A Double Dip Recession
It seems that all one hears about is the possibility of a double dip recession. Every day, the media is filled with statistics and headlines about positive or negative news and the pundits speculating about whether we are entering a double dip recession. Some months, housing starts are up, or down, automobile sales are up, or down, and so on, and each statistic is used as a barometer of whether we are entering a double dip recession.
The Only Thing We Have to Fear is Fear Itself
A famous US President once said that “the only thing we have to fear, is fear itself”. Appealing to the fear of a reader is a time tested way to gain readership. The media has to write interesting articles or readers would not want to pay money to read those articles. Therefore, by sheer common sense, one has to conclude that the pontifications about some indicator or other, have to be sensational in their own right. If they weren’t sensational in some fashion, the writer would find him/herself unemployed.
The Underlying Factors Governing Statistics
In trying to decipher whether a statistic indicates doom, one has to first examine why that statistic came out the way it did. Was there an incentive provided by government in order to stimulate car sales, and when did that incentive end? Was there a financial incentive to buy a house and when did that incentive end? Was the normal demand for that good or service used up for the next while by some government or other program that incentivized people to enter in to a transaction before they would otherwise have done so? Was there a fear of impending changes in interest rates (like announcements in Australia and in some European countries) which gave an incentive to get a mortgage at current rates rather than risk a future higher rate? Was there a new government tax being imposed (HST) that meant if you bought after a certain date, the cost would be greater because of greater taxes on the transaction? And so on.
More times than not, given the governments’ free spending of money these days, the background giving rise to the statistic, distorted the statistic beyond any use as an indicator.
Dead Cat Bounce
History teaches us that patterns repeat themselves. If one follows technical indicators and charts, the term ‘dead cat bounce’ often is repeated. Essentially it means that after a dramatic drop in value, there is a recovery – often almost instant and quite pronounced – which proves to be a false recovery because after a short time, the value again falls off and sometimes to a lower value than where the dead cat bounce started. The current fear is that we had a dramatic fall in the value of the stock market, in real estate (in certain areas) and in demand for goods and services. This description certainly seems to apply to our current circumstances. But one must take a longer term view of the situation.
To be continued – how do governments pay off debt?
