Thursday 21 March 2002

Pic of the day: Party like it's 1999?

Recession over?

The Federal Reserve has stopped lowering interest rates. Indeed, they have postured neutrality as to whether the next move will be up or down. Here in Norway, where we were just starting to lower rates, the central bank has also expressed a neutral bias. Increased growth in the USA (and its most loyal poodles across the pond) is sure to be followed by new optimism in the rest of the world, which is less strongly attached but still trailing along.

It is too early. Verily I say unto y’all: We need more recession.

***

This sounds like a cruel and callous thing to say, what with the unemployment and loss of savings that typically go with a recession. But recession is not the work of the Devil. It is a natural part of the business cycle. While markets do tend to overshoot, the original reason for recession is just that: Reason. Level-headed thinking reasserting itself after a period of irrational exuberance. With the bursting of a bubble, it becomes clear that future earnings will not be what people expected. You cannot continue to sell shares for more than you bought them for, unless the company continues to earn more and more. And you cannot always do that.

In fact, in the "real" economy, the recession is still doing its work. Companies merge and shed workers. Others businesses are simply not viable, and close down. This may be a sad thing to the people who work there, and not least for those who have lent them money. But it also means that money is no longer wasted on projects that weren’t profitable in the first place. This means more money will eventually be available for the better projects; it just needs to take some time for it to move over where it is needed.

And ideas are not fragile. If you think a good idea died with some obscure company, chances are it will show up again somewhere else. If it really is so good, someone will pick it up. Perhaps sometime later, when there is less competition, or technology is more advanced. Babbage’s engine never made it into production, either; but the world got its computer a few generations later anyway. Things tend to go faster than that, these days. Do not despair.

***

The recession is doing its work, sobering the economy and the people that act there. There is still one major task left for it, and this has me slightly worried. The stock market needs to be deflated. It has slid quite a bit since its giddy heights, but there is still far to go before shares return to being primarily a long-term investment. This will happen when the prices are justified by the dividends, or alternatively by the retained profit in the company. Today, the price is still decided by the gullibility of the buyer. You are still looking to sell $100 for $200. This lie will have to end.

But the shares have been a major investment object for pension funds. This means when the stock market deflates, the pension funds will shrink too. This could do unspeakable things to consumer confidence. And consumer confidence is the single most powerful factor in the economy. Unless people keep buying more than they need, the American (and America- inspired) economy will no longer be sustainable. We would still survive, or at least most of us would, but with a lower standard of living than today.

Sure, many people would say that this would be a good thing. We need less chasing after luxury and more serenity and a simpler life. Sure, they would say that; but only very few of them would choose that. In fact, those who would have probably done so already. And I bet you don't know a lot of them. So let's not follow that thread any further.

Now that the recession is supposedly over, I fear that a new slide might cast our civilization into a pall of hopelessness, in which much good might be lost. What I hope for is instead a missing recovery. Not quite after the Japanese pattern. For Japan is sliding because their culture is one of honor: To admit mistakes is bad; to point out mistakes is bad. We westerners are more blunt. We say: "OK, that soared like a turkey. Let's try something else." This attitude is good for restructuring.

Hopefully this restructuring can keep people employed while the stock market very gently slides. Preferably by old names disappearing and new ones showing up with a more reasonable capitalization. This has less negative impact than seeing the familiar names at lower values. Mergers, spin-offs, and new mergers are good for this.

A period of non-growth is not such a disaster. Japan has been gently sliding for ten years, and it has not resulted in mass poverty and riots in the streets. People continue to enjoy a high standard of living; they continue to get new and more advanced gizmos year by year. Trends and fashions continue to pulse. Life goes on.

We could do the same, only better. Moving sideways into a better future.