What about a Recession, Mr. Decker

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Clearly you don't believe that Y2K will cause a mass breakdown in our society. Well, I don't think that is likely either. (Just in case, tho, I'm going to stock a lot of jug water and dried legumes. "Beans, beans, good for the heart" as they say.)

But what about a really severe recession, which I think is extremely likely? For starters, consider all the poorly prepared countries abroad, to which we have loaned incredible amounts of money.

-- Peter Errington (petere@ricochet.net), June 30, 1999

Answers

Sorry to butt in...

Peter, you raise a valid question.

But when does a "severe recession" become a depression? Why is "depression" such a non-PC word anymore? Probably because we live in the amazing new depression- proof USA.

On that note, can anyone tell me who originally said, "80% of everything is crap."?

-- Level 5 (level5@def.com), June 30, 1999.


I imagine there is some sort of "official" line (percent drop in GDP or whatever) that defines the difference between "recession" and "depresssion."

Back in the 1800s, economic turndowns were called "panics." That became politically incorrect (PIC), so the word "depression" was substituted. Now, "depression" has become PIC, and so "recession" was substituted. A recession would have to be worse than the 1930s depression for them to admit it's a depression.

Humorous distinction: Recession is when your neighbor is out of work. Depression is when YOU are out of work.

-- A (A@AisA.com), June 30, 1999.


Pareto's Law and extensions:

20% of the salesmen bring in 80% of the business.
The last 20% of a project takes 80% of the time (think computer problem remediation).
80% of the wealth is owned by 20% of the people (actually 95 and 5).
80% of everything is crap (that doesn't mean the other 20% is really good; it's just NOT crap).
Taking a leak, the last 20% takes 80% of the time. :)

-- A (A@AisA.com), June 30, 1999.


Level 5, I believe the answer to your question is Theodore Sturgeon, the famous science fiction author. Supposedly, someone was complaining to him that 90% of SF was crap, whereupon he responded that 90% of everything was.

-- Peter Errington (petere@ricochet.net), June 30, 1999.

Peter,

I have predicted a sharp U.S. recession in 2000 due partly to Y2K problems. Economists do not agree on a single definition of depression, but it is possible a 2000 recession could go long enough and deep enough to make people consider using the "D" word. Ed Yardeni puts the depression risk at 5%. It's probably not a bad "guesstimate."

In addition to predicting a recession, I have also suggested the best preparations are financial. This includes eliminating debt, improving education and job skills, developing a plan for re- employment in the event of a layoff or downsizing, increasing personal savings, decreasing the beta of your investment portfolio, purchasing basic necessities in bulk, practicing day-to-day frugality, etc.

I do appreciate the irony that if everyone took my advice, our consumer-driven economy would tank... at least in the short term. In the longer run, however, our economy would rebound and we would have stronger, more stable economic structure.

Of course, my modest suggestions for preparation often receive catcalls from the serious pessimists. [Well, being accused of causing the deaths of countless innocents is catcall, I suppose.] While I think most people are well-advised to prepare for modest disruptions in basic services (Y2K or otherwise), I do not think extensive preparations (months of food, water, etc.) are necessary. Nor do I think some of these preparations are particularly useful for a recession... particularly if one goes into debt to finance these preparations.

Let me clarify this point before the villagers start assembling with the torches and pitchforks. Extra food is not a bad thing... as long it gets used and not wasted. Personally, I'd have a tough time eating several hundred pounds of rice and beans... even over a very long period of time. If you are buying something for Y2K you plan to use anyway... no problem. If you are spending tens of thousands of dollars on highly specialized stuff that you will NOT use after the rollover... invite me to the yard sale. (laughter)

Like Flint, I am a real world pessimist... particularly when compared to the community of professional economists. Here, I am considered a giddy optimist.

Hope this helps.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), June 30, 1999.



>>But when does a "severe recession" become a depression?<<

Interesting question. The best answer I have heard goes like this (assuming I understood it and can correctly paraphrase it):

The causes of a recession and a depression are somewhat different, although many of the outward effects are the same.

A recession happens when a high demand for goods and services slackens. Manufacturers are caught with excess inventory of goods. Service providers are caught with an excess inventory of employees. Layoffs occur. Purchasing power drops. The still-employed become cautious about spending and begin to pay off debt. Eventually pent-up demand begins to emerge into actual demand for goods and services. This is usually helped along by an easy-money policy that puts interest rates low. Recessions tend to be somewhat shallow and rarely last more than two years.

A depression happens when the excess is not so much an excess of inventory, but much more of an excess of capacity. A depression usually follows a period of intensive capital investment in new and more productive technology that eventually builds up the capacity to make far more goods and to deliver far more services than the world can absorb or pay for. This initiates a period of brutal competition. Prices fall, but not as quickly as production costs in the most modern factories. This actually makes it attractive to build *more* capacity, to modernize as quickly as possible, in order to reap the profits of an expanding margin. This cycle of high capital spending and (for some) high profit margins sparks the boom that precedes the bust.

The depression (bust) comes when excess capacity has grown so huge and the competition for markets has grown so fierce, that prices start to be driven down faster and faster. The favorable spread between prices and production costs that existed earlier narrows. As margins narrow the weaker players start to lose money.

The problem is that, when *excess* capacity reaches 20% to 30% of *global* capacity, the weaker players represent a vast amount of capital investment. The capitalist answer is to let the weak ones die, but that entails *huge* capital losses. When businesses fail, loans go into default. Banks fail. Huge numbers of employees are let go, as the efficiencies of the new modern factories built during the boom can now supply the world's needs with far fewer workers. With so many workers out of work, purchasing power plummets. Markets shrivel up. Competition gets even more fierce. Prices drop still further, until all the marginal players are ruthlessly pruned away and you hit bottom.

When the smoke clears, you have a manufacturing base and an economy that is extremely efficient, delivering goods at rock-bottom prices. You also have 20% to 25% unemployment and a lot of smoking wreckage where there used to be production and jobs. Capitalism has done its job, but at a very high cost.

Much of what I have paraphrased here I picked up by reading "One World, Ready or Not" by William Greider (who appeared Tuesday night in the PBS Frontline program "Crash").

-- Brian McLaughlin (brianm@ims.com), June 30, 1999.


Thank you much for all the responses, especially yours Brian. You put into words many concepts that have been floating around in my brain.

-- Level 5 (level5@def.com), June 30, 1999.

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