Economics and Social Issues and Stock Market28 Jul 2011 03:16 pm

I am fascinated by the number of people who continue to debate whether or not we are going into a “double dip” recession, and who forever talk about and question the overall “strength of the recovery”. This debate runs opposite but parallel of the debate we had some years back when people asked if there was a housing bubble with some claiming that the housing market would never go down.

In terms of the housing and stock market bubbles we went from denying its possibility to almost instantaneously being deeply mired in a historically severe recession for months. I remember reading articles proclaiming the health of the economy and real estate market in newspapers and magazines and within a few weeks having the same periodicals bewailing our being mired in a bear market for months. Even this year I continue to find articles which continue to push back the origination of the housing and economic downturn further and further back.

All of this is done with no mention that their publications had previously characterized much of that same time period as part of a raging bull market, adamantly denying and showing statistics demonstrating the health of both housing and the economy. Time periods with graphs documenting the continued rise in house sales and prices have been replaced with current graphs stretching well back into the same years showing dramatic declines in house price and sales.

Now, the entire discussion regarding the possibility of a double dip recession is just as bizarre as the roaring bull market articles during the housing and stock market busts. The earlier recession that almost was never admitted has mushroomed into a lengthy one of some 18 months and is now unanimously viewed as ending in June of 2009 by all mainstream economists.

The stock market bottomed a few months before the official end of the recession in March of 2009. Historically it is normal for the stock market to begin its rebound in slight anticipation of the general economy. So, if the recession ended in mid 2009 how can we be in danger of a double dip recession in mid 2011.

Almost everyone who has any even the most casual knowledge of the economy has heard of the business cycle. The standard business includes periods of growth and decline, of expansion and contraction. The time in which the economy contracts is referred to as a recession. In typical length of a recession is typically 3/8 or about one third as long as the period of economic growth.

Over the last few hundred years there have been a few rather lengthy business cycles which have raised the overall average up a tad. What this means is that is not unusual for a business cycle to complete in less than four years. Since the average business cycle lasts between 4 and 5 years, the average recession, therefore, lasts between 12 and 15 months.

With the above information in mind lets take a look at the concerns about a double dip recession and a fear of the strength and sustainability of the recovery.

We are now entering the 26 month since the end of the last recession. Even if we were to begin to be in a recession right now and it lasted the standard length (1/3) of the period of economic expansion our current business cycle would have ended after a 3 year life span. Though this is a bit short for a business cycle it would not be unheard of. Short business cycles have a tendency to be a little bit bubbly with quick frenetic growth followed by a sharp contraction.

The purpose of the above paragraph was to point out that it is impossible to have a double dip recession after two years. By definition a double dip recession would have to occur a business quarter or two (3-6 months) after the previous recession, not over two years later.

Now lets address the second piece of crap being hurled at us by the economic media and that is the concern regarding the “strength and sustainability” of the recover. Okay, since the recession concluded over two years ago I would consider it foolish to question its sustainability. The recovery has already lasted much longer than the recession and is nearing the typical expansion time frame for the average business cycle, not much question that it has survived and lived an acceptable life span.

Two paragraphs back I mentioned that most short or truncated business cycles have sharp bubbly inclines and rather intense downturns. So, lets now look at the “strength” of this recovery. From a financial and stock market perspective this current business cycle has been one of the strongest cycles on record.

The economic glory years of the 90’s were led by the great technology boom which revolutionized and continues to revolutionize modern life. When we think of change and the future we still think of the global possibilities offered by the internet and related communication technologies. When one thinks of technology one has to look at the Nasdaq and in particular the Nasdaq 100.

The Nasdaq 100 bottomed at 1019 in March 2009. Since then the Nasdaq and Dow have had meteoric rises which are truly amazing. In as little as 21 months the Nasdaq 100 stood at 2400. Which means in less than two years the 100 stood was 235% higher than it as at its low. Though the Dow and S&P did not double during this time frame they incurred gains that haven’t been seen in over 60 years.

At the end of 2010 corporate America were able to declare record profits. And while the pace has slacked off, the profits of corporations continue to rise. Therefore, according to the stock market and corporate America one can not doubt the “strength” of this recovery. Hell, this hasn’t been a recovery, it has been an epic boon for corporations and the stock market demonstrating almost unparalleled strength.

I know many of you reading this are almost screaming at the screen, “wait a minute, I haven’t seen any improvement or growth. It still feels like we are in a recession.” Some of you are even going further noting, “how can we have high unemployment and a decrease in the standard of living and not be in a recession, or at least be in a slow and stagnant recovery?”

Well if you take some time to read my other posts on the economy you will fully understand how we can be in a financial and corporate boon while the standard of living of most of us is in escalating decline. Here is the short answer.

Giving you a job adds to a corporations expenses and such overhead eats away at their profits. In addition, due to inflation the cost of materials and energy needed to produce goods is rising and therefore increased production would also add to their overhead.

So, those of you still reading this may wonder how a company can manage record profits in spite of the fact that expenses of production and materials have risen significantly over the last couple of years.

Here again is the short answer. Corporate America is not dependent on you as a consumer of their goods, in fact most of their profits do not depend on revenue through sales and business expansion. Their profits are mainly generated through financial instruments that not only are not dependent on a strong economy but are maximized when the economy is struggling.

First, most industries don’t even need cheap labor, they can pretty much have the majority of their products made by automation and their business run by computers. The only need they have for workers is for you to have enough money to buy their product. Yet, now that they do business throughout the world, they now have over 7 billion potential customers, and they can thrive even as their customers are poorer. Like Walmart, they make money on volume of sales rather than high prices.

Second, and more importantly is that as long as the economy stays weak the interest rates will stay low. With low interest rates they can borrow money at almost no additional cost and buy stocks, foreign bonds, CD’s, etc. for a substantial profit. It’s a version of flipping that was happening in the real estate market. Here you can purchase (borrow) a million dollars at .1% interest and flip it by investing that same money in something in which they will give you 3, 5 or even 8% for the exact same time frame.
This scam can continue as long as interest rates stay lower here than in other nations. In this new economy the majority of us aren’t needed as consumers nor workers. We are just observers and non-participants of the greatest transference of wealth ever recorded.

Will it ever end? Probably, just like the housing bubble ended though their were plenty of flippers.

How will it end? Another financial crisis will likely be the culprit.

The current debt ceiling debate is more drama than reality. Fleecing the average American of his remaining resources and services is the common goal of all the plans on the table.

Yet, at this point there is no true motive to truly reduce debt, because cheap debt has become the best and most efficient way of making money in our country. More debt at low interest rates is the goal, not the problem. The problem is debt with high interest rates because then you actually have to pay off your debts without being able to make more money with that debt in other debt markets.

The only thing preventing interest rates from climbing are the underlying deflationary tendencies of our struggling economy. If this economy were to actually begin to expand the debt bonanza ends and the big boys will start to really feel the pain. In the meantime their continued record profits are dependent on our being patient with our decelerating standard of living. It depends on are still choosing sides between Democratic and Republicans and viewing each other as stupid or mean spirited.

Even when this business cycle goes crashing down like the previous one, another economic phoenix will rise out the ashes with even less people participating in its wealth and glory. The only way we will be able to participate is if we demand it and stop believing in false prophets spouting forth change, hope or reform. The other way to participate is to become one of the soulless shysters who has no problem owning everything while the masses suffer.

Jim Guido

One Response to “All This Double Dip Nonsense”

  1. on 03 Mar 2014 at 11:20 am buy research chemicals

    I am so impressed I had to save it so I continously go back and read things I may have skimmed

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