Get ready for a three-year recession
Everyone's ready for the Greatest Depression to be done. Economists think it will be over by the middle of next year. What if it isn't?
The current contraction was a year old before we even figured out it was happening, which makes it longer than the average postwar recession. Here's why it could be exceptional.
In the middle of this decade, then-revered Federal Reserve chief Alan Greenspan believed that information technology had transformed the very nature of recession. Just-in-time inventory, supply-chain dashboards, and an army of permalancers made adapting to changing business conditions so easy, so quick, that old-school recessions, defined by two consecutive quarters of economic shrinkage, would be a thing of the past. Instead, we would experience a series of microrecessions — a down month here or there, followed by upticks — all happening so quickly we barely felt the prick.
Ah, for the good old days of microrecessions.
What's happened now is something akin to the introduction of automated trading on Wall Street. What made 1987's Black Monday stock-market crash so devastating was the unforeseen triggering of an avalanche of selling by computer. After that, the market installed circuit breakers to prevent a recurrence.
What Wall Street had two decades ago, we now have business at large. Idiocracy, the hilariously dystopian Mike Judge movie, has a scene where the clueless CEO of a giant corporation complains that the computers laid everyone off when the stock dropped. That's something close to what happened in the Panic of '08. As bad news cascaded through the system, they triggered layoffs and cutbacks, which then prompted consumers to cut spending, causing yet more danger bells to ring.
And all of this unfolded amidst a global economy already in recession. China and India, once seen as engines of growth for the world, are in parlous states. Most frighteningly, China's imports, which have propped up old-world economies like Germany, dropped 18 percent from a year ago. India, already running a large budget deficit, has little room to stimulate its economy. Dropping oil prices, meanwhile, have taken the wind out of petroeconomies like Russia, Venezuela, and Saudi Arabia.
That's why I think the recession could be far longer than the 18 months most economists predict. Where, exactly, is growth supposed to come from? U.S. consumers and businesses are reeling from debt. The rest of the world is hardly better off. The expectation that government spending will lift us out of this mess seems akin to expecting that President Change will deliver us all a new bicycle.
The Pollyanna response is that the same information technology which helped the recession unfold so quickly will help businesses spot opportunities for growth, making the recovery all the quicker. I doubt it. Human psychology teaches us that we are far more motivated by fear of loss than the promise of gain. (Greed, it turns out, is good — because it's so much scarcer than we imagine.) Singed by the suddenness of panic, we will be much less likely to respond to glimmers of hope. 18 months? We should be so lucky. Try three years — or longer.