Wednesday, December 9, 2009

False Dawn?

Every step of this economic cycle feels familiar to me, though sometimes I have to be reminded. "Oh, yeah, " I think to myself. "This is how it happens....this is what it feels like...."

To be clear; I haven't suffered through a 'Great Recession' before. But I have suffered through 50% or more declines in sales because the product I carried were fads. Fads = Bubbles. In their effect, Pogs and Houses, aren't as different as you might think. Beanie babies and Commercial Real Estate; Sports cards and Credit Cards. Trust me.

I'm thinking we're in the False Dawn phase of the cycle.

I'm getting an "Oh, this isn't over," feeling.

Whenever there was a recovery in sales (not always a sure thing) it happened so slowly, so imperceptibly, that we were often well into an uptick before I noticed it or, at least, was willing to acknowledge it. Back in the 80's, we were down so long that it looked like up to us. I wasn't really willing to admit that perhaps the Reagan recession was ending until near the end of the decade.

In other words, it didn't really recover until I'd given up on it ever recovering.

NOTE: I'd already written the above, when I came across the following, from the Times Online:
December 8, 2009

False Dawn for Christmas Spending Spree Hopes.


RDC said...

What people have to realize is that this down turn is a deleveraging event. It is a financial based, recession. The impact of those are much much longer lasting then your more normal inventory driven down turn.

The economy will be hindered until debt loads are reduced. Unfortunately for all of the debt load reductions that are taking place at the private sector, the government is adding debt faster. They are following the Japanese model and look what it has gotten them. A stagnant economy for the last 20 years.

Looking ahead to next year all most all levels of Government are in for a great deal of budget pain. State and local governments are going to find that their revenues are down and for many of them the budget cutting they did last year are still not going to be sufficient.

Anonymous said...

"the government is adding debt faster. They are following the Japanese model and look what it has gotten them. A stagnant economy for the last 20 years"

RDC, the relevant question is what would have happened if the Japanese gov't HADN'T increased its spending. Japan would have had much higher unemployment and social unrest.

GDP = C + I + G + X - M

C and I are plummeting (now and in Japan in the 1990s) because debts must be paid off. This must happen to a point.

But the worry is that sometimes it goes much TOO far the other way. We get into a vicious cycle of negative feedback . . . Businesses must lay off because no one is buying; consumers cut back because they lose jobs; so more businesses must lay off -- even those that are otherwise quite profitable, well managed businesses.

How to stop this vicious cycle?

Herbert Hoover once said of Andrew Mellon's views:

the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself.

Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...

A popular view to be sure (and one that it seems that you hold), but I think it is extreme and leads to unnecessarily high unemployment and hardship. Isn't there a better way?

Perhaps the Japanese did not make all the right choices in their "lost decade".

But I think you must ask: What if their gov't HADN'T increased its spending to make up the GDP gap? To me it's certain that they would have had much higher unemployment than they have had.

RDC said...

Not really. The problem is that debt levels get out of wack and the leverage ratios sky rocket sooner or later you have to take your medicine. By doing the type of borrowing that the US is doing and the Japanese did, you are greatly extending out the duration of the pain. You might be lower the intensity of it slightly, but extending the pain by a great deal. For every dollar that you spend in stimulus today, which adds to the deficit, you are adding a dollar plus as a future drag on the economy.

The Government does have existing programs which function as their own kind of stimulus, and which is a role that they should have. Those are items such as unemployment insurance, food stamps, and other assistence programs.

One of the reasons why economies grow so well after recessions is that weak institutions are killed off and new, vibrate institutions move into the space created. Many of our leading companies today were started during recessions. You will get less pain and more jobs faster by not proping up failing companies (GM, Chrysler, and AIG fall into that space).

Also if you look at where the debt is going a lot of it was used by states and cities to delay the adjustments that are necessary on their balance sheets. 2010 is going to be the year where the devil gets his due in that reguard.

Another point is that in many of the industries (such as housing sales) the current level tht everyone thinks is so poor, is really the level that was normal during pre-bubble time frames. So the money being spent to try and raise those levels are just trying to reinflat the bubble. Sooner or later that process will end and it will return to its normal level unless you continue to pump money into trying to reinflat.

The last point is that the government is extremely inefficient when it comes to job creation. The best way to build an economy is via private sector job creation and the best way to do that is by reducing the hurdles to business formation and hiring, not raising them. The hurdles occur in the form of regulation, tax levels, permits, data reporting, etc.

If you need to "spend" money you are far better off by selectively reducing taxes, by encouraging local government to reduce temporarily costs and rules for business creation (offsetting some of those costs) and true infrastructure creation (roads, bridges, and rail) not the money dumped into pet projects and calling it infrastructure.

Encouraging consumption is not constructive in the long term. Japan found that out and so will we.

H. Bruce Miller said...

"High costs of living and high living will come down. People will work harder, live a more moral life."

Funny how conservatives start clucking their tongues over "high living" only when working people start enjoying a few material comforts. I'm sure Mr. Mellon had no problem with the robber barons owning yachts and private railroad cars and building themselves multimillion-dollar "cottages" in Newport.

"Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"

Translation: The rich will have a chance to pick up bargains and get even richer.

Or, in the words of the old saying, "A recession is when the money goes back to its rightful owners."

RDC said...

There is a big difference between people enjoying a few material comforts and people living a lifestye by generating debt that they really cannot afford.

If, at the end of this, people realize that there is a cost to debt and borrowing money to fund a life style in the short term is the surest way to make sure that they do not build wealth in the long term then the pain of the current recession might be of long term value.

A continuation of building debt means that it will be repeated and probably at an even more severe level.