My Current View On The Economy
Sadly, and like most commentators, I can't really see any positive light for the economy over the next year. This is because if the problems are viewed in a simplistic manner they were created via excess and reckless debt originating from the private sector.
Now the solution is to try to fix matters with more debt, but this time originating from the public coffers. But is the Government debt reckless? Possibly not in the short term, but there is no doubt it in my mind that it will prove to be over the long term.
So until the whole debt problem has time to work itself out, both in the public and private sector, expect most assets and businesses to be under pressure for at least the next several years.
I just don't see any quick fixes possible because if people, companies or Governments get into major financial difficulty one year they don't bounce back the following year. You don't need a hardcore economic background to come to this conclusion, just common sense.
Recession - Yes. Depression/Slump - Maybe
At last everyone in charge is finally admitting, if only half heartedly, that the western economies are in recession. But the real question now on everyone's lips is - are we heading into a depression or slump? The trouble is that nobody can agree on the definition of a recession, let alone a depression.
Whatever the case, it's impossible to go into a depression without going into a recession so I would define a depression as a very serious recession. If a depression is on the cards I think it will look like this -
- 6-9 months recession (we are already at least 3 months into this)
- 3-6 months depression
- Back to a further 12 months of recession
And why not? We have just witnessed the biggest credit bubble of modern times (possibly ever) so to forecast a mega recession/contraction and even mild depression is hardly outrageous.
The Foundations Behind This Recession Are Interesting
If you look back at past recessions there has never been a consumer led one.
- 1973/74 - Caused by an Oil crisis
- 1980/81 - Sky high US interest rates in order to smash inflation
- 1990/91 - Savings & Loan collapse in US. Interesting to note that Wall Street was again a main player via excess greed and speculating too much with debt (junk bonds)
- 1998 - Minor recession caused by implosion of Far Eastern economies
- 2000/01 - The dot.com collapse plus September 11th
But a consumer led recession is what we've got now and that means economists and government advisors have no past road map to follow.
As I see it, everyone is in the dark about what to do and what will happen. Pretty much every market commentator has got things wrong over the past year. Yes, many people had been suggesting there were going to be problems but I don't think anyone would have said one year ago that investment banks would now be relics of a past age.
So if everyone was wrong then, it is possible that we're all going to be wrong when forecasting in the future, unless outlandish predictions are made. Perhaps the bookie Paddy Power was thinking along the right lines when a few weeks back it made a market on which major world city would be the first to riot (due to the economic problems).
They had New York City as favourite at what I thought were incredibly short odds of just 9/4. I've just checked and they're not making this market any more, nevertheless it was interesting.
Bookies are not known for getting things wrong and their market is certainly an outlandish prediction. Perhaps if a major world city does riot then that will be as good a definition of a depression as any.
Summary
I wish I could offer some good news for the next several months, but I can't. And if you're honest with yourself, unless you're a pawn broker or the owner of a chain of Pound shops, I think you'll struggle to find much light at the end of the tunnel.
Batten down your hatches, watch your costs, save money if possible and don't forget that out of adversity often comes great opportunity. And if you take on that mindset it won't all be bad...
