Economic recessions are inevitable. They are a periodic retreat to common sense after a interval where optimism and greed have driven the value of everything beyond sustainable levels. But recessions are not caused by the sudden arrival of market wisdom. Rather they are caused by panic, in which wisdom plays no part. There are two things to keep in mind as recessionary pressures kick in around the world. The first is that in our now globalized economy, nowhere is likely to escape the impact. The second is that once the value slide gathers pace, it will be hard if not impossible to control it.
President Bush is throwing $145 billion into the US economy to stave off recession. Other governments will do likewise. But they will probably discover, like the pilots of the British Airways plane last week as they came in to land at London Heathrow from Beijing, that suddenly none of the usual control buttons and levers works, however hard they push and pull them. It must be hoped that the world economy has as soft a landing as the BA plane had.
Experts suspect US consumers will bank the generous tax breaks Bush is giving them. They will not continue to fuel a consumer boom based largely on credit card debt. It was the US savings and loans debt, secured against properties whose price was falling, that began the present downturn. It is likely to be billions of dollars of delinquent credit-card debt that will add to the troubles. And then the real damage will kick in as corporate incomes drop and companies discover that they cannot service their high debt levels. Failing companies mean job losses, which mean lower government tax takes, which mean whole economies in trouble. If all the present indications are proven right, tough times are coming.
However, with recession also comes opportunity. The wiser companies and investors with good and prudent management will acquire the assets of the foolhardy, hopefully allowing them to rebuild more realistically when the good times return. And of course, return they will. Markets are moved by confidence. When investors become confident that the unreal values and assumptions in the system have been driven out, the funds will start to flow back into the markets. Risk, which is the essence of all good business, will once again become acceptable, but it will be a far more measured and indeed conservative level of risk. And so it will remain for some years, until rising demand for everything starts to push up prices again and once more the markets become infected with optimism and values begin to reinflate.
That is the economic analysis. Unfortunately recession is about much more than the numbers. People will lose jobs and homes. Vulnerable economies including those of Africa will see hard-won economic achievements stalled or even wiped out. There will be hardship. Indeed history has demonstrated again and again that in a recession the price of an eventual return to common sense generally falls most heavily on the little guys.
