Explaining recession

Generali

lynnexxxo wrote: »

So if enough people followed Martins advice and think 'do i need it,can I afford it, could i get it cheaper' before splashing the cash it could cause a recession???

JM Keynes* reckoned that this was a classic type of recession. People become gloomy about the future economy and so spend less. Retailers and then manufacturers start to see their inventories rise so invest less. They need less labour as a result so people lose their jobs which makes all their mates more gloomy about things and so it goes on....

That isn't the cause of the recession it seems likely we're about to have though. That's a nastier beast caused by credit contraction reducing the amount of cash people have to buy things and it's the sort of thing that can really spoil the party...



*Economist about the time of WWII and a real rarity, an economist that invented a theory and used it to get rich. In his case twice as he lost everything at one point.

lynzpower

That isn't the cause of the recession it seems likely we're about to have though. That's a nastier beast caused by credit contraction reducing the amount of cash people have to buy things and it's the sort of thing that can really spoil the party...

Gen,

has such a thing happened anywhere else in the world? Ever? A recession brought on by too much debt?

What was the start of the japanese one, was that a stock market issue? I did start reading about it once and got v confused....

Generali

lynzpower wrote: »

Gen,

has such a thing happened anywhere else in the world? Ever? A recession brought on by too much debt?

What was the start of the japanese one, was that a stock market issue? I did start reading about it once and got v confused....

3 obvious candidates spring to mind: Argentina (late C19th), US (1930s), Japan (1990s).

I don't know so much about Argentina so here goes on the US.

During the 1920s, the US economy roared ahead. Productivity soared and the economy had barely faltered during the short time she was in WW1. It seemed that good times wouldn't end and a series of asset price bubbles started to appear. The first of the real biggies was Florida land prices which soared on the back of speculative buying. Often people would buy land that they had never seen and never would, hoping to sell it on once it had risen in value. Loads of this land was swamp or just didn't exist. Florida land prices started to fall in 1925 and still haven't recovered their values in real terms I believe(!).

As Florida land prices fell, a stock market boom got going. More and more people were sucked in with tales of easy fortunes to be made. Lots of normal people set up 'margin accounts' with brokers. That is where you borrow money to buy shares. Fortunes were made and consumption rose rapidly on the basis of all the extra wealth that was being created. Then in 1929, the Fed raised interest rates a couple of times.

Shares stopped rising in value. Then they started to fall. A few people that had made crazy bets got 'margin calls'. That is to say that the margin (deposit) they had put down had been erroded by the fall in the market so they had to find more margin. As shares were a one way bet in the popular imagination, some had sunk everthing in to shares and so couldn't make the margin call.

When that happens, the broker will sell your shares to cover your debts. They'll just take what price they can and, with the margin, they should be ok. Trouble is, these sales had a knock-on effect - as they pushed prices of shares down, more people got margin calls that they couldn't meet. Their brokers sold and so it went on.

In the end JP Morgan (the man that the bank is named after) got a bunch of bankers to agree to buy shares very publicly. Whether they actually bought much is a moot point but they tried to 'talk up the market'. This seemed to work for a bit but soon prices started to fall again only this time it was mayhem. Even for really decent companies like US Steel, General Motors, Ford and Standard Oil there just weren't buyers at any price. Even the best stocks lost 10s of % of their value.

Banks went bust so rumour was enough to start a bank run. Nobody knew who had lost what and so nobody wanted to lend money. People just wanted cash or gold (the US dollar was convertable into gold at the time so they were the same thing). Business couldn't borrow to invest and they couldn't sell equity on the exchanges to invest. They laid off workers who in many cases had already lost a big heap of cash on the stock market.

Many lost their homes and their health. Some people starved. It wasn't until 1938 that the US economy started to recover.

Hugely shortened (and simplified I hope) version of what happened. JK Galbraith does a good version in his book The Great Crash. Feel free to ask me to clarify anything and I might (or might not depending really).

Japan I did a while back. Post 66 in this thread (link)

PS Sorry lovers of cited sources, this is a web posting not an undergraduate essay so you don't get 'em.

115K

Doozergirl wrote: »

All hail the king! :kisses2:

Yeah, Generali turns me on with his opinions, he really sounds like he knows what he is talking about.:o
(I have no way of verifying info.:rotfl: )

Generali

It's a massive simplification as is the Japan post but it's the best I can do given the limits imposed on writing on a forum.

If the hedge fund job pays off and I don't have to worry about cash I thought about writing some layman economics stuff. Could be fun (for me more than the reader I guess!).

Not sure about all this turning on stuff. Mrs Generali is next door!

fc123

Generali wrote: »

It's a massive simplification as is the Japan post but it's the best I can do given the limits imposed on writing on a forum.

If the hedge fund job pays off and I don't have to worry about cash I thought about writing some layman economics stuff. Could be fun (for me more than the reader I guess!).

Not sure about all this turning on stuff. Mrs Generali is next door!

Sounds like a good idea to me as I understand what you say (the only other money columnist I understand is Andrew Hilton and Merryn S S sometimes).......but one can get trapped into nice regular income territory.

But recessions throw up stuff...out of bad things come good things...though the bit inbetween can be a bit sticky.

I am already implementing my "recession" plan....but cannot say what.;)

Generali

fc123 wrote: »

I am already implementing my "recession" plan....but cannot say what.;)

I think the Labour Party got there before you.

Their's appears to be:

- Inherit an economy in good nick.
- Get lucky with falling prices for traded goods on the back of a massive worldwide trade boom
- Spend every penny you can beg, borrow or steal
- When the next recession comes act all surprised that there's no money left

fc123

Generali wrote: »

I think the Labour Party got there before you.

Their's appears to be:

- Inherit an economy in good nick.
- Get lucky with falling prices for traded goods on the back of a massive worldwide trade boom
- Spend every penny you can beg, borrow or steal
- When the next recession comes act all surprised that there's no money left

Oh gosh.......my plan is a bit more old fashioned Look at my skills, exp, knowledge and try to find a way of putting them to good use for a bit of hard cash.
As I have done a lot of free stuff over the yrs (princes trust, education as I could afford the time then) I plan on helping micro, creative start ups within my sector...problem is I would do it for free if I could afford to....but still got another 4 yrs to get last child to 18.

And that's why I am soooo p1$$ed off about everything...

I have given up on putting faith in the Govt. and the your post spells it out in simple terms (again) and so getting back on topic, as this is a house board, what is going to happen to those who get reposessed??
Last time, those that I knew that handed back keys, got LA housing without too many problems............perhaps the BTL'S will be OK after all??? They will serve a new purpose.

Generali

fc123 wrote: »

Last time, those that I knew that handed back keys, got LA housing without too many problems............perhaps the BTL'S will be OK after all??? They will serve a new purpose.

There are 2 big differences between now and the early 90s. One is the BTL phenomenon. The other is that social security (or whatever Ministry of Truth name they call themselves now) won't pay you're mortgage interest.

The latter means people will get reposessed more quickly which in turn is likely to mean a greater strain on local authority housing benefit budgets.

My feeling is that is likely to mean that rents will come under huge downwards pressure from HB payers. It's all well and good putting 'no DSS' on your ads but if thats all there is.....

In other words there'll be HB tenants around for those that can afford to take them: people who have smaller or no mortgages on their rental places. If you can't then you're likely to be fighting for a decreasing number of private tenants who can chose to pay a prime rent for a prime place or very little for a not so good place according to their whim and budget.

My belief is rents will rise at first if house prices fall (buyers delaying purchases pushing up rents, I suspect we're entering this point) and then fall quite hard as the economy enters recession and local councils start acting as monopsonists (the opposite of a monopolist - the only buyer rather than the only seller). BTL in places like NE England that have very little private economy* is going to be a tough business to be in.

PS Giving up on Govt is a good thing. They lie. Watch what happens to state pensions over the next 30 years. They're the biggest Ponzi scheme ever seen.



*70% of GDP in NE England is govt spending according to the Sunday Times.

ManAtHome

Generali wrote: »

- When the next recession comes act all surprised that there's no money left

Ey up, you missed the "blame everybody else" bit...

Was I hallucinating, or did I really see Ed Ballsup on the box last night claiming the UK had the best public-sector finances in Europe..? (please tell me it was the malt...)