Monday, August 2, 2010

The Current Recession versus the Three Before It

Please keep in mind that the GDP number is one of my least favorite economics. Only in a very rough sense can it give us a sense of what is going on in the economy. That said, two things are going on at present which can help us understand why jobs and GDP are indicating that the current economic downturn is longer and more severe than others in recent memory.

In recent history, every new economic "boom" has been fueled by more and more money printing. Thus, there are more distortions in the economy. When the money printing is stopped, or slowed, the downturn that results requires more re-adjustment in the economy than previous downturns which did not experience as great a period of money printing leading up to the downturn. For example the center of 1990-91 downturn impacted internet stocks. The epicenter of the current downturn has been the real estate market. Certainly, it can be easily seen that the real estate market has had a much more dramatic impact than the stock internet led downturn. The money to fuel the real estate boom has been multiples in size of what fueled the internet stock boom.

Secondly, with a government that is more active now than ever in attempting to prop up the old economy, the necessary liquidations are not allowed to occur, as they were in earlier downturns (Not that there weren't attempts to prop up earlier downturns, but not to the extant that we are witnessing now) . Thus, the economy tends to drag. The present support of the pre-crash economy has resulted in propping up the banking sector, the auto sector and the unemployed in general. These sectors would have been liquidated long ago if it wasn't for government intervention and the economy would have been on its way out of the current mess. But with these props, no one knows what the economy will look like once the props are removed. Will the Fed simply liquidate the trillion of mortgage securities it has on its books? Will they instead allow the money propping up the securities to simply enter the system once banks start to employ them instead of keeping them as excess reserves?

These are the questions that businessmen may sense, even though they don't understand the technicalities of what is going on.

How the Fed handles this situation will have a huge impact on how the economy will develop. That no one knows, perhaps even the Fed, adds to the great uncertainty felt by most businessmen.

Bottom line: Everyone understands that the ultimate impact of the propping up of the manipulated economy has yet to be felt. No one knows exactly how it will develop. This uncertainty adds another level to the slowness of the so-called recovery.

(Charts via WSJ.)

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