Questions that arise between economists regarding recessions often involve current politics and media performance, but are often more general - what policy implications do recessions have? are there other economic problems associated with recessions? is there a difference between a recession and a depression; if so, where do we draw the line? what global trends can be seen to cause, and perhaps even prevent, recessions - and most importantly: how do we predict recessions and prevent serious economic harm to families and businesses during a recession.
Generally, a recession is defined, in the field of formal, neoclassical microeconomics to be a reduction, in terms of GDP, of a countries production for two or more clearly defined periods (generally, quarters). In the United States, however, the private group of economists organized under the "National Bureau of Economic Research" officially defines when a recession starts and finishes.
Many, particularly those with degrees or research experience in the field of finance - that is, financial analysts, advisors, researchers and those closely involved with the stock market - suggest that recessions can be entirely predicted by the performance of the stock market. This is often strongly correlated with those who believe in the Efficient Market Theory - the economic theory that all prices in a market should be absolutely perfectly "right," because if they're not, a sufficient number of rational agents will bid their prices up until they are. In this case, analysts say that recessions are predicted by falls in general stock market performance (as, investors predict that future profits will be lower than the once predicted, and that prediction is the factored in to the price). Often, they suggest watching market indexes such as the Dow Jones Industrial Average, or Standard and Poor's 500 index.
This indicator correlates strongly, however, a dozen or so of the largest falls in the stock market over the last 50 years have shown absolutely nothing that appears to be a recession shortly after; certainly nothing formally declared contractionary. Furthermore, economic research in to the subject overwhelmingly concludes that stock market collapses occur well after the recession has already begun in many (if not most) cases - clearly an indicator that predicts something which already happened, isn't much of a useful indicator at all.
Participants in the previously mentioned Efficient Market Theory are likely to be strongly supportive of the Inverted Yield Curve theory as well. When an analyst researches a set of bonds or term investments (such as term deposits, T-bills, etc.), a number of different rates, for different time periods is reported - for example, at our current dismal rates, 1 year Canadian GICs are paying approximately 1.15 per cent interest, while 5 year GICs rank in at 2.2 per cent. According to inverted yield curve theory, if the yield curve - that is, the interest rates plotted against the length of the investment - becomes negative, (longer bonds pay less interest than shorter bonds, holding all other factors constant) then a recession is ahead. The theory here, is that people are less likely to want money during a recession, as fiscal supply shrinks, and consumers are more risk averse avoiding borrowing more money. Again, this suggests that the market itself is clearly aware of when a recession is forthcoming.
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Generally, a recession is defined, in the field of formal, neoclassical microeconomics to be a reduction, in terms of GDP, of a countries production for two or more clearly defined periods (generally, quarters). In the United States, however, the private group of economists organized under the "National Bureau of Economic Research" officially defines when a recession starts and finishes.
Many, particularly those with degrees or research experience in the field of finance - that is, financial analysts, advisors, researchers and those closely involved with the stock market - suggest that recessions can be entirely predicted by the performance of the stock market. This is often strongly correlated with those who believe in the Efficient Market Theory - the economic theory that all prices in a market should be absolutely perfectly "right," because if they're not, a sufficient number of rational agents will bid their prices up until they are. In this case, analysts say that recessions are predicted by falls in general stock market performance (as, investors predict that future profits will be lower than the once predicted, and that prediction is the factored in to the price). Often, they suggest watching market indexes such as the Dow Jones Industrial Average, or Standard and Poor's 500 index.
This indicator correlates strongly, however, a dozen or so of the largest falls in the stock market over the last 50 years have shown absolutely nothing that appears to be a recession shortly after; certainly nothing formally declared contractionary. Furthermore, economic research in to the subject overwhelmingly concludes that stock market collapses occur well after the recession has already begun in many (if not most) cases - clearly an indicator that predicts something which already happened, isn't much of a useful indicator at all.
Participants in the previously mentioned Efficient Market Theory are likely to be strongly supportive of the Inverted Yield Curve theory as well. When an analyst researches a set of bonds or term investments (such as term deposits, T-bills, etc.), a number of different rates, for different time periods is reported - for example, at our current dismal rates, 1 year Canadian GICs are paying approximately 1.15 per cent interest, while 5 year GICs rank in at 2.2 per cent. According to inverted yield curve theory, if the yield curve - that is, the interest rates plotted against the length of the investment - becomes negative, (longer bonds pay less interest than shorter bonds, holding all other factors constant) then a recession is ahead. The theory here, is that people are less likely to want money during a recession, as fiscal supply shrinks, and consumers are more risk averse avoiding borrowing more money. Again, this suggests that the market itself is clearly aware of when a recession is forthcoming.
