- Pronoy Chatterji
Inflation Is Up Again. Are We Headed for Another Recession?
by Pronoy Chatterji
Inflation. What is it and why is that the word we’re hearing everywhere? What does it mean that it is so high? Contrary to what those who are unfamiliar with the term might believe, “inflation” does not refer to the production of balloon animals or automobile tires. Facetiousness aside, with the drastic price hikes for nearly every store-bought good in the US, it’s important to consider whether the economy is headed into a recession comparable to the 2008 housing crisis – or potentially something worse – the Great Depression. There are multiple points of view on this topic, each equipped with the potential to be correct or absolutely catastrophic, but trends suggest that the economy is headed for green pastures and sunshine instead of an arctic plunge.
Most people don’t know what a recession is or they think it won’t affect them, and I can’t blame them. Recessions often happen in the background and under much outside speculation. It can be overwhelming to juggle all the different information coming from every news and social media outlet, which causes many to end up avoiding news on the subject altogether. However, recessions are real; they affect everything and everyone, from peoples’ paychecks to the price of eggs, and happen much more often than you may think. In this century alone, there have already been three, including the 2000 dotcom boom, the housing crisis of 2008, and now, the 2020-2022 recession. The most recent one will eventually be looked upon in a similar light, with the looming possibility of the economy plunging into a recession.
Catastrophic events usually create ripple effects within a society, often breaching the economy. When COVID-19 first ran rampant throughout the United States, it affected many Americans terribly. No one was allowed to work or go outside, people hoarded water bottles and toilet paper in their homes – life froze altogether. On top of millions losing their family and friends, the global economy also came to a stand-still. In fact, the GDP in the second quarter of 2020 took its deepest plunge since the Great Depression, wiping out nearly five years of steady growth. Given the terrible state of the economy that COVID-19 left Americans, it's hard to imagine any significant progress being made, and many experts concur that COVID still has its hold on the society and economy, with little hope for recovery.
We have seen a few of these recession scares in recent years. In fact, some which started in the early to mid-2000s proved to be just as scary as advertised. The two major recessions that were witnessed in this period had the same core reasons for their crashes: over-speculation. Speculation is the practice of purchasing a certain product in the belief that its cost will be more expensive down the road, and is something that many buyers do to prevent shortages. Following the housing boom of the early 2000s, mortgage dealers started becoming more lenient with whom they gave out mortgages to, often lending them out to people with poorer credit scores than usual. With housing prices skyrocketing, people started buying and selling houses at an alarming rate, and banks tried to take advantage of this boom by lending out high risk loans called “mortgage backed investments.” Banks thought that these loans would return higher payouts – a low risk, high reward type situation. With the rising housing prices, even if the owner couldn’t pay back the loan, the bank would get a better, more lucrative return on investment given the house was now worth more than the original mortgage was. However, the prices did not skyrocket. With confidence in the real estate market crashing, banks, in fear of subprime mortgages turning into collateral, stopped trading amongst themselves, and nothing could be prevented as confidence kept dropping in the market. With rising foreclosure rates and financial giants such as Lehman Brothers collapsing, the stock market crashed completely in September of 2008, losing half of its value and up to a quarter of Americans losing 75% of their wealth.
Some say the US has already entered a recession, depending on how you define the term. According to the dictionary, it means “two consecutive quarters of negative GDP growth,” which is what occurred in the summer of 2022. Looking back at that statistic, it would probably be some of the best news we could hear today because it shows that the economy has recovered and is showing signs of improvement. However, that is not the consensus, as the National Bureau of Economic Research (NBER), defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” If that is the case, then no, America never entered a recession in 2022, and with the current uptick in production in the GDP, is not heading for one anytime soon. Depending on which definition you follow, the nation either has hit one and recovered, or never hit one and is booming business. Either way, both are optimistic outlooks and should make Americans feel confident about the economy the US is about to enter.
Looking back at modern history and seeing the warning signs that led to the 2008 housing market crash, worrying over another recession would be comparing apples to oranges as over-speculation was the main cause of 2008, while 2020 was primarily due to the world economy coming to a standstill. While it is possible for other monetary crises to occur for different reasons, it’s highly unlikely that the US economy’s momentum will be interrupted in the coming years. Thankfully, the nation has recovered from COVID, and at least by the looks of it, the only recession we’ve experienced in 2023 are of viruses and bacteria.