The Sciences

The economic correction

Gene ExpressionBy Razib KhanAug 19, 2012 2:50 AM

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Finally the social bubble seems to be bursting. Do remember that in 2000 there was backlash against Amazon as well, and it's still around. Still, global oil demand level is low. Most people seem to agree that some of the "fixes" to the 2008 financial crisis were only band-aids, and the fundamental structural problems were put off for another day. Is that day now? Pessimism is cheap, but if you feel it, why not share it? I mused about a possible recession in May of 2007, and some of the comments were kind of funny and tragic. I'll quote, with names removed to protect the guilty:

They’re practically glorified hiccups nowadays. I don’t get what the big deal is. ... In a word, no. Unless you’re talking houses here in the Bay Area, but the “recession” is more like a return to a normal, vanilla market. All the economic signs I see look good. Krugman’s cat must be hurting. ... The economy has been generally good, unemployment has been relatively low throughout. And so no, I don’t see the looming failure ecomomically. ... I doubt it. People often react to one aspect of the economy without looking at the larger picture. Yes, there was an overextension of sub prime lending, but those are only a fraction of mortgages. Other fundamentals are still very strong, and the yield on equities (earnings divided by price) is often less than the after tax cost of money (about two thirds the long term interest rate to borrow). I think a recession is extremely unlikely when stocks are so cheap compared to money and smart companies are using their cash to buy back in their own shares and acquire other companies. ... I don’t get the impression of any looming recession, though I have read people predicting one over a year. ... Razib, this article from Donald Luskin should put your mind at ease. “Growth This Spring Is Strong, and Looks to Continue.” http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070504 “They’ve been saying the same thing for a year now, as housing has fallen off a cliff. But it just never comes true. There’s simply no evidence of infection of 95% of the economy by the 5% represented by housing. “Income is strong. Spending is strong. Jobs are strong. Corporate earnings are strong. Everything is strong but housing.” ... The U.S. Equity markets have been hitting all time highs, and valuations aren’t egregiously out of whack like they were back in 1999/2000. U.S. Corporations have posted double digit quarterly profit increases for at least 12 straight quarters, and are now sitting on boatloads of cash. Unemployment is at a reasonable level. I think at worst we’re going to see a *correction*, but not a depression. In addition, Alan’s doomsday prophesying aside, China has been posting nearly double digit *GDP* growth for the past 25 years (see here). Think about it: it’s unheard of for corporations to accomplish this, let alone an entire country. China may suffer the slings and arrows that come with grander economic cycles, but predicting its collapse is, I think, a bit misguided. And, as for Russia, Alan’s population numbers are 1) incorrect and 2) not taking into account the loss of population due to the breakup of the Soviet Union. Also, population loss does not equate with a deteriorating economy. That’s just Malthusian wrongheadedness.

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