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.
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:
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).
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.
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:
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.