The Economy Made Simple
Recession Might Be Good News
September 11, 2001
All of this talk about recession in the U.S. economy reminds one of the pre-1992 election jitters over Jennifer Flowers. If only the voters had seen the advent of Monica Lewinsky!
Why worry…Federal Reserve Chairman, Alan Greenspan, has declared, “The economy has not yet slipped into a recession.”
Whoops! Greenspan made THAT statement in October 1990…a full four months after July 1990 when the National Bureau of Economic Research declared that the U.S. economy began a recession that did not end until March 1991.
Is Alan wrong again?
A national recession has two faces. The first, and most obvious, face is the technical definition of a recession as two consecutive quarters of negative GDP growth. The second, and more sinister, face of a recession is the uneasy, almost nauseous, feeling of economic insecurity that haunts an individual like an approaching tornado despite any technical confirmation.
Technically, the U.S. economy is not in a recession…yet. By the technical definition, GDP or Gross Domestic Product which is the total value of all goods and services produced within a country in a year, minus net income from investments in other countries must decrease on a quarterly basis for two consecutive quarters (the U.S. economy is on a calendar year basis so the quarters are grouped into three month bunches starting with the first quarter which runs from January 1 through March 31).
However, in 1990, the first quarter GDP was up by 5.1% only to find it up 0.9% in the second quarter, down by –0.7% in the third quarter and finishing 1990 down –3.2% in the forth quarter. Voilà…from a rather healthy start (technically), 1990 ends in recession.
Viewing 2001 GDP provides little comfort. From a healthy 5.6% growth in the second quarter of 2000, U.S. GDP has successively shriveled on a quarterly basis until ending the second quarter of 2001 barely in the positive range with an anemic 0.2% showing.
We’re not in a recession. We’re not going to be in a recession. Recovery is on the horizon,” babbled Northern Trust Company’s economist Paul Kasriel (Obviously overcome by the excitement of a 0.2% growth rate). Did he remember that 0.2% translates into a much smaller looking .002 or 2/1000’s?
While a recession has not arrived to the U.S. economy in technical terms, there certainly seems to be a growing sensation of economic nausea in the stomachs of average Americans.
Who, with any common sense, can go to sleep at night with a feeling of economic security as hundreds of thousands of American workers are handed pink slips? What Alan Greenspan calls, “conditions of economic weakness,” is better known as the “breadline” for J. Q. Public.
It is laughable that the “Experts” are relying on the consumer to rescue this economy.
When the New York Times can report that, “Consumers kept the economy above water, stepping up their spending in the spring and early summer and, possibly, setting the stage for stronger growth in the current (third) quarter,” rest assured that the “Experts” have reached desperate levels of hope.
The proviso of a consumer driven economic bailout is conditioned on the hope that as existing inventories of goods shrink, demand for new consumption will require companies to hire more workers and expand. There might a better chance of the Russian Mafia merging with the Sisters Of Mercy happening!
Inventories are declining because demand is disappearing and companies are contracting. In simple English, companies have stopped the production lines because demand was declining. A rather significant component of companies contracting are the thousands of layoffs announced each week.
So, as the consumer is supposed to bailout the economy with increased future spending, the consumer is being severed from a paycheck by means of unemployment.
And, even if the unemployed do find new jobs, you can bet what might be left of your 401K that this new employment will be at a pay rate 25% to 50% below the previous job’s pay.
Take the case of Mr. Porche Iwasrich. Eight years ago good ole Porchie was a 22-year-old college graduate who just landed an $80,000 per year entry level position as an IT professional. Since his net worth was above a million dollars (all stock options), he went on a buying spree. After gobbling up a foreign sports car, a home theater system, two luxury vacations per year and a fortune in 5 star dining, Porchie met Ms. Beamer and settled into marriage and a family in their new $500,000 home. Eight years, two children, 27 maxed-out charge cards and a stock market collapse later, Mr. & Ms. Iwasrich-Beamer have two pink slips, a negative net value and 50% of their previous income.
Oh Yeah…the Iwasrich-Beamer family is going to bail this economy out.
Let’s get real here.
The U.S. economy is in the pooper. Companies are continuing to drastically cut employment and spending. Personal bankruptcies are at record levels and headed towards more than 1.5 million in 2001. Over 33 million American workers are living from paycheck-to-paycheck with near record levels of personal debt. The wealth created by the stock market is on a permanent vacation with the real estate wealth of the 1980’s.
Coincidentally, all of the world’s economies are on a simultaneous downward spiral. Even a ZERO percent interest rate in Japan cannot bring that country out of a ten-year decline. Europe is returning to the Dark Ages. And…South America is ripe for an economic meltdown. Are any bankers out there drinking a few retro-martinis in anticipation of an Argentine economic collapse?
While the “Experts” fiddle with their quarter-to-quarter economic statistics, John Q. Public is feeling sicker and sicker as the storm clouds darken…and with good reason. This economy is nowhere near a bottom.
Washington and Wall Street have continuously demonstrated an ability to be out of touch with reality. A year ago the nation’s media were quoting “Experts” who assured the public that a bottom was in sight and urged the unfortunate not to miss a “buying opportunity”.
Chairman Greenspan allowed the U.S. economy to burn like Chernobyl before he jumped in with six successive interest rate increases. But, by then, the damage was done. It is hoped that Alan doesn’t approach intersections at 90 mph before slamming on the brakes in the last 10 feet.
Average Americans are worried and the “Experts” are in a state of denial or, worse, a cover-up. With all of the possibilities for the economy still spinning in orbit, the best guess is that most people would be happy with a stop in the decline. Think about a recovery to the excessive market levels of the Clinton years only after inhaling.
In the present, a recession might be good news compared to the very real possibility of a worldwide depression.
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