Friday, 23 October 2009

How to filter news stories in a Recession

AS some may know my thesis is effectively on the short term and long term effects of the great depression that occurred in the 1930s. This gives me a very nice “BS filter” to filter all the economic about the global resession. For example the British economy continuing recession is the biggest non-news story. I thought I would share it with you why that is:
1) Recessions are non linear- i.e. there is no decline of output then rise of output, then out of the recession. There are some signs of recovery that might be unsustainable, there might be decisions or bank closures that through the economy in new lows. This is because the recession does not affect all the economic sectors in the same way or at the same time casing different lags in the economic system.
2) When we are talking about recessions the quarterly GDP figures are next to useless. Firstly the margin of error for quarterly accounts is more than +/- 2%, meaning that it could well fool you into thinking the recession is over. This is due to the fact that you do not count everything in a quarterly GDP – you count some things and then assume the rest is equal. However in a recession most things can change – relative prices, inventories and even intermediate consumption (i.e. production methods and their cost) are altered as people take account of the changed economic circumstances.
3) A recession is not just an decrease in total output of the economy – it is also a state of mind. Malta did not experience a recession during the period of the great depression. The effect of the depression in the whole of Europe, including Malta was the alteration of spending habits towards savings and away from consumption, condemning Malta to slower GDP growth rates for the rest of the 1930s. Likewise the economy can fell like it is a recession long after its GDP has stopped falling. In the words of a T/C economist “The recession has not affected how people live here because we have been in a permanent state of recession for the past 10 years” i.e. people feeling insecure about their future and reluctant to spend or invest.
4) Projects such as the car scrappage scheme that is in place in Greece and Germany are a wonderful way to boost output in the short term. If car sales are 10% of the economy and the scheme allows it a recovery of 5%, then the GDP output will increase by-0.5%, enough to turn the recession of the UK into a “recovery”. The project is a good idea since it understands that the recession affects consumers unequally: those who losses their jobs and bonuses might be worse off, but those on fixed salaries and safe jobs are actually better off, and they need to get over their fear and start spending.
Hope you have a nice weekend,
Alexis

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