Spend to stimulate the economy...

Famous Keynesian Diagram (aka. Keynesian Cross)

Global recession is already been a public secret for the last one year. US was in recession on the late of 2007 (following their own housing crisis), based on commonly-accepted definition of recession among economists (i.e. decline in GDP for two consecutive quarters of one fiscal year). And everyone in the world is experiencing the wave until indefinite time. During recessions, the following happens :
1. GDP falls
2. Consumption falls
3. Frozen credit market
4. Investment falls
5. Unemployment rises
6. Price deflation (in latter part, due to fall in demand). Note : price might rises as well, depends on the policies implemented
7. In the very latter part, if recession is left unsolved for a period of time, non-primary industries will start to disappear. No iPod, No Ermenegildo Zegna, No Calvin Klein, No Windows, No Lamborghini, and the lists go on. Basically the non-primary industries will disappear starting from the most non-essential items, and moving to the closest to the essential items. Why these industries dissappear? No one buys. Why does no one buy? No money, no longer important. So, could companies survive if no ones buy its own products? No. But, I doubt it will happen. It might happen though.
8. So on...

So, how could we solve this problem? Government and Us have roles. Government plays a very big role in getting out of recession. Government has two weapons (fiscal and monetary policy). These two policies might help a country to get out of recession. Fiscal policy is basically policy related to tax and to government spending. Monetary policy is basically policy related to money supply. When government cuts tax, building infrastructures, those are fiscal policies. When central bank cuts interest rates, prints money, those are monetary policies.

But do not forget, we have our part as well. If we are not on the same page with the government, the policies will not give any impact the economy. When government reduces tax rate (with the hope you will spend more), but you do not increase your spending, the policy becomes ineffective. When government reduces interest rate, but you do not borrow more money and invest it somewhere in the economy, the policy becomes ineffective.

Spending is one of the key of getting out of this current recession.Government and Central Banks have done much what they can do to stimulate the economy. Central banks have cut interest rate to the lowest level in the years of history. Governments are proposing infrastructure projects. Government reduces taxes. If we, the citizens, are taking the signal wrongly, the economy will not go any better. We have our part. I understand that it will take times. Consumers confidence must be in better shape before it could happens.

Keynesian approach of solving economic depression.