Recession/Depression?

I have been thinking recently, as i did in this post, about how to describe the year 2016 before it actually happens.

I am finding it to be really difficult this year.  There are so many things that I can see happening in 2016 that I can’t yet pinpoint one phrase that encapsulates them all.

How about something on the lines of ‘recession’ and ‘depression’?  If the facts were not blurred by the vast amounts of government stimulus, using money created out of thin air, which, however vaporous will still have to be paid back at some stage, then it could well be argued that we are undoubtedly still within the recession started in 2007 and, due to the lengthy period that has been the case, it should also mean that the world is even now in a state of global depression.  That may become glaringly obvious next year.

184670688_recession_to_depression_xlargePhoto credit unknown

 

I thought about saying ‘2016 the year the 2nd great depression is acknowledged’, but that only goes to one of the possibilities.  A very real one, nonetheless.  One that may find its trigger event within the next two weeks (mid December) depending on the interest rate decision to be made by the US Federal Bank.  How does that work?

Read this related article from Inequality.org first, then you will see more clearly what I am about to say.  Ok, so it was written in 2012, but not much has changed since then, so it is still relevant.

Well, currently US offiicial interest rates are at 0%.  A wonderful thing, until you realise that the only entities who can borrow at that rate are the US banks.  That situation was designed(??) so that the banks would have money to lend to businesses for them to spend to get the economy going again.  Smart thinking, yes?  Maybe.  Except the banks realised that lending money to businesses, involved risk, especially with the economy being what it has been since the GFC in 2007.  They decided that they could still make money, risk free (because they had no outlay to obtain the money for what they planned to do with it and no interest payments to make on it), by instead buying government bonds for a guaranteed 1/4% interest. All of the risk was on the government (that means the taxpayer). Of course they had to lend some of the money, mainly to businesses desperate for funds, but in the main, businesses were not prepared to risk borrowing in the difficult times (and still are not).

So, if the Fed puts rates up this month to 1/4%, the banks have lost their risk free, free money, incentive to take more stimulus money from the government.  Nothing else will have changed.

I know that is simplifying things a bit but that is basically the situation. I can’t see US businesses taking on debt at 1/2% or even 1/4% interest to fund projects that still carry the same risks as in previous months.

This one point is, I think, the main reason why the Fed has so far declined to raise interest rates over the last few years.  Personally, I think that they already know that the risk of failure is still too great to change things again this month.  But who knows?

And so, the eight year recession, or should we by now be calling it technically a ‘depression’ in the real economy (Realonomy), goes on, with an increased probability that if an interest rate rise does go ahead in the next two weeks, we may see financial mayhem breaking out over the course of the next year as a result.

Either way, the picture is not good.  But, will this, a global depression, with all that that entails, be the defining event of the year?  More thought is needed.  I still have a few more weeks to decide on the words.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s