Friday, December 01, 2006

Depression versus recession

Why I predict a bad recession and not a depression.

There is quite a bit of dicussion in the blog sphere that we could be in danger of a depression. This entry is to explain why I don't think this will turn into one.

First, let me define a depression.
1. 25% unemployment
2. A broken economy, specifically the banking sector
3. Stagnation: technologically, economically, philosophically

In other words, a depression is a lot more than a long recession.

What created the last depression? Among other factors
1. Cessation of trade.
2. Collapse of the banking sector
3. Incredible surplus inventory (years supply in many sectors)

Let me discuss what is different this time.

Despite all of the furor over "globalization", trade is here to stay. We can no longer function without it.

The banking sector is at risk and this worries me. We're going to need intervention after defaults. The financial sector is the "lubricant of the economy." Without loans, businesses have trouble expanding, individuals cease buying homes, etc.

Basically, children of the middle class cannot themselves be middle class without a banking system. Sans it, none of us would have homes, be able to better ourselves via education (unless our parents could pay for it, e.g., no student loans). Ok, some aspects of loans are currently way out of hand. That shall pass... I've gotten over that bit. My concern is to rebuild a healthy system post the coming crisis.

The last tidbit that sent us into depression was teh amazing surplus inventory of 1929/1930. Many industries had years of inventory. Ok, the housing industry (a large sector of the economy), does have a tremendous overhang of inventory. That will drag us down. But what about the other major sectors? I'll address the ones that drove us down to depression before.

1. Steel. With the current worldwide shortage... not an issue.
2. Cars... Ok, there is surplus and it will hurt, but nothing like 1929.
3. Consumer goods... Not much surplus thanks to "just in time" inventory. e.g., no piles of RCA radios this time. Computers? Na... they're worthless in 2 or 3 years anyway.
4. Agriculture. In the later 20's, Europe had rebuilt itself post WW1 and was able to feed itself. This cut off a large source of funds into the US. Ok, cutting off bond sales might be the same... we'll see. Our current Agriculture system isn't great, but I'm not seeing "grapes of wrath" part II.
5. Rail (and other transit). If anything, we must invest into this infrastructure. Everything from the Chicago cross over, the sunset line, more interstates, freeways, subways, airport (runways and terminals)... we're hurting for more transpertation infrastructure.

I do admit there are meany weaknesses to the current economy. In the great depression the hardest hit industry was the service industry. Or more specifically servants. Yes, servants. Once upon a time one definition of middle class was being able to afford a servant. Ok, I know many people who hire maid services, etc., but not a servant.

But today we hire people by the score in service industries. Restaraunts, spa,

and one interesting coorelation, Golf. In the 1920's, golf was incredibly popular, like today. ;)

So what's different?
1. When we lay off tremendous numbers of construction workers, we'll send them back south of the border. Cruel? Very. Reality? Yep.
2. Banking. The total cut off of credit to the middle class had major consequences. We'll have a government "bail out" this time instead of a president who didn't want to interfere.
3. Job creation. Infrastructure, or some industry I haven't thought of.
4. Inventory. "Just in time" will actually save our butts. Not in every industry, but enough.
5. demographics. The boomers are going to have to hire people to help them. Those that have savings will be forced to stimulate the economy.
6. Unemployment. It will get high... very high. But not 25% nationally. Its probably going to break 12%... ouch.
7. Trade. China will trade with India, Europe, etc. It won't be cut off like last time with smoot-Hawley and everyone reciprocating. Like it or not, the WTO is here. There is no simple unraveling of world trade. It won't shut off again.

Oh, this is going to be an ugly recession. Very ugly. But not a depression. I would hate to be a country selling luxury foods to the USA... that business is about to be cut down. We're going to be forced to drop back to a low (or zero) trade deficit. Cest la vie.

We'll be ok, but it'll be ugly.

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