Sunday, August 21, 2011

Recession or Depression?

It is now almost given that we are going to have economic downturn. Except the Fed and Obama Administration, everyone is pretty much sure that we are going to get a double dip. For people on the main st. we never left recession in 2008 in the 1st place.

Question is, are we going to be in recession or in a worldwide depression?

From Wikipedia; “In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.”

So what we have here?  We all know that GDP growth is below 2% in USA and almost 0 in most parts of Europe. In Japan it is negative. Only growth we still see is in the fantasy land of China and in some developing countries like India and Brazil. But we should be fools to believe anything coming out of China at face value. Before we go any further, let us understand what is GDP. It is C+I+G+Net Export. C is the consumer spending. I is investment by industries. G is spending by government and Net export is difference between export and import.  We also know that there has been no growth in real wages for the last 10 years. Consumers have been spending by borrowing, using home equity or some other form of bubbles created by the Fed. That ATM has now been turned off. Industries are sitting on piles of cash and not investing because they do not see any increase in sales in future.  Net export is negative in USA and in most European countries. We are helping the Chinese to come out of the swamp by purchasing all the junk from them and creating jobs there. In return they are now able to give lectures to America how it should live within its means.