Economic Recovery. How?

I have taken macroeconomics in college…wish i would have paid a little more attention sometimes. But anyway.

In the current economic climate, how is recovery even possible.

To me it seems like an inevitable snowball effect. 100 people lose their jobs and go on unemployment. Now they bring home about a quarter of what they used to and do not have nearly the disposable income they used to. As a result, seeing the revenue of their company dwindle, managers implement cost cutting procedures and eliminate jobs.

And then the cycle continues.
So how does an economy ever recover? Does it always take some sort of intervention? War, government, etc.

I’ll give a non-technical response. Lots of people have money but are not spending it out of fear that they are next to be fired. Thus, the increase in the savings rate. Somewhat better news (perhaps spurred by the stimulus package) and a decrease in the number of layoffs will make these people feel more confident, and they will increase their spending. Increased demand will force companies to hire more people to keep up with it, which will reduce the number unemployed, which increase spending more, and so on.

The danger now is that employers won’t be able to get the credit they need to buy raw materials for this increase in production, and that they’d rather pay overtime than hire more people.

Intervention has certainly been a factor. But what it comes down to is that eventually people have to start buying again, if only to keep things in working order. Eventually some people will not be able to put off repairing the roof any longer, because their current roof is leaking so badly. Other people will not be able to put off buying a car any longer because their current car is on its last legs. Other people will not be able to put off buying a new computer any longer because they need one for their life, and their current one is obsolete. Things like that.

For a while people can do without major purchases, but eventually they must be made. The economy turns around when a critical mass of people makes the decision to start spending again.

And to pay interest on those savings the bank must lend that money out, thus generating economic activity, though at a lesser level.