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Economics: A Postmortem Necessary Paper 3 -- Who benefits from a recession? by Sophia Barkat Abstract: This paper suggests that recessions are ideas hyped by Governments that need to raise money to pay off national debts or to pay for government expenditure beyond what is paid for by tax revenues,and is thus an excuse to lower interest rates on Government bonds. Paper: We are still following Hall and Taylor, Macroeconomics 3rd Edition. In Figure 1-5, you see that the Treasure Bill Interest rate rose during periods of economic recovery and fell during recessions. And in Figure 1-6, you see that Money Supply fell before recessions, though it tends to grow in the long-term. The graphs pretty much say it all. Fig 1-5 (Hall and Taylor) Fig 1-6 (Hall and Taylor) Together they solidifies the idea that Central Banks create inflation -- by reducing Money Supply and increasing the price of money -- just so that they can make a hoopla about this inflation and about the economy slowing down later and thereby giving the Government an excuse to reduce interest rates. We all know that Government bonds compete with other types of financial securities for your money. When there is GNP or GDP growth the stock returns are high and corporate bonds pay huge interests to lenders. US Treasury Bills pay nothing next to other fixed income debt instruments and consequently the Government does not issue a lot of Treasury Bills. But when the economics "boom" is over, or when the Federal Government needs to raise money, it starts to create necessary paths to give the Central Bank the right to intervene and cut interest rates. Depending on how desperate the borrowing needs of the Government are and on it's ability to raise taxes, the Fed cuts interest rates so that new issues of Treasury Bills and Bonds don't have to pay huge interests. The excuse given by Central Banks is that reducing the Federal Funds Rate will increase money supply to commercial banks and thus in turn to the economy -- businesses and consumers alike. The fact that capital spending does not go up means that business loans are not necessarily less expensive just because the Federal Fund Rate is lowered. In fact, interest rates on bank loans may go down a little though their grounds for approval may remains as strict as ever, meaning that actual loans may not go up as much as one might think. Since the year 2000, the Federal Fund Rate has dropped considerably, becoming a 45-yr low recently, and yet, Capital Spending has not increased. See for interest rate news: http://story.news.yahoo.com/news?tmpl=story&u=/ap/20030626/ap_on_bi_ge/fed_interest_rates_30 and for Capital Spending news: http://quietpoly.com/itrader/topics/macroeconomics/whycapitalspendingislow.html This must mean that either business loans have not become cheaper and easier to get or that businesses are already operating under capacity and don't find the need to spend on more capital. A discussion in I-Traderschool revealed that indeed, business loans have not gone up while the Federal Reserves has been cutting rates, supposedly to stimulate the business sector: http://quietpoly.com/itrader/topics/centralbanks/predictinggreenspan.html One may ask the question why people so easily believe what the Federal Reserves says. There may be two reasons. One may be that people blindly trust the Federal Reserves to bail them out during bad times because they believe in the fallacy that the Federal Reserves has done it once during the Great Depression. And the other could be that, they like the Fed's hands-off policy during periods of economic growth. The fact is the Federal Reserves does the right thing when the Government doesn't need to borrow -- it does not bother the Stock Market and let's investors make money. And it allows Money Supply to grow in the long-run to meet higher aggregate demand. This approach makes the business community think, and investors too, that the Fed has the best interest of investors in mind. It would be interesting to see what the actual reason for establishing the Federal Reserves was, and to see what the Great Depression was all about, especially since it was a man-made recession. But that's for a future paper.	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