Saturday 14 December 2002

Pic of the day: I had to fire up this ancient MS-DOS game, Transport Tycoon DeLuxe, to give you an even vaguely topical picture. I hope you appreciate the effort. I do.

Double-dip again

As I have repeatedly told the world or at least you folks: The American economy badly needs a recession. It can be short but brutal, or it can be long and mild. It can also be long and brutal, if politicians interfere (which they often do) in a headless-chicken way. But there must be a recession, because of the unpaid bills from the Long Boom.

It is not a matter of great magic. If a family has spent a long time buying more stuff than they could really afford, then one of two things happen. 1) They have to live below means for a while to pay off the bills, or 2) they have to get money from somewhere else. Right now, there is no rich uncle to the USA. The USA is the rich uncle. So, barring alien landings or angelic appearances, the meagre years have to come.

So while the stock market rose for like 8 weeks, the underlying economy continued its gentle descent. Companies closed down or merged or downsized. Workers were laid off. True, not all of these are in the jobless queue now. Some found new jobs ... but often at a lower wage. Some went back to the kitchen, and you know the wages there. Some decided to finish the education they had left to earn money in the new economy. A gentle decline in income, not a panic. At least not yet. The panic could still come, at least if the USA goes to a new Vietnam. But this is by no means sure. For now, the trend is a soft landing.

You should understand that when a company sacks workers, its stock goes up. This is the mind of the stock market, it is not entirely thinking like common people think. Read the papers and see if I am not right. A company announces bad profit warning, stock goes down. The company fires workers, its stock goes up. The company has shown willingness to change, this is a good thing for an investor. It is not a good thing for people losing their job ... but then again, it would be no better if the company kept people on board until it had to close down and they ALL lost their job.

People will continue to be laid off. As it gets more difficult to get new jobs in the same general wage range, people will look for cheaper housing. This will collapse the housing bubble, which is what has kept the economy afloat after the technology bubble died. Again, there is no need for a panic. People won't swarm out on the streets and freeze to their deaths en masse; they will just trade down. It has already been hard to sell the most expensive homes for a while now. This will move down and hit the middle class really soon unless something dramatic happens, sometime in 2003 I'd say. There will be regional differences, so I can't generally say you should sell your home while you can still get a good price for it. But some of you will see property prices slide all around the neighborhood. If your home is collateral for your loan, you will not bargain from a position of strength anymore with your bank. So prepare.

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When economists refer to the current president of the USA as "George W Bush", you should know that the W has a special meaning for them. It is the economist shorthand for doubledip recessions. Though I personally doubt that W Bush will be president by the time the final upstroke of that letter comes. It's the economy, stupid ... And the irony is that by and large it isn't even his fault. Not that he could have done any better. The writing is already on the Wall.