Lessons from Recession

Is Recession Man made? ∞

Introduction ∞

”’Recession”’ – A word that sends jitters in the hearts of the IT nerds giving them sleepless nights haunted by the fear of possible pay cuts and layoffs. The outward causes of recession may seem to vary each time. The last time it was the ”bursting of the “dot com bubble”” and now it’s blamed on the “subprime crisis”). However, the underlying causes of all these recessions are more or less similar. In this article, we examine the main causes and discuss some of the solutions.

Root Causes of Most Recessions ∞

Greed and Panic ∞

Both of these are negative emotions and they govern the functioning of the economy and capital markets. Out of extreme greed, companies make over ambitious plans for expansion and borrow heavily to fuel their ambitions. They also go on a recruiting spree, which is when we get the ”feeling” that the economy is booming.

When corporates go overboard with such ambitious plans, any brief fall in demand for their products or services leads them into a heavy liquidity crunch and they are suddenly forced to cut down on their plans and costs (including manpower costs) to avoid huge losses. This is when we feel the pinch of recession.

A classic example of going overboard due to greed is the situation in which the Tatas find themselves today. The Tatas went overboard with their ambitions and bought over Jaguar Land Rover Company by taking huge loans, and are now struggling to repay the debt. They are now again borrowing from the common man (by way of Corporate FDs) to repay their debts. This means they are taking more loans to repay off earlier loans!

Greed can also lead to Corporate Frauds, as is the case with Satyam Computers, where the founders of the company fudged the company’s account books that presented a false picture of the company’s financials and inflated the company’s share price, enabling the company founders to make money at the expense of lakhs of shareholders and thousands of employees.

Protectionism or Panic is another emotion that plays with people’s minds. An example is when most equity investors suddenly get into a panic mood and sell off their stocks, causing a stock market crash.

Flawed Business Orientation ∞

Most companies are measured on their performance on a Quarter-to-Quarter basis or Year -to- Year basis. This means that the generation of profits is not sufficient, the companies always need to show higher profits compared to earlier quarters and years in order to satisfy their shareholders. Hence they take extra risks (such as investing in risky forex instruments, derivatives and subprime lending) for generating more profits. These risk-taking strategies backfire badly when there is a sudden liquidity crunch in the market.

High Commodity Prices (Crude Oil, Coal, Copper) & inflation ∞

One major flaw with most economies in the present times is excessive dependence on certain depleting natural resources, especially Crude Oil (Petrol). This remains a major worry for most countries, in spite of oil discoveries being made occasionally. Nobody has a concrete solution for this oil shortage and governments just helplessly watch the Crude Oil Prices shoot up as demand grows, plunging the economy into inflation and recession. Prices of all essentials (including food) shoot up as a result, as the middle-class people struggle more, to make ends meet.

”Did you know?” International prices of Crude Oil shot up from about $100 per barrel to as high as $150 per barrel within a couple of months in 2008, mainly due to traders “speculating” (read ”gambling”) with Oil Future Contracts resulting in artificial pushing up of the prices!

Inflation is another big concern, with food prices shooting up by as high as 50% within a year (Examples are rice, sugar and Dal).

Artificial Stimulation of demand ∞

Most economies run by encouraging the common man (read ”Consumers”) to go on a spending spree for luxury items and consumer goods, most of which are not really necessary. This spending increases profits of the companies that manufacture consumer goods, thus resulting in more money for government in form of tax collections.

To ensure this, liquidity (money) is artificially injected into the economic system, by way of fiscal stimulus packages and loans at reduced interest rates. This “artificial demand” for consumer goods, presents a false picture of a ‘booming’ economy, but clearly, such artificially stimulated demand cannot be sustained for too long, resulting in the economy plunging into a recession.

Turning a blind eye to the facts ∞

There are usually enough indications of a recession well before it actually occurs, but governments typically either ignore those indications, or push them under the carpet, or provide a temporary patch-up solution.

”Did you know?” The subprime crisis actually surfaced in 2007 itself (though the recession apparently started only in 2008). However, the US Fed just provided a patch up solution by reducing the money lending rates and injecting liquidity into the system. Everyone soon forgot about the looming crisis, and started squandering away the fresh money provided by the US Fed and in 2008, finally, the whole crisis resurfaced, this time in full throttle and could not be suppressed anymore. As a result, many financial giants in the US, such as Lehman Brothers and Merill Lynch went bankrupt and were taken over by other companies.

Solutions for building a Recession Proof Economy ∞

Agrarian Economy ∞

It has been proven, especially during recent times, that agriculture provides much more stable employment as compared to other industrial sectors. This has been one major reason why Indian economy (being predominantly agrarian) has been less affected by the recession, compared to the US and UK. Unlike in the US, where so many financial giants collapsed, no such thing happened in India.

Most Industries in the other sectors are unable to provide sustained employment over the long term. We have seen over the past decade that during each economic boom, a different set of sectors hog the limelight, whereas some others stagnate and plunge into recession.

”’Examples:- ”’

In the 1990s – IT sector was in the limelight

Early 21st Century- Finance, IT and Realty Sectors were in the Limelight, whereas Aviation and Pharmaceutical Industries were going through a rough patch.

Recent Recession (2008-09) – Infrastructure, Pharmaceutical and Healthcare sectors came into the limelight whereas IT, Finance and Realty Sectors went through a rough patch. Aviation has recently made a partial recovery.

All this leaves the Student community a confused lot, as they are not sure of what kind of career to pursue. For example, many students who went for degrees in Computer Science and IT with hopes of landing a good job in IT, subsequently found themselves unemployed and then turned towards government jobs.

”Did you know?” Companies in Agriculture Sector (such as Jain Irrigation, Bayer CropScience and Rallis India) have performed very well despite recession! Agriculture is clearly a recession-proof sector!

Cottage Industries: ∞

Cottage industries enable people to work at home with simple tools (such as handlooms) and produce sellable goods such as clothes, baskets, etc. The knowledge of the trade is easily passed on to subsequent generations. In contrast, modern factories require huge capital investments in terms of Machinery, power and infrastructure. This, in turn, requires a person to undergo many years of schooling and expensive professional college education (Read “Engineering”), not to mention the cut-throat competition at all stages, in order to get even a decent job.

The Vedic Observer ∞

Interestingly, the ancient Vedic lifestyle was designed to be peaceful and simple, where people did not have to work too hard or face cut-throat competition or gamble with shares in order to earn a livelihood, nor were they overtaxed, either mentally, energetically, or monetarily as we are in the modern times.

People would engage primarily in agriculture and cow protection. They used to work about 8 hours a day about 4 months a year during the sowing and harvesting seasons, which would provide them enough for the whole year. If anything additional was needed, that would be provided by trade and commerce centered on simple cottage industries.

People had more time for asking the larger questions of life. Just as we aspire to take up higher and higher positions and roles in this corporate world, the people of the Vedic Civilization would invest time in understanding the higher role and purpose of human life, i.e. understanding and reviving our original position as eternal living entities, servants of the Supreme Being.

This effectively means understanding the plans of the Supreme Being as described in the Vedic scriptures and help in the implementation of the same. Thus they learnt to live in harmony with nature and all other living beings with a single focus of achieving a common goal. The isopanishad aptly describes this – ”ishavasyam idam sarvam….” Isopanishad_Text1 – ”Everything animate or inanimate that is within the universe is controlled and owned by the Lord. One should therefore accept only those things necessary for himself, which are set aside as his quota, and one should not accept other things, knowing well to whom they belong”.

The society was mainly divided into four divisions. There was a learned/intelligent class of people (referred to as “Brahmanas”) who were in full knowledge of the scriptures and subject matters related to self realization and all moral & social codes, who selflessly focused on serving the society by educating the masses in higher subject matters of self-realization without any expectation of remuneration. The Ruling and Administrative class were ably guided by such learned brahmanas and they ruled efficiently and justly. The Mercantile Class would engage in agriculture, Cow Protection, Trade and Commerce. The labour class would assist all the above classes and would receive remuneration for the same. Since the Brahmanas guided the entire society, there were no worries related to the recession, job insecurity, stock market crashes, scandals, corruption, political instability, crime, pollution, etc.

Compiled by Vivek Devarajan