One thing that every economist believes is that recessions are something that cannot be avoided. The reason for this is that in a healthy economy you are going to have periods of high growth, slow growth and no growth. In fact in order for the economy to be healthy there needs to be some contracting and expanding. But in order for the economy to be considered in a recession the contracting period has to last for at least two consecutive quarters of a year or more simply put 6 months in a row. But the most common question that nobody can seem to answer very well is what is going to cause the next recession. In fact even fifty years after the great Depression, a really bad recession, and the answers to what causes an economic downturn or a recession is still a huge mystery.

Even though the exact causes of an economic recession are still a mystery there are numerous theories that have been put forth as to what causes an economic recession. But probably the most common thought on what causes a recession is that they are caused by events that have an economy-wide impact. Some examples of these events would be: increase in interest rates or a decline in consumer confidence.

In fact the general consensus is that a recession is primarily caused by the actions taken to control the money supply in the economy. So in the United States many economists believe that it is because of the Federal Reserve that we go into a recession. The reason for this is that in the United States it is the Federal Reserves responsibility to maintain an ideal balance between money supply, interest rates and inflation. And if the Federal Reserve loses balance in this equation the ending result is that the economy spirals out of control. In fact we have actually seen this happen recently. In 2007 the Federal Reserve monetary policy of injecting huge amounts of money supply into the money market kept the interest rates down but inflation actually continued to rise. And it was this combined with how easy it was to borrow money that caused our economy to spiral out of control to where we now sit in 2008. Most economists believe that we are currently heading towards a recession, not to mention that quite a few tend to think we are already there.

But something else that you want to keep in mind when it comes to the Federal Reserve Board causing a recession because of their responsibility with the money in the United States, it is also because of the actions of the Federal Reserve Board that we come out of or recover from a recession. Many people tend to blame the current President of the United States for any recession that our nation faces, and they also tend to give the current President the credit for getting us out of the recession. But what these people do not realize is that the President actually has hardly any control or influence over the economy for the short term. What they do has a gradual and long term effect on our current economy.

Another theory about what causes an economic recession is that they are caused by events that hurt particular firms or industries rather than events that impact the entire economy. The reason that some economists support this theory is because of how a recession seems to affect some industries badly, while other industries seem to thrive during these hard times. The economists believe that this happens because either a major innovation or a change in the price of a key item can adversely affect some firms. And when they are adversely affected they tend to lay off workers and reduce their production, which slows down that industry even further because they demand is greatly reduced. But at the same time there are other industries that are going through a major hiring phase and are actively looking to hire new workers, so it seems they are being helped by the recession activity. But what happens is that the people who were laid off can't find work right away because sometimes it takes time to find new employment so while they are waiting for that new job to come in there is a period of reallocation, moving workers from one job to another, which can cause a recession until everything is figured out.

Here are some other popular theories about what causes a recession.

• Some people believe that each recession has a unique cause, while others think that recessions usually only have a single cause.

• Example of a single cause bad investments by businesses
• Recessions and depressions, like that of the Great Depression, are caused by stock market crashes
• Factors that stunt short term growth in the economy, such as a sharp increase in oil prices or even going to war
• Globalization has changed the nature of the business cycle.

But regardless of which theory you believe there is no definite answer to what causes a recession. But in most cases there is ample proof that a recession is caused by numerous factors, meaning that various events took place and the end result was a recession. In fact a great example of the numerous factor theories is the recession that took place after the dramatic increase in oil prices in the 1970's. The reason that this set off a recession is that the prices set off an economy-wide decline in the demand for oil because of the fact that real income was reduced because of the higher costs of oil imports. Not to mention that tighter monetary policy dampened the inflationary pressures which followed the price increases. It was all of these factors that slowed the overall demand, which in turn resulted in a recession.

Here are five negative items that could cause an economic recession or even worse a depression.

1. Dollar collapse - there is a growing concern for the United States ability to attract foreign capital to finance both private and public investments. The reason for this is that the effect of high budget deficit subtracts from domestic savings, which means investing in general. Not to mention that the huge trade deficit also adds to financing needs. Something else to keep in mind with the dollar collapse is that the dependence on foreign financing is actually reducing the confidence in the United States economy. In fact between the years of 1985 to 1987 the United States dollar fell 49% against major currencies, Treasury bonds increased 2% and stock prices fell 30%. But in general a falling dollar would greatly affect the United States corporate bonds and 50% of those bonds are actually held by foreign investors.
2. Oil rise - if the price of crude oil were to rise that would be harmful to the economy because of the fact that other prices would rise as well. Crude oil actually affects a lot more industries than just gasoline because of the fact that you need to have gas to run most machinery, but crude oil is also used in making other products such as asphalt. But if these prices were to rise it would actually slow consumer demand. And because of the slowing consumer demand it would undermine business and consumer confidence.
3. Inflation - this can happen if both the dollar starts to fall and oil prices start to rise. The reason that this happens and is connected to oil prices and the falling dollar is that these factors make it to where consumer goods are more expensive, producers have to increase the prices of their products to make up for the increase in oil prices and to make the same profit that they were making before the dollar fell. But if the United States was dealing with inflation what you need to know is that China would then revaluate their currency at a higher rate, dollar value decreases yen increases in value, which would make the inflation even worse. But something else with inflation is that high inflation makes existing bonds unattractive, so new ones have to be offered, but the new ones are going to be offered at a higher rate.
4. Housing bubble - if the interest rates on mortgages raised by 2% this could actually stop people from buying houses, which would in turn bust the housing bubble. But on the other hand if the prices of houses dropped or deflating prices, this would deflate household wealth, meaning people would have less equity in their homes.
5. Global economy - this is where you are going to need to look at other economies other than your own to see if they are showing signs of a recession because in some cases other countries recessions can greatly impact the other countries depending on how much they rely on imports. A great example of this is that Euro is weighed done by currency appreciation, and both Europe and Japan are experiencing a slowdown of economic growth. Not to mention the fact that increasing Arab violence can erode business and consumer confidence.