Welcome to Finance and Fury the Furious Friday edition

If you have been paying attention to the news then you would know about the current GDP per capita recession.

Today we will look at recessions and different policies to help boost the economy. It is all apart of this miniseries on supply and demand side economics.

There are lots of different views to avoid recessions and get out of them.

What is a recession? What is a GDP per capita recession?

  • A period of temporary economic decline and negative GDP growth for 2 consecutive quarters.
  • The GDP per person is declining, we haven’t had a recession under this definition since June 1991
  • If this keeps happening for 2 years, that’s when we get a depression.

GDP?

  • The measurement of what we are marked against
  • An aggregate measure of production equal to the sum of the gross values added of all residents and institutions engaged in production

The four components to GDP?

  • Consumption, usually the largest component of GDP. The value of consuming by individuals in the economy.
  • Investment, it is business investments in new equipment and services. Buying things for the business to operate, this gets included in investments.
  • Government spending, the sum of government expenditure on final goods and services.
  • Net exports, this is our exports minus our imports. In addition, the services we produce that are used by other countries.

Economics textbooks will admit GDP is flawed when it comes to measuring production in an economy.

How do we boost GDP?

  1. Supply side: boost domestic demand through cutting taxes and reducing regulation
  2. Demand side: boost domestic demand through expansionary monetary policy, or expansionary fiscal policy

The Great Depression:

  • Started in 1929 and lasted until the late 1930s
  • What was the result?
  • What triggered this? Well a major fall in the US share market
  • Worldwide GDP fell by 15% and it lasted over 2 years

What was the cause?

  • Keynesian theory – demand driven theory. Loss of confidence from the market crash led to a reduction in consumption and investment spending
  • Why didn’t the massive spending help?
  • What are the issues with increasing the money supply?
  • What if there is no confidence?
  • Monetarists – believe the great depression occurred normally but the shrinking of the money supply exacerbated the economic situation
  • It was caused by a banking crisis
  • A vicious cycle started and a downward spiral accelerated
  • What are the criticisms?
  • What is the lack of spending or lack of money supply?
  • Why was there a crash in the first place?

Australian school and Debt Deflation

  • Friedrich Hayek and Murray Rothbard – wrote America’s Great Depression (1963)
  • Expansion of the money supply in the 1920s, leading to an unsustainable credit-driven boom
  • It was the inflation of the money supply that led to an unsustainable boom in asset prices and capital goods
  • What was the chain of events that proceeded?
  • Credit expansion cannot increase the supply of real goods
  • Who is Hans Sennholz?
  • Why were there protectionist trade policies?
  • Why were the income tax rates raised?
  • See any problems with demand side and monetarist solutions?

What happened in 2008?

  • Massive debt increases to fuel demand as well
  • Monetary stimulus has very little effect
  • Central banks print money for the sake of putting it into the economy

Summary:

  • Keynesian theory is really only effective for relatively closed off economies
  • The multiplier has been small
  • If we keep trying a failing solution, why should we expect a different result?
  • What is the solution? We will cover this next Friday

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