As we began our 4th of July weekend, many Americans are taking stock of the country’s economic malaise. While millions of jobs have been lost due to the current economic recession, there doesn’t seem to a be a light at the end of the tunnel yet. Sadly, this was the same story that faced Americans last 4th of July: cities canceling fireworks displays and a concern that the recession would get worse or continue longer than expected.
Some economists are now worried that a “double dip” recession could become a reality., This is almost certainly going to happen, though not necessarily because of a worsening economy, but rather as unemployment benefits run out and as the federal stimulus program winds down. Long economic recessions, such as the Great Depression, often have a “calm within in the eye of the storm”.
This is how I look at the faces of the current economic meltdown:
Phase One: This was the private sector debt crisis and financial meltdown that was caused by several bubbles popping at once such as the real estate bubble and the private sector debt bubbles, that built up below major financial institutions, all popped at the same time. Although it was a surprise, the financial fundamentals fueling this collapse were hinting at a collapse for years.
Phase Two: World governments bailed out major institutions which years prior were seen as rock solid investments and hundreds of billions of dollars were pumped into economies via the stimulus spending bill. People had hope that the recession would be short lived and that developing countries, such as China would power a global return to growth relatively quickly.
Phase Three: As a result of small rainy day funds, and decreased tax revenues, state and national governments are experiencing the so called “sovereign debt crisis”, which is causing even some cities in the United States to declare bankruptcy. This was due in part to massive increases in spending during good times and as a result of the economic crisis which began in full three years ago. While there are always a budget crisis somewhere in the United States, the magnitude of the problem is unprecedented in scope and size.
Phase Four: Massive budgetary restructuring. Seen primarily in Europe and other countries outside of the United States where massive budgetary cuts are being used to par down debt. This is also playing out on the state level in the United States. The U.S. federal government has put off this problem for another day, but eventually, likely in two to three years, a massive restructuring of the federal budget will be mandatory. I think that military spending will likely be almost halved, as a percentage of the federal budget, in fifteen years time. Especially if the Iraq and Afghanistan wars wind down, in favor of maintaining social safety net programs such as health care reform.
Phase Five: Massive financial restructuring and the balkanization of economic sectors. This is just my personal conjecture, but given that financial regulations were loosened up quite a bit prior to the current economic downturn, it appears that much can and will be done to segregate different sectors of the economy. For example, the interconnectedness between the real estate and broader financial markets helped destabilize major financial institutions. The federal government winded up doing what the law should have automatically done: bankrupt the failing businesses while preserving the other healthy parts of the institution. Because the government had to step in and do this, the damage was able to spread further than anyone expected, and toxic assets remained on the balance sheets of businesses which should have remained solvent.
How will this increased level of financial restructuring affect major sectors of the economy? I am guessing that it will lead to an increased balkanization and globalization of various financial sectors. The next financial crisis in seven to ten years may be contained to a specific sector of the economy, but may not “spill over” into other areas of the economy as easily.
Of course, these phases are not distinct and they are very much overlapping. The real estate meltdown continues and has changed the fundamental assumptions in that market. But what does this mean for recovery? Not until the sovereign debt crisis is adequately dealt with will businesses feel safe about engaging in new ventures, meaning that it may take several years for the economy as a whole to return to pre-recession levels of unemployment. Nonetheless, specifics sectors of the economy in the United States will likely experience real growth over the next couple years, and Americans who are under- or unemployed will look to these sectors for opportunities.