Can We Survive The Economic Hangover in 2010 Caused by Recession?

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Excessive Alcohol & Drugs are Harmful

Let me start this post with a simple common sense question. How many of you consume alcohol or drugs? Well you don’t have to answer it right now in public but just imagine someone who consumes too much of either one. Its a well proven fact that excessive consumption of drugs or alcohol is never good for your health. Ironically however doctors have been using both in the form of medicine for curing patients for past 100 years.

Recession Forced Govt to Recommend Drugs

If we draw an analogy from that to what happened to world economy in past two years, you will realize that it was also a patient in desperate need of these drugs at the end of 2008. The financial systems throughout the world seemed to have completely collapsed. Banks had stopped lending and consumers had stopped consuming. Central (federal) banks and reserves of the world had to assume the role of doctors in this scenario and step in to help elevate the world out of that crisis. Massive drugs had to be injected in the economies to jump start them. The drugs were what we call as record low interest rates. Throughout the world Central banks reduced the rate at which they lent to banks. The Federal Reserve in US had reduced it to literally 0%. Results are common knowledge; economy touched its bottom in March of 2009. The stock market first started going up, then consumer demand and lastly manufacturing and production. Not that we are fully recovered now but we are making progress.

Recession finally seems to have be over in 2010

Lets fast forward now to current day. The Pennsylvania and New York Manufacturing indexes (the two major indexes predicting manufacturing activity in US) are at all time high. The US GDP grew at record 5.7% last quarter. Generally in US a 3% GDP growth in considered good. Retail spending went up 0.7% in January. So now the doctors are coming back into the market. Their motive is to get these ailing economies recover 100%. Their immediate goal is to figure out when and how to remove the patients (the world economy) from the drugs (record low interest rates) they had prescribed when no other medicine was working. As they are preparing to pull back the economies from these drugs , the economies would be suffering through what I call as hangover period.

Why can’t Govt Continue Use of Economic Stimulus Drugs

Many of you would be asking if these drugs are so wonderful why don’ the central banks keep supplying them to the economies. Why does China’s central bank have to raise reserve requirements twice in one month. Why does Federal reserve in US has started talking about raising interest rates and why have they decided not to buy any more MBS (mortgage backed securities)?

Economic Hangover is Inevitable

The answer lies in the small country in southern Europe known as Greece. Greece might be the size of Maryland. But the problems it is facing today might be faced by all the bigger countries like US, China if they do not remove themselves from the drugs. So lets deep dive for a moment and get a better idea about what these drugs are. Whenever central banks relax the monetary policies to such levels, there are usually two impacts. First it takes on too much debt, like in the case of US where their total debt has become almost the size of total US debt. The second impact is the creation of asset bubbles like in China where there was so much abundance of money that property prices went up by 82% last year.

So what will happen during this hangover period ? I do not know! For that matter no one truly knows. However analysts around the world are speculating based on their complex algorithms to calculate and predict the economy directions.This is the first time central banks across the world have used these drugs in such massive quantities to tackle the global economic crises. If you look around, some impacts can already be seen. Investors have become very cautious about their investments. They would stop seeking risky investments since they are not confident about the market reaction. Banks would tighten lending standards again and slow down lending further. New businesses in turn find it difficult to get money to sponsor their ventures. This would slow down the economic/GDP growth as a whole.

What to do while this hangover lasts

So as we move through these turbulent times, all we can do is hope for the best. We have to believe that the growth that we have seen over the last 9 months is real. We also have to believe that people like Ben Bernanke know what they are doing and they would be able to maintain the delicate balance between growth and ever growing national debt. Surviving the next 9 months of hangover is critical for all economies throughout the world so that we can finally say that the 2007-08 financial crises ended in March of 2009. But until then everyone has to figure out their hangover pill to get over these crisis.