Recession

• Recessions traditionally form by a combination of cyclical vulnerabilities + an exogenous shock that starts the Recession
• Recessions usually involve a negative feedback Loop:
  • Drop in Sales = Drop in Production = Drop in Income = Drop in Employment = Further Drop in Sales : Repeat

3D Method of Assessing Recession Impact

1. Depth
2. Diffusion 
3. Duration

Typical signs of a recession

• consumption slows - people stop buying things
• unemployment goes up
• 
  

Recession Impact on Budget Deficits

• Recessions typically reduce tax collections and increase burden on government safety nets
• Governments tend to ramp up spending during recessions to help counteract them
• This typically results in growing budget deficits
• In the US budget deficits typically increase by 4% of GDP during a recession (per year compared to the previous year not in a recession)
• Loan and Bond Default Rates tend to jump during recessions (especially with junk Bonds and other lower-rated credit)

Theories on What Causes Recessions

• Financial Innovation Goes to Far:  Wallstreet purses a new financial tactic and takes it too far.  Much money is made, then there is  crash
• 2008 Great Recession:  Caused by over abuse of collateralized mortgage obligations
• 2001 Recession:  Too many non-profitable .com IPOs
• 1990 Recession:  Excessive junk bond lending