The measure of two negative contractions to gauge a Recession is no longer viable as governments intervene with stimulus, central banks pump unlimited amounts of paper liquidity into the markets and economy while agencies manipulate economic numbers to avoid mass hysteria.
The employment rate is also a poor measure of a Recession as recent slowdowns have proven that employment can still be high but at minimal or discounted wages. Employment as we knew it has also evolved massively as companies contract workers these days more than employ. Such contracts allow corporations to have workers without benefits and thus save massively on healthcare, provident fund subsidies, compensations, overtime, etc. It makes it convenient to control employment numbers when contracts expire but don’t add to the unemployment statistic. However, the contract-worker still pays income tax while the corporation claims on expenses.
Consumer spending used to be a key element to gauge if an economy was buoyant but even that has become misleading as banks dish out seemingly unlimited amounts of credit to anyone (qualified or not) that drives up the consumer spending statistic. Other financial institutions find ways to creatively channel new monies from paid-up assets that creates more liquidity for homeowners and policyholders. This helps create the illusion of affluence without the risk of default. If that sounds like the Sub-Prime, then you should know that it is in many ways. As long as the premiums keep flowing, everything is fine. But it is a financially deadly game of musical chairs. Because when the music stops …
Bailouts have also become part of that norm as corporations deemed “too big to fail” will expose themselves to massive risk and poor corporate management in the game of higher leverage for better margins. In a slowing business climate, corporations will find their cash flow slowing and liquidity drying up. Unable to increase the bottom line, corporations will resort to cost cutting and cutbacks. When that is not enough, they will turn to risk, leverage and creative accounting to improve their earnings. They do so in the knowledge that they are too big to fail. Knowing that their failure will cause mass hysteria, they will leverage on the government for a bailout or corporate compensation to keep their companies and their jobs. The fall-out from such a failure can become systemically fatal and cause a domino effect especially if the corporation is a bell-weather business.
So while the big players play their game and stay afloat (and get richer), the small guy in the street feels the full wrath of a Recession but is unaware that there is a Recession at all. Prices stay lofty but their salaries don’t. The economy reports growth but their personal bank accounts don’t. The press says there’s nothing to worry about but their property prices are falling. The employment rate reports more jobs were added but their neighbour is still unemployed.
The measure of a Recession is also made redundant by the myriad of economic failures that can cripple an economy without going into a double-negative contraction on the GDP such as hyper-inflation, stagflation, disinflation, currency devaluation, deflation and a host of other economic descriptions, each one defining the sort of economic failure that undoubtedly has an effect on the street. And that is where the real recession is – on the street.
The old school way to gauge a Recession still works by using production/service levels, import/export traffic, productivity/utilisation, foreign/domestic investments, consumer/producer prices, real-estate construction/sales, transportation/communication traffic, currency inflows/outflows, monetary policy/cashflow, consumer spending/income, the average between GDP and GDI and the good old-school method of valuing an economy – property prices.
However, few know how to do this and even fewer know where to find this information. So we depend and believe the one source of information from which we get our illusions – the press. It’s difficult to not believe what you read because the statistics and facts are all true and accurate. However, what “they” don’t want you to know is what they keep out of the reports. This is called “Selective (statistical) Reporting”.
If you don’t read the newspaper, you’re uninformed.
If you read the newspaper, you’re mis-informed.”
~ Mark Twain
It is only when it is too obvious or when it is way after the fact that we get the whole truth. I sometimes wonder why they call it the “News” when the information that matters is usually old.
The massive influx of paper liquidity and the toxic ease of collateralised debt has given birth to a monster – Easy Credit. Easy credit has created a poisonous illusion of a money fountain that never stops flowing. Remember that the more you take from the fountain, the dryer it becomes. And when the fountain eventually dries up …
The re-introduction of the Automatic Discharge from Bankruptcy is another illusion. When not so long ago, a Bankrupt had to pay their debts in full in order to be considered for a discharge, today, you may be considered for an automatic discharge (terms and conditions apply, of course) without the obligation to pay up in full. To many, this is a good thing and a way to legally default on your obligations. This has led some people to believe that they can live lavishly without worrying too much about the consequences. They have been duped into believing that our current financial system is so effective that they can and will find some other way to tide over the crises or in a worst case, take the bankruptcy knowing they will be discharged after three years.
However, this can be a fate worse than bankruptcy itself. Financial institutions are not likely to bankrupt you now knowing that the debt will have to be written off. They will instead issue writs against you (to own you) and thus give them first bite in renegotiating your obligation for a longer term at a higher premium. This is where you sell your soul.
The fountain is now dry and the music has stopped.
THE REAL RECESSION
Since the failure of the LTCM in 2000, the fall of Enron, World.com and the Dot.com, through the Sub-Prime Debacle, Financial Crises, Greek Bond Failure and European Crisis, the world never truly recovered from all those downfalls. Massive amounts of paper liquidity flooded into the markets and into economies over the last fifteen years to prop up prices and market caps. However beneath all that liquidity is a stark picture of lower revenues, stagnant middle incomes and decreasing home ownership. The last fifteen years has been an effective transfer of wealth to the wealthy elites while the middle-class faltered and fell into the lower income category. The obvious dwindling population of the middle-income earners is proof of this. And so is the higher net-worth of the elites.
This is possible because of the way information is disseminated in today’s age of electronic communication and social media. The elites have control over what information flows out and what they keep close to their chest by owning the major news networks and press holdings. Financial institutions control the flow of monies, preferring to lend massive amounts to (corrupted) governments and large corporations instead of the guy who needs a home loan or the promising SME that needs cash for a start up. Collateralising huge corporate debt is big business for banks today while home loans at prime rate is peanuts.
These same elites have control over what is taught in universities – the first level of social engineering – as evidenced by the lecturers who have a seat on several board of directors of significantly large corporations and/or are in influential political positions in government or statutory boards. The knowledge learnt is often not applicable in the real world and often conflicts with real economics. This ignorance is bred down into the street as the lesser educated rely on the better educated for guidance. It’s the blind leading the blind while both are deaf to the reality that is in their pockets.
The obsession over the GDP number has distracted the man-in-the-street into believing that everything is hunky-dory as long as the economy is not in contraction and as long as there is an income and sufficient spending power to sustain a lifestyle over this and next six months’ obligations. (Note that when the income stops, your illusion ends.) Financial advisors are telling clients that as long as you have a nest egg or liquid assets that can last for eighteen to twenty-four months, you can ride out any Recession. (Note that if this is true, at the end of that Recession, you will have nothing.)
If things pan out as I anticipate, we might just be looking at a repeat of 2000 to 2003 when the market didn’t crash in a hurry but took us on a three-year slow bleed. Those kinds of recessions are the worse – slow killers with no horizon to look forward to.
Most of the younger generation will not know of, or remember, the painful markets of 1974 to 1985 and 2000 to 2003. The current young workforce aged between 20 and 32 can not know what it is like to be in a severe recession and to be retrenched and unemployed for long stretches in time. We’ve had things so good for so long that complacency and nonchalance will be the main cause and catalyst for the next great downfall – history has proven it so many times in the last 130 years – and this time, I reckon we’re in for the big one.
We are in a Recession. By whatever means you wish to qualify or disqualify it, there is no doubting that life on the street is not as rosy as we would like to believe it to be. What is real is the level of debt that keeps this illusion going. Without this debt, we would be in severe financial dire straits. It’s just that we choose to not see it.