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  • 7 months ago
How can factors like inflation, supply and demand, and interest rates trigger recessions? Learn the economic basics of modern markets.

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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. So what causes recessions? Richard Coffin digs into the economic fluctuations that affect our modern markets.

Lesson by Richard Coffin, directed by Augenblick Studios.

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Transcript
00:00For millennia, the people of Britain had been using bronze to make tools and jewelry,
00:12and as a currency for trade.
00:15But around 800 BCE, that began to change.
00:19The value of bronze declined, causing social upheaval and an economic crisis,
00:25what we would call a recession today.
00:28What causes recessions?
00:30This question has long been the subject of heated debate among economists,
00:35and for good reason.
00:36A recession can be a mild decline in economic activity in a single country that lasts months,
00:42a long-lasting downturn with global ramifications that lasts years,
00:47or anything in between.
00:49Complicating matters further, there are countless variables that contribute to an economy's health,
00:55making it difficult to pinpoint specific causes.
00:58So, it helps to start with the big picture.
01:01Recessions occur when there is a negative disruption to the balance between supply and demand.
01:07There's a mismatch between how many goods people want to buy,
01:11how many products and services producers can offer,
01:14and the price of the goods and services sold, which prompts an economic decline.
01:19An economy's relationship between supply and demand is reflected in its inflation rates and interest rates.
01:26Inflation happens when goods and services get more expensive.
01:31Put another way, the value of money decreases.
01:35Still, inflation isn't necessarily a bad thing.
01:38In fact, a low inflation rate is thought to encourage economic activity.
01:43But high inflation that isn't accompanied with high demand can both cause problems for an economy
01:49and eventually lead to a recession.
01:52Interest rates, meanwhile, reflect the cost of taking on debt for individuals and companies.
01:58The rate is typically an annual percentage of a loan that borrowers pay to their creditors
02:04until the loan is repaid.
02:06Low interest rates mean that companies can afford to borrow more money,
02:10which they can use to invest in more projects.
02:12High interest rates, meanwhile, increase costs for producers and consumers,
02:17slowing economic activity.
02:19Fluctuations in inflation and interest rates can give us insight into the health of the economy.
02:24But what causes these fluctuations in the first place?
02:28The most obvious causes are shocks like natural disaster, war, and geopolitical factors.
02:34An earthquake, for example, can destroy the infrastructure needed to produce important commodities,
02:40such as oil.
02:41That forces the supply side of the economy to charge more for products that use oil,
02:47discouraging demand and potentially prompting a recession.
02:51But some recessions occur in times of economic prosperity,
02:55possibly even because of economic prosperity.
02:58Some economists believe that business activity from a market's expansion
03:03can occasionally reach an unsustainable level.
03:06For example, corporations and consumers may borrow more money
03:10with the assumption that economic growth will help them handle the added burden.
03:14But if the economy doesn't grow as quickly as expected,
03:18they may end up with more debt than they can manage.
03:21To pay it off, they'll have to redirect funds from other activities,
03:25reducing business activity.
03:27Psychology can also contribute to a recession.
03:30Fear of a recession can become a self-fulfilling prophecy
03:34if it causes people to pull back investing and spending.
03:38In response, producers might cut operating costs to help weather the expected decline in demand.
03:45That can lead to a vicious cycle,
03:47as cost cuts eventually lower wages, leading to even lower demand.
03:53Even policy designed to help prevent recessions can contribute.
03:57When times are tough, governments and central banks may print money,
04:02increase spending, and lower central bank interest rates.
04:06Other lenders can in turn lower their interest rates,
04:09effectively making debt cheaper to boost spending.
04:12But these policies are not sustainable and eventually need to be reversed
04:16to prevent excessive inflation.
04:19That can cause a recession if people have become too reliant on cheap debt
04:23and government stimulus.
04:25The Bronze Recession in Britain eventually ended when the adoption of iron
04:30helped revolutionize farming and food production.
04:32Modern markets are more complex,
04:34making today's recessions far more difficult to navigate.
04:38But each recession provides new data to help anticipate and respond
04:42to future recessions more effectively.
04:45Want to learn more about how financial markets work?
04:50Watch these videos to learn about the stock market,
04:52or what causes economic bubbles.
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