huge profits in the future.

    Therefore, an asset that is considered to have a high price in the future must be in great demand. So that more and more investors invest in these assets and make the price increase.

    However, if the price increase is not accompanied by an increase in the intrinsic value of the asset, it will have a bad impact. Because in the end, people will realize that the asset price is too expensive.

    So the demand for these assets will decrease which will also lower the price. So investors who have bought assets at high prices will experience losses.

    The Greater Fool Theory

    One theory that is considered to be the cause of the economic bubble is the greater fool theory . This theory is in line with the term economic bubble which describes a significant increase in asset value.

    In general, this theory states that price increases occur when someone can sell an asset that is overpriced to a “stupid” person. Then the “stupid” person will sell it back to the “stupider”.

    This will continue until the price of an asset becomes very high. Until finally the last person could no longer find a “stupider” one to buy the asset.

    So that the bubble will burst and make asset prices that were very high fall very low. So the last “stupider” person will receive a large amount of loss.

    Extrapolation

    Extrapolation is the behavior of equating historical data in the past with the future. This could be the cause of the economic bubble phenomenon considering that the term economic bubble is closely related to price increases.

    Indeed, one way to predict the value of an asset is to look at historical data. However, historical data is not the only data because there are other aspects that also need to be taken into account.

    Extrapolating behavior does not take this into account. They only see that the value of an asset in the past can rise to a very high which may also happen in the future.

    At some point, investors will realize that these assets cannot provide the returns as in the past. So that the bubble burst was marked by a decrease in asset prices.

    Lack of Community Financial Literacy

    It is undeniable that today many people are starting to realize the importance of investing. Unfortunately, awareness of investment is not accompanied by good financial literacy.

    In fact, one of the possible causes of the economic bubble is the lack of public literacy regarding the financial world . In fact, there are still many people who do not know the term economic bubble.

    This lack of literacy or knowledge will certainly affect people’s decisions to invest. One of them is in determining the right instrument and can provide benefits in the future.

    People who are minimal in financial literacy tend to make decisions on a whim and without careful consideration. As a result, they are more easily trapped in the economic bubble phenomenon so that they will get losses in the future.

    Tips to Avoid This Phenomenon

    After understanding the term economic bubble and its causes, of course you need to avoid this phenomenon. Because the losses that can be received due to the economic bubble phenomenon can be very large.

    There are several ways you can do to avoid this phenomenon. Here are some tips that can be done so as not to get caught in an economic bubble.

    Perform Fundamental Analysis

    One of the techniques in investing is fundamental analysis. This technique is done by choosing investment instruments that have good fundamental values. Of course, the fundamental value must be in line with the asset price.

    Fundamental analysis techniques are usually used in stock selection. This method is done by looking at the company’s performance and assessing whether the stock price is in accordance with that performance.

    But you can apply fundamental analysis techniques not only to stocks. Various other assets also have a fundamental value or intrinsic value on which the price of the asset is based.

    Given the term economic bubble is an increase in the value of prices to be unrealistic, then it doesn’t matter as long as the price increase is reasonable. This means that the price increase occurs because the intrinsic value increases.

    Don’t follow

    One of the problems faced by investors, is the fear of making decisions. So many investors prefer to follow the steps or decisions of other investors.

    This is what makes signaling groups very popular  because it makes investors not have to think. The decision to buy or sell an asset simply follows the signals given in the group.

    Whereas decisions that only follow the words of others are very vulnerable to bad effects. Because the decision could be wrong and was done to increase the price of a particular asset.

    People who are not familiar with the term bubble economy are often used for things like this. When the bubble has burst, then of course the one who feels the loss is yourself.

    Improve Financial Literacy

    Improving financial literacy is a must to avoid the economic bubble phenomenon. Apart from exploring the investment world, you also need to learn other things such as financial management and macroeconomics.

    Because basically, economic activities around the world are interconnected. For example, economic conditions in the United States can have an impact on the economic conditions of other countries.

    In addition, it is very important for you to study the economic history of the world. So you can take lessons from history and use them for consideration in the present.

    Moreover, the term economic bubble itself is not new. There has been a lot of history from various countries in the world that you can use as a lesson to be able to avoid this phenomenon.

    Avoid Excessive Desire (Greedy)

    One of the problems that must be avoided by investors is greed. Because greed will make you want the maximum profit to ignore various aspects that must be considered.

    Especially now that there are many investment instruments that promise too sweet but end up losing. Excessive desire or greed will encourage you to get stuck in such an investment instrument.

    Usually when feelings of greed arise, then someone will forget the term economic bubble. When they see an asset experiencing a rapid increase in price, they buy it without thinking.

    As a result, when the bubble burst, they were trapped because they had bought at a high price. Even worse, they can’t sell the assets, so they lose all their investment capital.

    One of the things that investors should be wary of is the economic bubble. Especially considering the term economic bubble that makes people suffer huge losses.

  • Understanding the Meaning of Economic Bubbles

    Understanding the Meaning of Economic Bubbles

    There is a phenomenon in economic studies called economic bubbles or bubble economy . This phenomenon occurs in many countries and has a long history. In this article we will study the general definition of a bubble economy or economic bubbles and some of the events in which the phenomenon of economic bubbles occurs.

    According to its basic concept, economic bubbles or bubble economy refers to a situation where the price of a product or asset in a certain market segment experiences an unusual or unnatural increase in value/price, and occurs in a relatively fast time.

    There are many examples of economic bubble phenomena that occur and involve different economic sectors, including the housing sector or better known as housing bubbles and the stock market or stock bubbles .

    In its development, there have been many studies that examine more comprehensively the concept of the bubble economy , including the question of what is meant by an unreasonable price increase and how to categorize time as relatively fast. However, we will not discuss this in this paper.

    The following are some examples of events that illustrate the phenomenon of economic bubbles .

    One of the classic examples of the bubble economy phenomenon occurred in the 1637’an era known as The Tulip Mania .

    Since the late 1590s, tulips have become one of the commodities imported from Turkey to the Netherlands. Later, this flower became phenomenal in the Netherlands and became one of the trendsetters , especially as a decoration on clothing. Because of the high charm of tulips in the eyes of the public, the demand for these flowers soared rapidly with increasing public demand, until its peak in the early 1637’s.

    The high demand, which is not matched by the availability of tulips, has made the price of tulips soar to the equivalent of 40 times the average salary of Dutch workers per year. Unfortunately this did not last long, especially when market participants holding tulips started selling the flowers to the market and other market participants followed suit, causing the price of tulips to plummet within a month. It is said that after the incident, the price of tulips was not more expensive than the price of a red seed.

    Economic bubbles in the 1997-1998 Asian economic crisis.

    Not a few studies have stated that the 1997-1998 Asian economic crisis was caused, among other things, by the bursting of the economic bubble, considering that in the late 1980s and mid-1990s, interest rates in developing countries in the Asian region tended to be high, far above interest rates. interest offered by developed countries.

    The high interest rate is seen as an attraction by investors, resulting in a very large capital inflow to developing countries, including South Korea, the Philippines, Indonesia, Thailand, and Malaysia. As a result, the economic growth of these countries increased rapidly to be in the range of 8% to 12%.

    Even so, the high growth was solely due to the large inflows of capital, not supported by investment in the real sector and productive assets owned by these countries. In other words, the economic fundamentals of these countries can be said to be porous.

    As a result, when the Central Bank of the United States began to raise the benchmark interest rate ( Fed rate ) after being able to recover from the domestic economic recession, the flow of funds that previously existed in Asia began to move rapidly towards the US market which was considered more stable.

    In addition, the higher the interest rate ( Fed rate ), the stronger the US$ exchange rate against other countries’ currencies. These two factors led to massive capital flight from Asia. In the end, this caused a panic rush in the banking sector, when many people collectively withdrew the cash they had stored in commercial banks, resulting in the collapse of Asian currencies.

    The case of the economic bubble that hit internet-based companies ( .com companies ) in the mid-1990s to early 2000s.

    Another example of the occurrence of economic bubbles in the modern world is the period from the mid-1990s to the early 2000s. At that time technological developments entered a new phase, where there was a boom in internet-based technology companies. This period is also known as the era of The New Economy , which was marked by the emergence of internet – based companies or better known as . com companies .

    When these companies began to go public , the value of their shares skyrocketed many times over, offset by high expectations of market participants and the general public for the success of the new economic era. At that time, all issues related to the internet and online became the main topic of every conversation with optimistic tones.

    Unfortunately, all of these things are not followed by prudent company management , solid financial foundations, and optimal analysis of operating profit/loss calculations; in other words, the focus of attention is the marketing factor alone.

    Until when the United States Central Bank ( the Federal Reserve ) again raised its benchmark interest rate in the 1999-2000 range, these companies began to lose financial strength. This was exacerbated by the number of start-up companies that posted large losses in their financial statements.

    In the end, all public expectations did not materialize, and the economic bubble burst. Records say there is more than US$ 8 trillion evaporated in the market. Even big companies like Amazon.com, Cisco System, Priceline.com, to Yahoo! experienced a decline in stock prices by more than 90% (Jimenez, Alvaro, Understanding Economic Bubbles , 2011).

    Furthermore, there are several theories that try to explain the characteristics of the economic bubble, one of which is the research conducted by Thompson and Hickson.

    The study conducted by the two mentioned two types of bubbles , namely short -term informational monopoly bubbles . This type of economic bubble is usually characterized by the absence of an increase in the supply of products/assets. These bubble characteristics are also known as mini bubbles .

    These bubbles tend to occur through market manipulation mechanisms by market participants who have information about certain assets/products. With financial strength, certain market participants began to speculate on the asset. This attracted the attention of other market participants and began to hunt for similar assets, resulting in a drastic increase in the value/price of the asset in the market.

    This condition is usually unpredictable from the start and it is not known how long it will last. Therefore, this phenomenon is not accompanied by an increase in supply to offset demand .

    Furthermore, the bubble will burst when the perpetrator performs a massive asset disposal, thereby dropping the price/value of the asset.

    As we know, there are at least two behaviors ( economic behavior ) that we can find in market participants, namely those who make decisions with a long-term horizon and prioritize the fundamental factors of an asset, and market participants who focus more on short-term profits, by making purchases. asset at a low price and release it again when the price is high (market participants of this type are known as speculators).

    In this case, the phenomenon of The Tulip Mania can be categorized as short-term informational monopoly bubbles .

    Meanwhile , the next bubble is a long-term government involved bubble , which tends to last longer and is characterized by an increase in product/asset inventory.

    Bubbles like this usually occur as a consequence of taking or changing economic policies (monetary and/or fiscal) and other policies by the relevant authorities.

    However, different from the first type of bubble , here policy makers have calculated and calculated the impact of implementing the policy, both positively and negatively, thus including anticipatory steps as compensation for these impacts.

    The case of .com companies is an example of long-term government induced bubbles . This is evidenced by the growing number of .com -based companies even today, but with capitalization that is not accelerating as fast as in this case (Thompson, E., and Charles R. Hickson, Predicting bubbles, Global Business and Economic Review , Vol 8, 2006).

    In closing, the phenomenon of economic bubbles ( economic bubbles or bubble economy ) has occurred since several centuries ago until now. These bubbles can occur due to purely speculative factors, but can also be caused by the emergence of consequences for economic policies taken by policy-making authorities. **