Recession's End

In the last few weeks, it seems like the worst is now over. Growth in most of the Western world is happening again, albeit at a rate which is hardly greater than zero, but that’s at least better than decline, and forecasts seem to indicate that the situation is at least likely to stabilize if not improve. This leaves me with a few questions, some of which relate to whether this stability/recovery is simply an illusion, and some of which relate to how the world will be reconfigured in the wake of this calamity.

So first to the questions about whether the worst is yet over. The things which were going wrong at the outset of the crisis – housing price collapse and credit freezes – do seem to have been averted thanks to massive government intervention. Things aren’t necessarily good again, they are just getting worse less quickly, which I suppose is an improvement. Still, I worry about commercial properties, and other types of lending instruments like interest only loans. The combination of devalued property and a collapse of retail purchasing is going to make it hard to continue paying the bills, and if a development goes bust, there may be little value left for the banks to recoup. Could this be the start of another credit crunch?

A great deal of damage has been mitigated by massive government spending (at least if you believe Krugman and company), but this must at some point end, as current levels of spending are unsustainable in the long run, or maybe even in the short run. When that extra stimulus dries up, where will demand come from? Consumers are likely to be tapped out and still attempting to pay off their debts from the run up to the collapse. Businesses will be reluctant to invest when no one is buying. This leads me to my second area of concern: What will a “recovery” look like?

It doesn’t seem that a recovery, whatever form it takes will mean a return to business as usual. On a global level, many jobs, especially in the West will be gone. Detroit isn’t going to expand its production anymore. Wall Street will not contribute as much as in the past to tax revenues, or private wealth. Jobs in retail that depended on massive consumer credit and rising home values will not return.

At the same time this is happening, the Chinese government will be faced with a growing problem. Demand in the West which depending on what you read either contributes a substantial amount, or at least a non-trivial amount to Chinese GDP will disappear at least for the foreseeable future. It may be possible to realign the economy to take advantage of domestic demand, but it seems unlikely that the Party will be able to alter consumer behaviour that quickly. This means that even as jobs are disappearing in the US, the Chinese government may continue to finance industrial expansion in China, further reducing prices in the rest of the world and making American exports even more uncompetitive. In this environment a revaluation of the Yuan is especially less likely, which will not help America export its way out of the recession.

This leads me to ponder what sort of a world we will be living in over the next two to five years. Employment will be down, consumption will be down, debt repayment or default will be up, standards of living in the West, if not the entire world will slide. The expectations of many people about what they can afford will have to change substantially, even as taxes will have to rise to pay for the bailout as well as to finance obligations to retiring workers. This may lead to the first generation in decades that doesn’t really get to retire. It would certainly be good in the respect that government finances are likely to be stronger because of it, but for those new workers, their prospects of finding meaningful employment, or employment at all will be harshly reduced, even as they have to compete against developing world workers earning pre-industrial revolution level wages.

What does this mean for life in the West? It seems like a lot of people are living with the illusion that when the “recovery” happens, it will be back to life as usual – or at least what had become usual over the last decade – but this to me seems a fantasy. No governments (with perhaps the notable exception of the UK) are presenting this reality to their citizens. A depression scale crisis may have been averted, but it by no means ensures that we will be able to return to living as we had in 2006.