Myth of Improvement of Economic Recession

By Adarsh Chandrakar

World economy is facing the worst time since the great depression of 1930. This recession started with the reduction of Business and Banks having the credit crisis for conducting their further business in December 2007. Banks either started defaulting or getting acquired by other bigger banks. This resulted in huge job loss across the world. US have seen that largest bankruptcy of Lehman Brothers which owed as much as USD 613 billion when it collapsed. The economic turmoil didn’t stop here itself. As the time progressed the manufacturing industry and retail industries also started showing the worst sign. They started filing bankruptcy. Another biggest bankruptcy was in the form of GM defaults. The unemployment rate in US soared from 4.6% to 9.5% within a year. The foreclosures increased all across the US. Consumer habits started changing due to the ailing economy and start impacting the retail sectors heavily.

The US S&P 500 figures have seen a drop of 41 percent in stock market just in 2008 which is huge and definitely one of the worst considering that the biggest yearly drop ever was in 1931 during the Great Depression when the S&P dropped by 47.1 percent. In 2008 US equity performance has seen a USD 7.3 trillion of stock market value vanishes.

To counter the effect of downtrodden economy the US Govt and even all the Govts of the world had only one plan to pump trillions of dollars of artificial money in the economic system. Govt started bailing out the banks with the logic that the current forms of banks are the savior of economy of the world. US itself pumped USD 700 billion in 2008 which was increased further by additional USD 150 billion. These money was definitely a savior for these banks for not to file bankruptcy. But the market was not getting stabilized and was witnessing continuous fall. Banks were still facing the credit crisis to operate and continue their business smoothly.
US got a new and dynamic president in the form of Mr Obama in 2009. He looked very promising leader and claimed to bring a change. After getting into the office he had the toughest task in the US history to rescue US economy to crumble completely. He also used the similar weapon like the previous administration to rescue economy. In Feb 2009 US administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

Starting with the monthly view of the S&P 500 trend chart, the bull market of the last five years turned down, as the index fell below the 24-month exponential moving average. The Relative Strength Indicator (RSI) is below 50, indicating a downtrend is in place. The Moving Average Convergence Divergence (MACD) fell below zero, a sign stock market trend has reversed and we have entered a bear market. Finally, the Slow Stochastic fell through zero, another sign of a bear market.

US Market Trend for last 10 years

With the advent of the huge artificial money market started showing the sign of the progress. Banks hands again started getting little free to operate and provide market credits. The stock market started showing an early sign of improvement. Slowly consumer behaviors have also started showing the sign of improvement with increase in their expenditure. The consumer behavior researchers started commenting it to be stabilizing. We have to keep in mind that 71% of US GDP of around USD 10 trillion is generated by consuming habits. The current results of stabilization can be considered as a very significant sign of market stabilization.

The trend for the US Consumer behavior for last 2 years is as follows:

US Consumer Behavior

US Consumer Behavior

The overall Consumer Mood Index (which is based on a combination of current economic conditions and economic outlook measures), now at -98, improved by 15% from February to March, and has essentially returned to its level of a year ago (-94).

Consumer Behavior Comparison

The market signs are looking very good that we will be out of recession very soon and again the economy will be very strong and free from any fear. The investment tendency of the common man will improve and will provide an additional strength to the US economy.

My perspective differs here. In my perspective the current sign of improvement of economy is artificial and will stay only for short time. The current visible improvement of economy is just due to the extra credit available in the market due to the artificial money pumped by the US Govt. Consumer habits seemed to improved as US citizens are thinking that their Govt has nailed down the problem and now they have the safe gateway. I will go back to the basics of economics to support my theory. The economy can become stronger if there is balance between demand and supply. The demand is nothing but the purchasing power capacity and supply is in the form of production.

The rate of increase in unemployment rate has definitely reduced compared to last year but still there is no significant sign of improving job market. Until the jobs will start creating we can’t say that we are over with the recession. The improvement can be a short term effect and the condition can become worst due to the negligence.

The unemployment forecast for US is as follows:
U.S. Civilian Unemployment Rate
Past Trend Present Value & Future Projection
Percent Unemployed Seasonally Adjusted.

US Unemployment Rate

US Unemployment Rate

The average consumer spending seems to be improved but it’s among the Americans who were able to afford and already possessed surplus and were reluctant to spend because economy was continuously going down. The data to support my logic is in terms of average consumer expenditure per day is as follows:

US Consumer Spending 2008 - 2009

US Consumer Spending 2008 - 2009

Upper Class Income US Spending 2008 - 2009

Upper Class Income US Spending 2008 - 2009

From the above data we can easily analyze that there is significant improvement in the upper income Americans which is the main reason of improvement of average consumer spending. In reality the average American household income has not stabilized as the job condition for them has not improved and neither there is any visible sign for the same. Still the job loss is continued and the rate decrease in job loss seems to be promising but most likely that seems to be temporary to me due to the huge amount of artificial paper money pumped into the market. Sooner the artificial money in the market will be exhausted and we’ll be again back to the same condition which we witnessed in 2008. This time the effect will be much grave then 2008 as it’ll be proved that artificial pumping of money will not help in stabilizing the economy. All the Govts of the world is going to be clueless for the action of economic reforms. This will result into the longer period of economic chaos. Everyone will start realizing that there are very big flaws in the current system of economics and it requires a radical change to build economic strength.

The efforts are required to strengthen the economic strength of common man by decentralization of economic development rather than giving power only to big giants who commits all sorts of mistakes in the greed of accumulation and maximization of personal profit. The concept of profit maximization of the firm should be changed to the increase in purchasing power capacity of larger group so that there would increase in consumption which will balance the increase in production due to technological progress. The concept of empowering every producer who physically and intellectually directly participates in the increase in the production should be implemented by allowing them as the share holders and profit sharers of any economic organization. This will help in increasing the purchasing power capacity of larger population of the world; which will result into larger consumption of the available production. The ratio of conversion of need into demand will be increased which is going to build economic strength of any economic zone.

One precaution will also require to be implemented is to restrict the pressure from the production from external economic system. In true sense the free trade has to be balanced with local production strength and capacity. Regular endeavor is required to build the strength for local production for local needs. This will result in making every individual economic zone stronger to support them and do the economic development planning. Another best practice to implement would be providing more control to the individual economic for local economic planning and decision making process. The locals understand best of the local problems hence they should be allowed to take the decision for local progress. The administrative system and economic system should be separated so that the economic corruption due to the result of central administrative system can be avoided. This type of radical change in the system is not going to come until the locals are better educated with the economic system and start participating in building the economic system. It’s like when more hands will join to build the economy the stronger will be the effort and there would be multiple gateway of control which will result into the better quality of the economy. It’s my vision but you are the one who can implement it for your own progress.

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3 Comments

  1. Very interesting article indeed.

    Just to add. seeds of current recession were `swod way back in 2002 by Mr Bush jr which is directly linked to housing crisis. However we can trace it back to early 90s particularly gulf war. refer news.bbc.co.uk/hi/english/business/the_economy/ne…/226986.stm

    First major incidence was reported at time of Mr Reagan when he decontrolled central bank intervention in maintaining interest rate.

    Gulf war as we all know was primarily designed to create American dominance on oil particularly after dominance in latin america was threatened by Mr Chavej

    What in this time American capitalist did, as pointed by Mr Ravi Batra on his interview posted in Youtube was that they did not equally distributed productivity gain which happened to mass IT revolution and globalisation to common people, which led to demand creation on white goods rather than meeting or increasing purchasing power for common people.

    To top this Mr Bush Jr announced in 2002 that he would encouraged housing for all american citizens as policy. This led to spurt in real estate market. Too reap abnormal speculative profits Banks encouraged people to take more loans even without checking whether people have purchasing power to meet those loans.

    It went to extent that if you don’t have jobs, no income, no collatral you are the best person to get loan. (NINJA LOAN)

    To encash and pass on this risk banks bundled these loans and sold it globally rating them as AAA+ highly secure. (seuritization of loans) They managed to do so as property prices were rising so it was assured that banks would get loan value. But oversupply and non payment of loans which was just 0.5% higher than normal interest rate and related forecloser bought the property prices to as low as 30% of original value. Since banks had passed on these loan amounts to insurance and stock markets pension funds and other economic instrument this fall led to domino effect and desastor happened.

    From common people perspective, people lost there life time saving to extent of 80%, companies were further forced to cut jobs and down production to meet demands (white good?) people further lost there purchaing power and crisis depend further.

    Though we have announce 10.6 trillion USD bail out from US alone, many east european and affrican countries dont have funds to come out of this mess. Refer http://news.bbc.co.uk/2/hi/in_depth/business/2007/creditcrunch/default.stm

    Follow the money

    I still dont see any concrete action which would bring world out of this mess other than bailouts, of which most of it spent on either paying rich dividend to investors or compensation to CEOs. Many companies have spent millions from this bail out money on holding gala expensive seminars in 7+ star hotels for top brass.

    in end I just want to point out unless disparity of income is bridged between top earner to bottom most people this would not solve. For example Mr Bill Gates earns 10000 USD per sec where are average per person in come per year in india is Rs 3000 only. Till the time greed from wall street and blue boy in banks is not controlled and they are allowed to get as mr Obama once commented “Golden Parachute” dont think much positive

    post your comments on this

  2. Thanks for your feedback. I am pleased to read very interesting information shared on the cause of economic recession. Why don’t you write a comprehensive article on this and share it with Paras Jain. He is one of the site moderator for Prout Journal. He can work along to publish the same.

    I want to make some comment on your conclusion. All along in the history the powerful in the society has never given up their throne by themselves. It’s always been that they have been thrown away by someone else. Sometimes it has been by power struggle, sometimes its been by rational thoughts. The power shift has been happening in the society according to the nature of the power in the history. This time the nature of power is more economic rather than physical strength or intellectual power, so the only solution could be economic radicalization. So it has to be reverse of the current practice which means from few controlling the economy, it has to be major controlling the economy. It’s only possible by tje economic revolution of major coming forward to take the control rather than waiting for the control being passed to them. It has never happened in the society neither its going to happen this time. The issue of delay in revolution is only because common man have lost all their vigour and risk taking capability. It’s the human lethargic characteristics that they don’t look for other options until there is no other way.

    So no paradigm shift will happen until common man comes forward to take the control. To me it seems to be only possible when there would be major natural destruction for the correction. So Shiva has to work with HIS face of Vama to teach the lessons of progress to the society. To me it seems that major natural disaster approaching us very soon from all direction which might bring bigger psychological change in the society. I might be wrong but this is my analysis and others can add their view point.

  3. You are very right in pointing it from social angle. Remember the yug concept (Vipra, chhatriya, Vaishya and Shudra)
    If from my humble understanding on current affairs of world, I would say we are nearing peak of Vaishya yug and ultimetly this would degenerate in to shudra yug bring total chaos.

    As i had written earlier in this group Capitalism as concept / dream was not that bad. Main issue is capitalism it self in true character as defined by Adam Smith does not exist, where equal opportunity to all for growth, Buyer is the king etc…was main tenet.

    Today capitalism is degenerated in oligopoly or cartels where even choice of buyer / masses, whether in terms purchasing or education or freedom of thoughts all is controlled discreetly / indirectly, (refer Necessary illusions by Noam Chompsky)

    Though you are right that masses have power to bring changes, But inherent will, voice, thoughts are suppressed by dividing them. One of way is so called consumerism and “Me first” culture. This is done by giving same product with slight technical differentiation, and selling them at differential prices and as competing product by promoting / generating demand through very lucrative advertisements. This goes to extreme where cartels forces consumer do generate demand, whether the products have utility for consumer or not.

    Cartels choose what you are going eat, were use, spend, in a day and they do it for your whole life. Example in US, health care has artificially made so exorbitant if you don’t have medical insurance you cant survive. If unfortunately you practise / use alternative medicine, like traditional medical system you are either loosing health insurance or your premium would be exorbitant. This is mainly because major drug manufactures have very strong lobby.
    Another example, what you eat is influenced directly by majors like CocaCola or Pepsi like companies or indirectly by companies like Monsanto. All of this controlled at back end in future and derivative markets in Wall street or similar stock exchanges.
    From where your are going to buy and what is decided by Walmart, JC Penny, Sears, Target Costco and to an extent by eBay and Amazon.
    Your fuel is controlled by Shell, Mobile and other 3-4 majors in world.
    Your thoughts is controlled by so called free press which is ultimately controlled by Warner Bros, Sony, and other Joshua groups.
    So called free Internet is indirectly controlled by Microsoft, Yahoo, Google. Remember 90% of world PC use MS windows.

    the whole beauty (sic..) about this system is though each firm in there segment like food, fuel etc would look like they are competing against each other to provide benefit to consumer, but inherently they are together. If you don’t believe, please check shareholding patterns of all these firms. If you are able to figure out through very complex maze of cross holding equity, intercompany ,investment and portfolios. Also check how these companies join hand and lobby in white house or senate or Congress

    Now each individual in society is so much dependent on these cartels where they would find strength to come togather and fight. Main effect on society is that this kind of behaviour kills values, ethics and morality. Without which no leader can emarge and socity cant raise it voice.

    You may say I have given all examples of US, but masses live in Asia. But remember old saying whole world is born to work like slaves and US citizens (read Cartels) are born to enjoy. another saying says if US sneezes whole world gets cold. which exactly happened in this current recession.

    You may wonder does US has so much wealth that it can control. Actually no where near that. I would write about that later based on your feedbacks

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