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The Recession That Wasn't…But Will Be
For over one year the author has not followed the economy for reasons due to the
awakening; there have been far more significant issues which exceedingly
overshadowed such trivialities as “the economy.” However, I will give a brief
update as to the state of economic conditions of the United States as of April
1, 2002.
We are going to have 20 years of uninterrupted growth averaging 5% per
year…APRIL FOOLS!
It has long been my position that the extraordinary boom of the late 1990's
would ultimately lead to an equally extraordinary bust. This is only a logical
conclusion based on how capitalist economies function: Grow then contract in
varying cycles; the business cycle will never die. Yet these cycles do not
always follow predictable or historically precedented models, either in
magnitude or length, and there are many, many different interrelated causes for
each boom and bust, but it's all about oversupply then correction. If you drink
too much, you have a good time while it lasts, but the inevitable hangover
arrives; the more you drink, the more you suffer. (Economics 101, college
style.)
Anyone interested in charts would see that the stock market run-up of the 1990's
almost matched exactly the run-up of 1920's United States market, but also the
Japanese boom of the eighties. It would be overly simplistic to presume a
1930's-style depression would naturally follow the boom we experienced only a
short time ago. It may also be too simplistic to suggest a decade of stagnation,
Japanese-style.
As of this writing, the economy is slowly emerging from a recession; a recession
so mild it had only minimal impact; one of the softest in recent history. The US
GDP grew at an annual rate of 1.7% in the last quarter of 2001 after shrinking
mildly in the third quarter. Certainly, it did stagnate throughout all of 2001,
with unemployment skyrocketing (jobless claims reaching 500,000 – a rate last
seen in the early 1990's) and consumer confidence dropping precipitously; but
also nothing close to a bust as one may expect, considering the prolonged bubble
of the previous decade. Stock levels are not that far off from peak (with the
exception of the tech sector, of course), and the unemployment rate, while high
and climbing, is historically quite low, and not nearly as severe as earlier
recessions. Moreover, it is not impacting in a uniform, national fashion. For
instance, the area in which the author lives (Boise, Idaho) is still growing
somewhat strongly, and the unemployment rate is 4%; hardly a recessionary
environment, let alone collapse or depression.
There are several reasons why the house-of-cards economy did not collapse, but
the main reason is historically unprecedented money growth being supplied by the
Federal Reserve and increased government spending; from late 2001 to late 2002,
the Fed repeatedly lowered interest rates from 6.5%, until reaching 1.75%
shortly after the September 11 terrorist attacks. Growth in money supply is
still a whopping 10 to 15%. Consumers continue to borrow like it was going out
of style, far beyond their means. This is astounding policy manipulation of the
aggregate. And there shall be a price to pay.
The recession was nowhere severe enough to consolidate excesses of the prior
boom, and they eventually will be purged. So this leaves us the question of,
“what happens next?” There are several possible outcomes. We could soon
experience a double-dip recession, with the next contraction occurring in 2002
or 2003, in a manner similar to that which occurred in 1980, and the 1982
recession that followed. (But of course economic conditions of that time nowhere
coincides with current conditions.) Or, frighteningly, a full-blown depression
-- of which we are seeing only the beginning stages. Or, the most likely
scenario, several years of miserable stagnation, with little or no growth, and
frequent declines, followed by anemic, pseudo recoveries. This is based on the
1990's situation of Japan. If one remembers, Japan dramatically lowered interest
rates to near zero, for much of the decade; this may be a similar situation the
Fed will face, considering there is now very little room to maneuver should the
economy continue into another fast descent. This would mean long-term
stagnation. Japan also had to borrow MASSIVELY in a seemingly futile attempt to
stimulate its economy. It ran huge budget deficits and its national debt is now
160% of GDP. This far exceeds that of the US, which until recently was enjoying
surpluses, at around 50%. Remember the consensus by politicians of never-ending
surpluses until 2010? How naïve.
There is another possible outcome for the near-term performance of the economy;
this is the “status quo” view among “professional” economists and other
“mainstream” pundits: That we are going to rebound sharply and enter another
long boom period like the late 1990's. To this scenario the author says: Bull
pucky. The odds of this are so low it's not even worth discussing. But is it
“possible?” Of course, BUT if this did occur, this would make me fret even more,
but it would be a dangerous postponement of the Reckoning in the long-run, and
would guarantee a far greater, future collapse. The bigger they are, the harder
they fall. This “happy days are here again” outcome would become the “my God,
how could we have allowed this economic calamity to befall us?” outcome.
But we have another factor to consider: the election year of 2004. President
Bush is obviously riding high in the popularity polls, but is this destined to
last continuously? It sure did not with his father after the Gulf War. It's the
economy, stupid! Now, the elite would prefer to have a prosperous economy during
an election year, and if it is poor, the president always takes the blame
(wrongly so, since incumbent presidents usually exhibit little real influence
economic influences). But even if the economy remains prosperous at that time,
Bush would almost certainly be presiding over a failing economy in his second
term. Long before he was elected, this author has not only repeatedly said Bush
would become Commander in Chief, but also during a time of great crisis and
economic stagnation. Recent events have proven this correct. By the way, the
September 11, 2001 initiated War on Terrorism is merely another code name for:
World War Three. It is global in scope, and will be persistently long. You have
only seen the very beginning.
Therefore it seems certain that further economic pain lies ahead, the only
speculative variable being the degree of severity. Decade-long Japan-style
stagnation? Very likely. Double-dip or multiple recessions at least until 2005?
Very likely. Never-ending propagation of hubristic, New Economy 1990's? NOT!
If we don't swallow the bullet and “get more recession” soon, we shall surely
will be condemned to exist in the history books as a very dismal first decade of
the 21st century.
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