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All the experts from World Bank to Raghuram Rajan are saying that a recession coming is possible. Recession news has worried everyone but this begs the question - what is a recession? In this video, I tried to explain the recession in simple terms. Recession explained in simple terms is to make you understand economic fundamentals easily and explain to other people as well.

Here’s the analogy I used to tell you what is recession - If there is a food truck owner who wants to earn profits from their food business. The business owners aim to grow their business and possibly buy another food truck by using the rewards from the current business. In a normal economic situation, this will surely happen. This happens because of regular, irregular, and new customers coming to the truck daily. The efficiency of the food truck will also increase. The food truck’s quality of food will also improve. If there are 200 people paying 200 rupees, then the food truck will be generating a profit of ₹40,000 every day.

But this isn’t enough amount to buy another food truck. So, the food truck owner goes to a bank to raise some loans to buy another food truck. This is how our economy works - we can replace the food truck with any company like Amazon, Google, FB, and so on. Under extraordinary situations like war, famine, pandemic, or a banking system collapse, these institutions like governments, companies, and food trucks don’t grow. Because of this their overall production and income drop. This is because people would want to hoard money instead of spending it since there is too much fear.

The history of recessions tells us that - the last 3 global recessions were in 1990, 2008, and 2020. The 1990 recession was because of the gulf war, the 2008 recession was because of the housing crisis and subsequent banking crisis, and the 2020 recession was because of the novel covid-19 pandemic. In 2023, we are looking at all of these 3 things together. All these 3 things are impacting the global markets together right now.

In March 2020, the pandemic kicked in and many people lost their jobs. In the US, the unemployment rate shot up to 13% in April, May, and June of 2020. Right now the unemployment rate is 3-4%. The government of the US deposited money into people’s bank accounts to keep the economy going. Because of this, the food truck owners didn’t have to shut their businesses. And subsequently the people around also had money to buy more stuff. Because of this businesses prospered and hired more people, making the economy function again properly.

The excess money pumped into the system made the prices rise. But around the same time, Russia Ukraine war started. The two aspects of it are the oil coming out of Russia and food grains coming out of Ukraine. Because of this, the production and operating costs of the food truck owner increased. Because of this the prices of the end product that is meals also increased - causing inflation.

But Governments intervened right away to control inflation by raising interest rates. It was done to minimize the effect of inflation on the poorest of the poor in the country. But this led to the third trigger - Banking Crisis. The interest rate increase resulted in higher cost of loans (increased EMIs) for consumers and businesses alike - which led to stopping them from spending extra money on goods they didn’t need. The interest rate in the US has increased in the US by 400 basis points in the last year. Customers take out money from the banks and invest it in government bonds - taking money out of the economy. This will cause a credit crunch. I’ve explained way forward and the takeaways from this entire situation at the end of this video.

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Chapters

0:00 - Intro
1:08 - Pointers
1:23 - What is Recession
3:54 - History of Recession
4:42 - Pandemic
6:19 - War
8:28 - Banking Crisis
11:10 - Way Forward & Takeaways
13:52 - Outro

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