The financial crisis has created a sharp fall in demand, what economists call a Keynesian recession.

It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy.

Thus, absent a recession, demand has remained largely unchanged over the past year.

The onset of the Great Depression saw a collapse of demand, which in turn led to a sharp fall in imports.

Deficit spending in a recession, he said, help s maintain the aggregate demand for goods and services.

Public debt could be reduced without fear of recession, because private demand would be stronger.

It is not often that the world finds itself facing the stagflationary risk of lower demand and lower supply at the same time.

Moreover, interest rates tend to decline in a recession, even if there is no central bank, stimulating investment demand further.

First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go go years before the recession.

Not this time. The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth.

Over most of the postwar period, this post recession release of pent up consumer demand has been a powerful source of support for economic recovery.

This illustrates a fundamental point in the short run, reduced economic activity is the principle way of lowering oil demand.

It is the result of politics and policies in several major economies politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize.

With private consumption representing more than 70 of aggregate US demand, cutbacks in household spending will deepen the recession.

More broadly, given Europe s slide into recession and only a slow rise in world trade volume, renewed growth and stronger import demand in Japan would support global recovery.

For example, demand for investment goods may rebound, especially in certain hard hit sectors, after a recession has caused physical capital to become technologically obsolete.

This would be the right policy if Germany was a freestanding country, but the eurozone s heavily indebted member countries badly need stronger demand from Germany to avoid recession.

While the decline in aggregate demand led to reduced imports, the combination of higher interest rates, lower public expenditure, tax increases, and wage deflation boosted unemployment and triggered recession.

And some of it is coming from private investors, who are using gold as a hedge against what remain low probability tail risks (high inflation and another near depression caused by a double dip recession).

The Problem With Secular Stagnation

As in Japan, such measures would enhance long run fiscal sustainability without weakening demand at a time when the economy has not yet fully recovered from the Great Recession.

America s 2001 recession was one brief, mild double dip.

How could this be? As the economic historian Alexander Field has shown, many firms took the down time created by weak demand for their products to reorganize their operations.

By that time, with the global economy spinning into near depression, commercial and industrial gold use, and even luxury demand, took a further dive.

Put differently, the bust that follows years of a debt fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand.

But continued growth increases demand for oil, sending prices even higher. The alternative to monetary and fiscal expansion is recession, at which point oil prices would stop rising.

Unfortunately, the Great Recession of 2008 2009 is far from being a normal global recession.

When weak demand leads to recession, increase government spending and or cut taxes by just the right amount, determined by a Keynesian multiplier, and presto! the economy rebounds quickly.

This pattern also characterizes the current recovery, and recent data suggest that mismatches between the demand and supply of labor by industry are back to pre recession levels.

How can confidence be restored as the crisis economies plunge into recession? How can growth be revived when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower?

Unfortunately, as China has already claimed a large share of the world s merchandise exports (10.4 in 2010) and economic stagnation in the West is constraining external demand, this strategy can no longer work.

The first, the Secular Stagnation Hypothesis, has been proposed by Larry Summers. Its key premise is that the equilibrium interest rate at which demand would balance supply is currently below the actual interest rate.

That is partly because the job losses during the Great Recessionwere so large twice as large as those of previous recessions since the Great Depression.

This approach appears to work until domestic aggregate demand can no longer sustain growth and employment, at which point it ends in either gradual stagnation or a violent financial and economic crisis.

Secular Stagnation for Free

Double Dip Days

Imagining Recession

Recession Insurance

Stagflation Cometh

A depression seemed possible.

The Recession Dating Game

His was the age of Ostpolitik and détente, of the first global oil crisis, of economic recession, stagflation, and the return to Europe of mass unemployment. His generation confronted the scourge of domestic terrorism and witnessed revolution in Iran, the Soviet invasion of Afghanistan, and the rise of Solidarity in Poland.

But recession could also result if deficits are allowed to fester, or are increased with additional stimulus to boost jobs and growth, because bond market vigilantes might push borrowing costs higher.

One is the recession that the recession has caused us to rethink our relationship with the things in our lives relative to the value so starting to align the value with the true cost.

Dog Days For The Super Dollar