What do we reckon about................... the recession? A final word.

The main thrust of this thread has been that any definition of recession based on quarterly economic growth figures is misleading, and furthermore that politicians use these numbers to talk things up, when perhaps they shouldn't. My previous posts on this can be found at http://stevestonechat.blogspot.com/2011/06/what-do-we-reckon-about-recession.html and http://stevestonechat.blogspot.com/2011/06/what-do-we-reckon-about-recession_27.html

I think I can prove just how misleading these definitions can be, and demonstrate why they are so dangerous in terms of their effect on decision-making - from personal experience.

You'll see above that I used to own a snooker club. It was situated in a busy town centre in England. A lengthy period of good trading was observed around the middle of the last decade. Then, in early 2007, I noticed a decline in business. At first, I thought that people were just being cautious after excessive Christmas expenditure, but in March 2007, things got a little worse again.

And then I learnt something, during a phone call with the local Borough Council. They employed people to analyse CCTV footage of the local shopping centre that surrounded the club, and reported that 30% fewer people were visiting than the month previously, a fact that was mirrored by decline in their revenue from parking meters. During the same week, British media for the first time began to talk about the 'credit crunch'.

Putting these two things together, and looking out of the windows, I could feel that a recession had begun, and I thought it would be a deep one. You can only cut overheads so much, and there was the added fact that the British smoking ban was due to commence July 1st of that year. I quickly began formulating an exit strategy, and before too long, I sold the club on. Thank goodness I did that - the club eventually closed in February 2010, with rather significant debts.

You can imagine my surprise when, based on three consecutive quarters of negative growth, the British Government finally announced a recession had 'officially' begun - in October 2009. And there's your proof.....

What do we reckon about.... the recession?

You'll hear the word somewhere, at least one a day. The politicians tell us through the media that it's 'officially' over, and although there are concerns about a 'double dip', don't worry, because as fragile as the recovery is, everything's going to be all right, anytime soon.

It's a big lie, and the top politicians might not even know it. In fairly simple terms, here's why;

Between the 1930's and 1970's, what can loosely be termed as Keynesian economics dominated Government policy. Everything was based on the reality of supply and demand. Most economists agreed that recession was characterised by 'low or no growth' of economies, say 0-1.5% per year. Reasonable growth was considered to be 2% or 3%, with good growth being regarded as perhaps 4% or 5%. The growth figures of 6% to 12% achieved by some Far East countries in the last third of the 20th century was considered exceptional, as was negative growth, which was considered to be a sign of depression, a state worse than recession.

All that changed with the advancement of monetarism in the late 1970's, and its effect on Government policy. Instead of the reality of supply and demand, the leading principle became expectations. Before too long, key stock market prices became expectation-based. So if a large company only made $3billion, instead of the expected $5billion, stock markets would fall. Similarly, if a report on industrial performance was better than anticipated, stock markets would rise. Not too long ago, I remember a report on Sky News, featuring a guy in America, who was closing his car showroom because of the recession. He speculated that General Motors might face some problems soon. Although General Motors made no comment in the media that day, Sky News later reported that the FTSE100 in London finished 1.5% down 'on the news'....

Following the advancement of monetarism, it didn't take the politicians too long to realise that expectations had become everything. Words gradually became of greater importance than actions. So if you talk something up, it might well get better. If you talk something down, it may well get worse. Some people call this 'spin'. And before too long, a new definition of recession was upon us. A recession now only 'officially' exists in an economy if there are three successive quarters of negative growth, and as soon as that's no longer the case, it's 'officially' over, and we can all look to the future.

The definition is of course a load of old tosh. If it were true, the long and deep British recession of the 1970's was barely a recession at all - there was just one case of three successive quarters of negative growth, 1973-4, see http://www.guardian.co.uk/business/interactive/2008/oct/22/creditcrunch-recession, GDP changes since 1955. And yet I lived through the miners' strike, the power cuts, the three-day week, and the 1978 Winter of Discontent....

The new definition of recession of course enables the politicians to talk everything up, which they believe will make things better, faster. If things aren't going well, they can say it's not a recession, because we haven't had three negative growth quarters, or they can say it's 'officially' over, and we're in a fragile recovery, because the latest quarter shows small positive growth. It's not necessarily a bad thing, but it's still a lie, which some people will unfortunately base their decisions on.

So where are we really with the recession? Well, I have a lot of experience over the years in econometric modelling - that's trying to explain things using economic data, and then using the knowledge to try and predict the future. I once worked with the Henley Centre for Forecasting, and I can tell you without doubt that the number one indicator of economic activity is house prices. That may well mean bad news for the American economy for a while longer, since the trend in house prices in America still seems to be down. It's probably worse news for the British economy, which tends to run about two years behind the US....



If you enjoyed reading this, please take a look at my series of sci-fi adventure novels, at http://steven-stone.blogspot.com/.

For further information on my novel 'Intrepid', a top 100 Kindle bestseller in science fiction, military and war, see;
Premise - http://stevestonechat.blogspot.com/2011/06/premise-for-novel-intrepid.html
Review - http://stevestonechat.blogspot.com/2011/06/review-of-novel-intrepid-by-martin-ince.html

For further information on the sequel 'Intrepid - The Two Storms', see;
Premise - http://stevestonechat.blogspot.com/2011/06/premise-for-novel-intrepid-two-storms.html
Review - http://stevestonechat.blogspot.com/2011/06/martin-ince-review-of-novel-intrepid.html

I guess time travel is one sure way to get yourself out of a recession....