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  • For millennia,

  • the people of Britain had been using bronze to make tools and jewelry,

  • and as a currency for trade.

  • But around 800 BCE, that began to change:

  • the value of bronze declined, causing social upheaval and an economic crisis

  • what we would call a recession today.

  • What causes recessions?

  • This question has long been the subject of heated debate among economists,

  • and for good reason.

  • A recession can be a mild decline in economic activity

  • in a single country that lasts months,

  • a long-lasting downturn with global ramifications that last years,

  • or anything in between.

  • Complicating matters further,

  • there are countless variables that contribute to an economy's health,

  • making it difficult to pinpoint specific causes.

  • So it helps to start with the big picture:

  • recessions occur when there is a negative disruption

  • to the balance between supply and demand.

  • There's a mismatch between how many goods people want to buy,

  • how many products and services producers can offer,

  • and the price of the goods and services sold, which prompts an economic decline.

  • An economy's relationship between supply and demand

  • is reflected in its inflation rates and interest rates.

  • Inflation happens when goods and services get more expensive.

  • Put another way, the value of money decreases.

  • Still, inflation isn't necessarily a bad thing.

  • In fact, a low inflation rate is thought to encourage economic activity.

  • But high inflation that isn't accompanied with high demand

  • can both cause problems for an economy and eventually lead to a recession.

  • Interest rates, meanwhile,

  • reflect the cost of taking on debt for individuals and companies.

  • The rate is typically an annual percentage of a loan

  • that borrowers pay to their creditors until the loan is repaid.

  • Low interest rates mean that companies can afford to borrow more money,

  • which they can use to invest in more projects.

  • High interest rates, meanwhile, increase costs for producers and consumers,

  • slowing economic activity.

  • Fluctuations in inflation and interest rates

  • can give us insight into the health of the economy,

  • but what causes these fluctuations in the first place?

  • The most obvious causes are shocks like natural disaster, war,

  • and geopolitical factors.

  • An earthquake, for example,

  • can destroy the infrastructure needed to produce important commodities such as oil.

  • That forces the supply side of the economy to charge more for products that use oil,

  • discouraging demand and potentially prompting a recession.

  • But some recessions occur in times of economic prosperity

  • possibly even because of economic prosperity.

  • Some economists believe that business activity from a market's expansion

  • can occasionally reach an unsustainable level.

  • For example, corporations and consumers may borrow more money

  • with the assumption that economic growth will help them handle the added burden.

  • But if the economy doesn't grow as quickly as expected,

  • they may end up with more debt than they can manage.

  • To pay it off, they'll have to redirect funds from other activities,

  • reducing business activity.

  • Psychology can also contribute to a recession.

  • Fear of a recession can become a self-fulfilling prophecy

  • if it causes people to pull back investing and spending.

  • In response, producers might cut operating costs

  • to help weather the expected decline in demand.

  • That can lead to a vicious cycle as cost cuts eventually lower wages,

  • leading to even lower demand.

  • Even policy designed to help prevent recessions can contribute.

  • When times are tough, governments and central banks may print money,

  • increase spending, and lower central bank interest rates.

  • Smaller lenders can in turn lower their interest rates,

  • effectively making debtcheaperto boost spending.

  • But these policies are not sustainable and eventually need to be reversed

  • to prevent excessive inflation.

  • That can cause a recession if people have become too reliant on cheap debt

  • and government stimulus.

  • The Bronze recession in Britain eventually ended when the adoption of iron

  • helped revolutionize farming and food production.

  • Modern markets are more complex,

  • making today's recessions far more difficult to navigate.

  • But each recession provides new data to help anticipate and respond

  • to future recessions more effectively.

For millennia,

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B1 US TED-Ed recession inflation economic demand interest

What causes an economic recession? - Richard Coffin

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    Raven Lin posted on 2019/10/16
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