Recession Journal Part IV: The Double-Dip Trip

by Jabulani Leffall on 11 September 2009 13 comments

Have you ever been broke as Jack's magic beans? 

You know, broke as when said beans dropped on the floor because he brought home magic beans instead of food?

Have you ever been that hard up for cash but anticipating a reprieve?

Oh you have.

Okay, well, do you remember how you felt when that direct deposit finally hit or you heard that the check really was in the mail? You felt better right?

Do you remember the euphoria of going from broke to liquid, if only temporarily, and did the money start to burn holes in your pockets on account of you spending it already in your mind before you withdrew cash, wrote a check or swiped a card?

If you're familiar with these questions and can answer them honestly then you are a living breathing symbol of the economies of 1980-83 and 2007-2010.

Let me explain. For the past 18 months or so, most of us have "felt," broke, if only broken in spirit by the slew of continual bad news. In point of fact a great number of us were even broke literally if we or someone on whom we depended loss their job or home.

But now, oh but now folks, we have a potential reprieve — that's the good news. As of the start of September, everything from consumer confidence and expenditures, oil prices, retail sales and industrial output capacity is moving in a positive direction.

Financial market indices, as a result are up, buoyed by the psychological boosts these numbers bring. The S&P 500 index, for instance, hit an 11-month high the week of September 7, 2009.

And even the one down arrow is shaping out to garner a big thumbs-up as a recently-released Labor Department jobless claims last week fell to the lowest level since July.

But should we start spending in our minds now? Should we stimulate the economy and not let the terrorists win now?

Well that's up for debate but the truth is that we still don't know if a lift out of our lovely recession will be a “V” recovery for victory over being broke as beans or a ‘W” recovery — as in wait and see because we’re not out of the woods yet. Who knows, maybe we might even be in for a VW recovery. Wouldn't that bug you out. Marinate and then laugh if you care to.

So my good people, the "VW" or just "W" recovery, represents an up-down-then-up again recessionary trajectory, one that despite current indicators could be in the offing.

What to do?

Well, in a cursory web search using the search terms "Double-Dip Recession," I found Richard Marcus, associate professor of managerial economics and finance at the University of Wisconsin-Milwaukee and I knew that school was in.

And I knew that he has a handle on such things as money and the like. And I knew that he would likely pick up the phone himself and given the often genteel mannerisms of fly-over state residents, I knew he would actually talk to me if I explained who I was and why I was calling and that his work would help further an eventual point that I would be getting to.

Dr. Marcus likens the current economic situation to the extended double-dip recessionary period of 1980 to 1983. Back then, as it is now, there was major government spending and the recession was exacerbated by a severe credit crunch as well as monetary policy from the Federal Reserve that made the downturn more protracted.

Over static on my cell, Marcus posited that if forecasters are to use history as a guide, the 1980-83 downticks turned around with sustained spending, a tax cut and more “helpful monetary policy” and that nowadays if we want sustained change we should act accordingly.

Marcus says that while there is every indication that the current recession will soon be over, this economy is sort of like a swimmer underwater that comes up from air and then goes below again, only to come back up.

I like that he used wide-open metaphors that could apply to dips. He was doing my bidding (insert cartoon villain laugh here).

“I’d said before that I thought there’d be some upturn but I also said that the period 2007 to 2010, will likely take as long to right itself as that time in the 1980s,” Marcus told me. “This is because you have a tax increase that will kick in to slow the economy and eventually even $800 billion in stimulus money will teeter out. Plus the Federal Reserve has doubled the monetary base and they have to be more restrictive.”

Indeed despite positive economic data, the government’s current fiscal and monetary bend and that of the early 80s are two sides of the same coin in that policies in both eras seem, as Marcus puts it, “contractionary in nature.” Plus Marcus added that he expects overall unemployment to continue to rise, “likely going to 10 percent or above before it’s all over.”

And now back to you folks. How do you feel? Do you feel confident? Are you ready to pick up those broken beans and throw caution to the wind, take some risks, buy some goods, services or memories?

Or are you forever changed due to the emerging consumer ethos of frugality, caution and selectivity as the country emerges from the most pervasive downturn since the Great Depression?

<>Well consider the thoughts of yet another economist, Nouriel Roubini, from NYU, whom I probably could not have reached by phone to talk to in a short period of time even if I had one of those long-reaching thingamobobs that grab objects even while you're sitting down.

Roubini is known in many circles as “Doctor Doom,” and he has said that going forward, even if the recession ends, there might not be enough spending in this or other countries to offset the wicked drop in consumer demand from "over spenders" in the United States and Britain.

Yes the U.S. and U.K., which in recent years have become both home to some of the world’s most conspicuously consuming people, and also two of the countries hit hardest by all this crunchy credit.

So if you're thinking that a turnaround is here and your money is burning a hole in your pocket and you want to spend as you did in headier times, think again, double dip yourself before you trip yourself.

Whether the recession is finally over or not, remember when you were broke as a bean and remember how you felt.

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Guest's picture
Phil

Look, this thing isn't over yet. Not by a longshot. The problem is debt saturation - people have taken on too much debt over the last 20 years or so and their incomes have been pretty much flat in that period (adjusted for inflation). That's the difference between now and the early 80's. We can't have the people take on more debt because they're pretty much tapped out - they don't have the ability to service more debt now.

Don't believe all this talk of "green shoots" - the only thing that's led to an improvement in the economy (and actually, it's not an improvement yet, just a slowing in the rate of how bad things are getting) is a huge amount of government spending. And guess what? We're on the hook for that spending and we're going to be paying higher taxes in the future to service that debt as well... and that will dampen growth as well.

So stay prudent with your money. Keep growing that emergency fund - The unemployed are having a lot tougher time finding work now than they have in the past. It's not unusual for it to take six months to over a year to find something. Even if we didn't lose another job between now and the end of the year we'd still hit 10% unemployment in December according to calculations by the Calculated Risk blog. That's because our economy needs to create 130K jobs/month just to tread water due to population increases. I don't think we're going to see unemployment under 8% again for several years. Plan accordingly.

Xin Lu's picture
Xin Lu

I personally think just because the stock market went back up a bit doesn't mean the recession is over.  Unemployment needs to go down before everything recovers. There is a lot of government intervention now that is causing some numbers to look better than they really are.  So the double dip scenario is likely, but we will see. 

Guest's picture
Dias

That's an informative piece Jabulani! The state of being broke is indeed taste like even worse than bitter gourds and smells worse than the Rafflesia.

The unexpected changes in the economy wipe out many assets, money and value, leaving millions affected, thousands broke and drove hundreds to suicides.

I've a friend who became suicidal around a year ago when the crisis started because he lost his house, job and assets, resulting in his family breaking up as well...

For this recession, we need to look at it more deeper. Although many are affected but some are not really affected at all, and yes, I am not referring to the rich.

In Singapore, during the Great Singapore Sales period, people are still spending well. I realise that it is about certain sectors especially the finance and real estate that are heavily affected. Those who are working in other sectors arent really affected.

Another problem that I see is that money is never really the issue, people themselves are the issue. I've written a on this subject on my blog at http://www.diaslu.com/the-psychology-of-money/

Guest's picture
valletta

I sold my profitable business TWO years ago, just before the real effects of the downturn.
I have been unemployed since then, turned down for being "overqualified" for every job I've applied to.
Deep depression, like I didn't know existed.
But...I start my new job, back at my old employer (rhymes with snapple) next week and couldn't be happier. Things are turning around in this area and it's known as a canary in the mine.....keeping my fingers crossed for the rest of you :)

Guest's picture

I'll be frank here guys... compensation in the financial services are reaching and breaching 2007 levels. Profits are back up, and there are 25% less people to pay, so the leverage on the upswing is huge.

Guest's picture
Phrank

There really isn't anything on the horizon that will drive sustainable growth in the US economy at this point. The "growth" we're seeing (and I agree with Phil above, it's not really growth we're seeing, but we're just seeing things get less bad) is coming from the government sector. Japan did similar things all throughout the 90's and yet they've still ended up with 20 years of stagnation now. It seems we're headed in a similar direction. If we consider that our downturn actually started in 2000 when the tech bubble burst (and most stock indices are about at the same level they were then) we've already had almost 10 lost years.

The advantage that Japan had going into their downturn was that their people had a lot of savings. This is not an advantage that the US has - our people have a lot of debt. This will likely make out experience more difficult than the Japanese experience.

When it comes right down to it, the "wealth" of the last 15 years or so was just an illusion built on debt. Now we're in the midst of a painful readjustment down to a more sustainable standard of living.

Jabulani Leffall's picture

On the last point it is right on the money. 'Not bad' doesn't necessarily mean good and this is the point is. This is the point of these posts, talking about the illusory recovery. Even alchoholics can be in recovery but the fact that the U.S. no longer makes anything and that we have more debt than savings and more ideology than policy, further complicates things. Plus I think a lot of consumers have short memories and tend to act in times of famine as if things will never get any better and in times of feast as if the boom will last forever.

 

 

Jabulani Leffall

Monetary Gadfly, Common Currency

00000 Broke Blvd. Kitchenette #68 & 1/2

Lowcash, CA 90000-0000

Guest's picture
Guest

Thank you for always adding your special brand of humor in your very thoughtful articles.

Guest's picture

Excellent article. I think many people miss the deep structural issues that are going to impact our economy for a long time. We didn't get into this mess in a couple of years and we won't work off the excesses in a couple of years either.

I wrote a piece recently about why i thought the next 18 months would not be a good time to be in the stock market.

Read the update on my Stock Market Prediction Here

Greatly enjoyed the article but am saddened by where I see our country going for a while.

Guest's picture

Jabulani--you're taking on the deeper issues that economists and government analysts either don't understand or refuse to venture into. I agree with all that you've written.

The problem with optimistic economic projections is that they develop legs because they're popular, and people's hopes are pinned on them. They can keep going even if they aren't true.

What ever happens, the best course is to prepare for the worst. If the good times return, you'll be that much better off. If the worst happens, you'll be prepared. That's a can't lose recipe.

Guest's picture

There's no way a recovery is anywhere close...there's simply too much housing inventory and too few jobs. Factor in home prices that really haven't fallen that much (the median sales price is only low because distressed properties skew it lower), and things aren't so bright.

Oh and then there's the hundreds of thousands of foreclosed properties withheld by banks and lenders that haven't been made market yet...and that's just housing.

What about credit cards, business loans, etc, etc...

Guest's picture
neverland~

the global financial crisis was an earthquake to the whole world, i remember many companies went bankrupt, people lost their jobs last year, though not seriously. but obviously the situation is becoming better in China, companies are afraid getting more orders cause they can not find as many workers as they want, especially in the southern part of China.[img]http://www.photosnag.com/img/4713/n09x0302vnsn/clear.gif[/img]

Guest's picture
djohngo

I don't think we're looking at a V or a W. I think it's more like an L. As others have said, the solid foundation of manufacturing jobs upon which the U.S. middle class was based is gone, and the easy credit that we tried to use as a substitute, is drying up. Another recessionary force will be huge price fluctuations in the price of oil. As demand increases, the price will go up again, devastating the transportation, retail, and agricultural sectors, and essentially putting a ceiling on any recovery.

We'd also better hope that we don't do anything to piss off the Chinese enough to dump our T-bills. The resulting devaluation of the dollar wouldn't necessarily be a bad thing, provided we still had a manufacturing sector, which we don't. A weak dollar might boost our ag. sector. But even if it did, the ag. sector doesn't have the high-paying jobs needed to sustain a middle class.

We need to make some serious changes. 20th century strategies won't work in the 21st century.