Wednesday, 16 April 2014

The Dead Economic Recovery

World went into recession after the 2008 Financial Crisis had struck the world. In 2014, news reporters, business analysts, and politicians keep talking about the economic recovery. Where is the recovery? It has been seven years, and the U.S. economy still has not recovered. Unfortunately, everybody forgets history.


I listed the last five U.S. recessions because every recovery has become weaker and weaker.


Name Time Peak Unemployment
Early 1980 recessions January 1980 to July 1980
July 1981 to November 1982
7.8%
10.8%
Early 1990s July 1990 – March 1991 7.8%
Dot Com Bust March 2001 – November 2001 6.3%
The Great Recession December 2007 – June 2009 10%


Starting in the early 1980s, we experienced two recessions back to back. Federal Reserve, our central bank, triggered the first recession. It stomped the breaks on the economy because the economy grew too fast and created inflation. Central bank contracted the money supply to combat the high inflation rates from the 1970s. A contracting money supply removes money from the economy, reducing consumers' spending. Unfortunately, a contracting money supply raises interest rates, and short-term interest rates soared to 20% over night.


We have a theory called Cyclical Asymmetry. A central bank contracting a money supply always slows an economy, and it could trigger a recession. However, a central bank boosting the money supply should spur economic growth as the central bank injects money into the economy. Consumers, businesses, and government spend more money, prodding economic growth. (Interest rates also fall that lets banks lend loans with low interest rates). According to Cyclical Asymmetry, boosting the money supply does not always expand the economy.


Then the Ayatollah Ali Khamenei staged the Iranian Revolution and overthrew the Shah in 1979. New government stopped selling petroleum to the United States, causing petroleum prices to spike. Unfortunately, the U.S. economy relied on cheap, fossil energy to power its economy and factories. Soaring petroleum price triggered the second recession, and the unemployment rate peaked at 10.8% in 1981.


Everyone forgets history especially the politicians and news reporters. The United States government, i.e. CIA, helped overthrow a democratically elected Prime Minister, Mohammad Mosaddegh, in 1953 to support the Shah of Iran. Prime Minister wanted to nationalize its petroleum industry and to keep the petroleum profits for his country. On the other hand, the Shah signed over 40% of its oil fields to U.S. companies after it took power. Perhaps the U.S. should stop trying to help the world. Our interference into foreign countries continues to backfire that creates future problems.


Experts debate whether the 1980s recession was the worst since the Great Depression. Although the 1980s recession had a greater unemployment rate, the 2007 Great Recession lasted much longer. Then the computer industry lit the United States on fire and created high paying jobs as businesses, government, and households invested in computer technology.


The United States entered a recession in 1990. The Federal Reserve tightened the money supply to reduce the inflation rate while Iraq invaded Kuwait, causing the petroleum price to soar to new heights (Similar to the early 1980s).


President Bush senior invaded Iraq and freed Kuwait. Then he withdrew the troops because he feared a long, arduous occupation of Iraq. Unfortunately, President Bush junior had started the decade long occupation of Iraq, costing the U.S. government in trillions of dollars.


U.S. economy entered a recession with unemployment rate peaking at 7.8% in 1990. Recovery had become weaker. As the economy recovered, they called it the jobless recovery. Although the U.S. economy recovered, the U.S. economy did not create new jobs. In the old days, economic recoveries always created jobs.


Then the internet and communications industries ignited the economy in the mid-1990s. Businesses and government adopted e-commerce, designed websites, and expanded communications, creating thousands of new jobs in the process. Many consider 1999 to be the best year for the workers because the United States had the greatest portion of its citizens in the workforce with low unemployment rate. I remember a gallon of gas cost less than a $1.


Then many internet companies bankrupted during Dot Com Bust in 2001. George Soros, one of the world's richest men, asked one question – how do these companies make money? We discovered the answer – they didn't make money. Subsequently, everyone learned about the fraud and illegal activities of Enron and WorldCom.


According to Table 1, we experienced a relatively mild recession with the unemployment rate peaking at 6.3%. This recovery was weaker than the previous recovery. They called it the job-loss recovery – the economy recovered, but employers kept shedding jobs. Did you notice the play on words - the jobless recovery versus the job-loss recovery? Of course, George Bush junior became president in 2000 while his father was president during the last recession.


An economic recovery should create jobs. Some experts claim the U.S. manufacturing never had recovered. Strong U.S. property bubble lifted the whole economy by creating jobs in the banking and construction industries. Then the housing bubble popped in 2007, triggering the Great Recession. Many consider the Great Recession as the most severe recession to hit the U.S. economy since the Great Depression. Although the unemployment rate peaked at 10%, the people are still feeling the recession in 2014. On the other hand, the economy rebounded strongly after the early 1980 recessions.


Remember the theory - Cyclical Asymmetry? Shrinking the money supply always contracts the economy while boosting the money supply may not expand the economy. Federal Reserve dumped trillions into the U.S economy to revive it. The Fed did not release precise details so estimates range between $2 trillion and $8 trillion. It provided emergency loans to banks teetering on bankruptcy. It bought bad mortgages from the banks. Consequently, we have witnessed the weakest recovery ever in the United States.


U.S. government dumped trillions into the U.S. economy. Federal government lent $700 billion to bail out the banks and financial institutions. President Obama signed the American Recovery and Reinvestment Act in 2009 to provide $831 billion for creating jobs. After dumping trillions into the economy, what have we seen – a nonexistent recovery?


When we study the history of the United States in the 19th century, the U.S. experienced a recession or financial panic every ten years. After every crisis, the U.S. economy came back stronger and grew faster. After the last three recessions, the recoveries became weaker as the United States has aged into an old man struggling to get out of bed in the morning.


Did you notice the number of years between recessions? United States experiences a recession every 7 to 10 years. We are in 2014, seven years after the Great Recession. We still have not recovered, but we should expect a new recession to the hit the United States between now and three years. If we never recover from the Great Recession, we will not recover from the next recession that will hit the economy anytime soon. Unfortunately, the United States has no industries to lift the economy out of its doldrums, because we have entered a period of stagnation.


P.S.: Japan entered two decades of weak economic growth after the bubbles in its real estate and stock markets collapsed in the early 1990s. Japanese government and central bank bailed out the banking industry and injected trillions of yen into their economy.

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