2001 Economic Crisis

Aditya Chandrayan 17P064

Arindam Das 17P074
Ayushi Agarwal 17P078
Keshav Gupta 17P087
Ruchit Parekh 17P093
Sahil Seth 17P114
Introduction
A decline in a country’s GDP growth for two or more consecutive quarters is called a recession
Recession is the result of reduction in demand for products in the global market

According to National Bureau of Economic Research, Recession is a significant decline in economic activity
lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial
production and wholesome retail sales.

Business life cycle

Recovery | Growth
Profits rise : Credit grows : Inventory increases :
Growth rate rises and the peaks

Recession | Trough
Falling activity : Credit dries up : Profit decline :
Policy eases : Inventories & sales fall
The 2001 Recession
As per NBER, the chronology of US business cycles, the average recession lasted 11 months during the post
WW2 period. The shortest downturn lasted 6 months while the longest lasted 16. Hence, the 2001
recession, which ended in November 2001 was somewhat shorter than average.
Expansion Length Contraction Length Real Non Farm Unemployment
GDP Employment
3/91 - 3/01 120 months 3/01 - 11/01 8 months -0.62% -1.34% 2.10%
 What caused the 2001 recession
The collapse of the dot com bubble The September 11th attacks

The accounting scandals contributed to a relatively mild contraction in the North American economy

In general recession is attributed to the following

Currency Crisis Energy Crisis War

Over production Under Consumption Price of commodities like fuel

The effects of recession include

Bankruptcy Credit Crunch Deflation

Foreclosures Unemployment Reduced GDP

 Argentina’s Crisis: The Beginning
• The crisis began in 1999 when the
Argentine economy started shrinking, i.e.
the GDP of the country started falling.
• It fell for three consecutive years till 2002,
with the highest drop being about 15% in
one single quarter in 2002.
• Rapid depreciation of its currency, Peso.
• Very high rate of inflation and increasing
unemployment.
• Wage rates also fell drastically during this
period, which led to further rise of poverty.
• All these factors led to public unrest and
there were riots as well.
• Prolonged political instability in Argentina.
• The reasons for this crisis could be dated
back to 1980s when the foundation was
laid by the increasing government debt
and Latin America Debt crisis
 Argentina’s Crisis: Reasons for Crisis
1980’s
• Military government ruled, which relied on huge
borrowings from abroad and that too, at high
risk.
• Latin America faced a sever debt crisis as the
debts raised by the three biggest economies of
Latin America exceeded their earning power
and they were not able to repay it.
• Military control resulted in unresolved political
pressures that led to government spending
more than it could raise by taxation and
borrowing from financial markets.
• Argentina replace Peso with Australes as its
currency in 1983.
• Inflation was too much to handle in 1989 and
thus as a remedy the closed market economy
opened to privatization, deregulations,
liberalization and tax cuts
Argentina’s Convertibility Law
a) A fixed exchange rate with the anchor currency, i.e. US
dollar
b) Unrestricted convertibility between the domestic and the
anchor currency
c) Government had to maintain a foreign reserve in dollars
equal in amount to the money floating in the economy
• Led to a bi-monetary system where both
currencies became equally important
• Dollar denominated loans, bank deposits
and transactions became widespread.
• Imports became pretty cheap
• Huge volume of dollars used to flow out
• To maintain a 100% foreign reserve ratio,
government raised foreign loans which
resulted in mounting government debts
 Argentina’s Crisis: Main Reasons

Devaluation of Brazilian Tax increase in 2000 and Extensive Government Debt

Real and Fall in Exports High level of Unemployment

• Brazil plunged into economic • In 2000,when the economy started • Extensive borrowing required to
stagnation and devalued its slowing down, the government maintain the 1:1 ratio between Peso
currency opted to increase taxes and Dollar
• Dollar was unusually strong. Thus • Decision reduced confidence in the • Economic policies applied increased
Argentine Peso also started economy and discouraged the the interest rates in the country.
appreciating. growth of the private sector • Increased the risk
• Products of Brazil cheaper than • Private companies raised the perception/premium of its debts.
those of Argentina. prices of the utilities very high, so • The international bond rating
• Situation further aggravated by the inflation zoomed up agencies downgraded Argentina’s
rising interest rates by banks in the • Due to falling exports companies debt which pushed up the domestic
country. to cut their production, and were interest rates.
forced to lay off people
 Argentina’s Crisis: Recovery
Deregulation of currency and end of convertibility
Argentine government abandoned the 1-to-1 peso dollar parity
which was in effect for more than a decade
Increase in exports and reduction in imports
Peso depreciated, Argentine goods became cheaper.
Imports became much costlier and the citizens preferred
domestic goods to imported goods
Supportive Government Policies
Encouraging people to consume local goods than foreign ones,
made easy credit available to the businesses, set aside funds
for social welfare; new provisions to improve tax collection
mechanism
Administration of Currency Revaluation
Inflow of dollars into the economy; government
bought dollars from the market and adding it to the
forex reserves
Huge amount of Pesos entered the market which
could have led to inflation. The government issued
bonds to suck out liquidity from the markets
Causes In-depth
DOT COM BUBBLE
OCCURRED IN LATE 1990’S AND WAS
CHARACTERISED BY RAPID RISE IN EQUITY
MARKETS FUELLED BY INVESTMENT IN INTERNET
BASED COMPANIES. DURING THE BUBBLE THE
MARKETS GREW EXPONENTIALLY WITH NASDAQ
GOING FROM UNDER 1000 TO OVER 5000 IN A FIVE
YEAR PERIOD
THE BUBBLE GREW BECAUSE OF A COMBINATION OF
SPECULATION BASED INVESTING AND ABUNDANCE
OF CAUTION AVERSE VENTURE CAPITALISTS
PROVIDING UNRELATED FUNDING.
AT THE MARKET’S PEAK, GIANTS LIKE DELL AND
CISCO PLACED HUGE SELL ORDERS FOR THEIR
STOCKS RESULTING IN PANIC SELLING. WITHIN A
WEEK THE MARKET LOST 10% OF ITS VALUE. AS
INVESTMENT DRIED SO DID THE LIFE OF CASH
STRAPPED STARTUPS RESULTING IN EVAPORATION
OF BILLIONS OF DOLLARS OF INVESTED CAPITAL.
9/11 ATTACKS
THE STOCK MARKET CLOSED FOR FOUR TRADING
DAYS AFTER THE ATTACKS. THE STOCK MARKET
REOPENED ON SEPTEMBER 17. THE DOW PROMPTLY
FELL 7.13% CLOSING AT 8920.70. THE 617.78 POINT
LOSS WAS THE DOW’S WORST SINGLE DAY DROP AT
THAT TIME.
THE ECONOMY HEADCONTRACTED AT 1.1 PERCENT
IN THE FIRST QUARTER BUT HAD BOUNCED UP BY 2.1
PERCENT IN THE SECOND QUARTER. THE ATTACKS
MADE THE ECONOMY CONTRACT BY 1.3 PERCENT IN
THE THIRD QUARTER.
ALTHOUGH THE RECESSION ENDED IN NOVEMBER
2001, THE THREAT OF WAR DROVE THE DOWN DOWN
FOR ANOTHER YEAR. IT HIT BOTTOM OCTOBER
9,2002 WHEN IT CLOSED AT A DECLINE OF 37.8 FROM
IT PEAK.
UNEMPLOYMENT CONTINUED TO CLIMB REACHING
6% , THIS WAS THE PEAK OF THE RECESSION.
 Situation Post Recession: Stabilising the economy

Compared with the last three recessions, the decline in total output in 2001
recession as smaller than average ,the recovery was weaker than average

• There was just three quarters of negative growth and cumulative output decline was less than 1% of
GDP
• Economic Performance had been weak just over2.5% which was below the average growth rates in
the previous two recessions
• There was a rise in inflation from 4.2% in the beginning to 6.2 % No. of jobs fell by 2.6 million
• Despite small drop in total output, federal government revenue dropped to 16.4% of GDP
Economic Performance
• Figure 1 shows the growth rate of total output as measured
by GDP over the past 5 years.
• While the recession was brief and rather mild, total output
growth for most of the past two years of the recovery has
continued to be below average.
• In total, aggregate output at this point in the cycles has
roughly matched previous recessions, while having followed a
slightly different path

• Figure 2 shows total output for each of the past three recessions
normalized to the beginning of the recession (the business cycle peak)
• Recovery was relatively mild and since the recovery output has grown
more slowly.
• The employment picture shows a much bleaker picture of the state of
economy

• Figure 3 shows that employment has not yet recovered and

remained below 2% of what it was at the start
• Whereas, in the past two recessions ,recovery took place at an
earlier stage In 1981-82 :2% higher than at the peak
• In 1991-92: Recovery to prior levels by this point
Budget Performance

• The path of expenditures from the 2001 cycle is roughly equivalent to

past recessions; however, the path of revenue shows that the 2001
cycle has seen a significant drop in revenue relative to past
recessions.
• In fact, total revenue has declined by 12% since the start of the
recession, even despite the fact that total output has increased by
over 4%.

• The revenue deterioration has led to the reemergence of

federal deficits.
• Figure 6 shows that since the start of the recession, the
deficit has increased by nearly 6% of GDP.
• Compared to past recessions, the decline in the budgetary
situation has been faster and more severe than in either of
the prior two cycles.
• Importantly, by this time in the previous cycles, the budget
situation had already begun to stabilize or improve.
3.Policy effectiveness
• Where on one hand the total output has not suffered dramatically, we also did
not see a strong recovery either
• Recent policy has not been effective in stemming job losses let alone in creating
new jobs
• These policies came at a very heavy hefty price and have thrown the budget into a
very severe deficit – 455$ billion for that year alone. Simply put, policies that were
sold as economic and job stimulus did not do their job. Instead we are faced with
massive deficits
• In addition, as observed from the comparisons with past recessions ,the current
budget situation is not simply the normal course of a business cycle, but rather,
current policies are contributing to the most severe fiscal decline in at least 25
years.
Recommendations

• Central banks could stimulate the economy with expansive monetary police
• Government could play a crucial role through Fiscal policies
• Lowering interest rates, pumping credit and liquidity into the global financial
system
• Fed could have adopted a policy of inflation rate to prevent the deflation
associated with a global depression
• Giving a tax cut increases disposable income of people which could lead to
increase in consumer spending
• Government spending in infrastructure during recessionary period provides a
huge push by creating jobs
• Learning from the scenario to prevent such recession to occur again