Paul Krugman's latest version of his book The Return of Depression Economics makes for terrific reading . That he won the nobel prize for economics last year shows out in the form of his clear thinking about the reasons why depressions happen and how they lead to prolonged recessions .
He has masterfully de-jargoned the crisis making it a good read .
Despite all his explanations , I think the basic reasons for a recession are much simpler .
All that marketing as a science is focussed on doing is converting wants into needs. And creating more and more wants and converting more and more of them into needs. Till one day your infinitely bloated 'wants' make you a slave of the ambitious and equally 'wanting' financial system.
Let me illustrate this with an example .
Let's say - a basic need is to have a house in Mumbai .
You have two options - buy or rent ( classic dilemna - no McKinsey needed )
If you rent , you pay a certain amount every month , live in Mumbai till you have made your moolah and catch the flight home in some years. All seems to be fine . Math says you will spend 50,ooo bucks a month over 20 years i.e. 1.2 cr . With some inflation , say 1.5 cr. Simple landlord-tenant relationship and life chugs along.
Now , every Tom, D & Harry around you will seem to be making a killing with a real estate investment , every bank conversation will funnel into a investment strategy discussion on why not a house , every neighbour will quit his lease and buy , every builder will entice with EMI , every broker will show you an offer you can't refuse and every year your landlord will breathe down an annual 15% increase . The collective pressure will convert your 'want' of a house into a 'need' for a house .
You fall for it .
Suddenly , the economy surges around you - as you have now activated the capitalist machinery - a broker earns commission , an advocate registration doc fees , a carpenter and interior designer attack the house with Jacquar , marble and teak, new furniture and furnishings clean out whats left in the bank , a bank executive creates a loan dossier and wins his incentive , an insurance agent creates a policy premium , a gardener ( in Mumbai ?, you kidding!) , the municipal commissioner turns up with his annual tax bill , the society needs maintanence payments , and you need to pay a chartered accountant to calculate your tax liability , pay a lawyer to read the fine print of tenacy documents and a broker to manage the property. Not to mention paying some of the builders employees wages, to the building construction industry and to the transport business .Wow and whew !
Let's get back to the math .
At a 12.5% annual interest ( most banks currently ) for a 1 cr house ( a measly 800 sqft 2 bed place ) will lighten your account by 1.25 lac a month or 3 cr over 20 years , not taking into account the cheerfully sucking economic predators , detailed above , surrounding you.
All this converting wants into needs business takes into account a perennial growth in ones income so the propensity to keep paying smaller and smaller EMI's is factored .
Many such wants spin the capitalist wheel till there's huge amount of job creation , money exchanging and overall gain . Trouble is when consumtion stops .
If you can't be convinced , this wheel stops. And when money supply stops - like when the music stops in a game of musical chairs - someone has to dance in the centre of the circle.
If you imagine a country as big as ours or as big as the US creating 24X7 wants , surely somethings gotta give somewhere . Either in depleted energy or in stressful health or in absurd levels of greed before prices will keep rising ( inflation ) till its impossible to convert a 'need' anymore. Leading to empty stores of 'wants' noone can afford or wants to buy .
And isn't that a recession ?
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