Recessions are caused by excess.
They once were common in the U.S., until computer networks let stores manage inventory better, in the early 1980s. Previous post-war recessions had mainly resulted from an excess of inventory, resulting in lay-offs, then the sale of the inventory and the return of employment.
While there have only been two general recessions in the U.S. since then (1991 and 2001), both relatively brief and mild, this doesn’t mean we haven’t had excesses, and the resulting suffering. The dot-bomb, starting in 2000, certainly hurt me personally, along with millions of others. But the housing boom quickly replaced those jobs and that aggregate growth.
So now we have newspaper columns asking whether a recession is coming, and essentially all the economists I’ve read are arguing about why a recession should happen, disagreeing only about how general the fall-out might be.
- Optimists expect growth in Asia to offset slower growth here, and prevent a recession.
- Pessimists argue growth in Asia is tied to American consumerism, and argue for a global downturn.
Both sides may be right.
No one argues any more whether the housing bubble has been popped. The question is how hard the fall and how bad the fall-out.
The fall-out is worse in areas that were most over-built. This is primarily a suburban housing crash. In Oakhurst, formerly South Decatur (before the real estate boom started), across the street from where I live, there are still new mini-mansions going up. There are still tear-downs happening. There are still new condos and townhouses being snapped-up by willing buyers.
Out in suburban Gwinnett County, where costs are low and new supplies abundant, it’s a different story. It’s also tough in areas that were just starting to turn around, because so much of that turnaround was based on "creative financing" schemes — adjustable and "sub-prime" mortgages — which are re-adjusting and being foreclosed.
The knock-on impact of all this, however, hits everyone. It’s hitting today in England, where Richard Branson (a hero in the fiction written here) is closing in on one of the country’s leading mortgage bankers. I’ve written before here about the fraud that keeps this from unwinding, but we’re already hearing talk of a "banking crisis" in the otherwise-pollyanna U.S. financial press.
How bad will it be, and how widespread? This is where the arguments exist between optimists and pessimists. Optimists think the damage is contained, or at least mainly limited to the U.S. Pessimists (like Nouriel Roubini, at left) see damage everywhere, and don’t see it being written-down without a global economic meltdown.
The best argument for a general U.S. recession is this. The U.S. consumer has been pulling the world economic train too long. We’re sated. We’re too fat, too lazy, and too smug to really compete economically. We need a rest.
What we need, mainly, is for Chinese demand and Indian demand to pick up, and a U.S. reversal-of-fortune could cause that to happen. What form it takes is up to China and India. It’s unlikely to be as consumer-driven as our own growth has been. I would expect luxury goods to remain strong, as sales move to the Arabian peninsula and Russia, where oil wealth is burning holes in wealthy pockets.
So my fearless forecast is this. The U.S. recession has already started, and will get steadily worse through 2008. But we won’t have a worldwide recession. Demand will grow, if not for the same goods as before.
We’ll call it a recession. Some here might call it a depression. But what the U.S. is about to face is not really much different from what hit the dot-commers early in this decade, or the biotech guys a decade before that, or the leveraged buy out guys and S&L guys a half-decade before that.
Bad for you, thanks to technology, is just good for someone else. Find who that someone else is, invest with the expectation they will step up to the plate, and you can profit from the downturn.
