April 2000
The anti-gravity economy: Are recessions a thing of the past?
There are three major structural changes in the U.S. and global economies that will change the patterns of recession and recovery, and that have significant implications for you and your business.
The first is that the mechanism that used to trigger a recession has been removed. In the bad old days (say the 1980s) when the economy was really roaring, companies would build up inventories so that they’d have enough product to sell. But when inventories and interest rates both got too high, or when the economy hiccuped from a disappointing Christmas or a jump in commodity prices, profits would be eaten away by interest costs. In response, companies would start to trim inventories. In order to trim inventories, they’d stop buying raw materials. When everyone tried to do this at the same time, aggregate demand slowed. Companies responded to this decline by trying to cut their inventories even further, which further reduced demand – and the vicious cycle that produced recessions was rolling, pushing the economy into recession.
This doesn’t happen today for two reasons. First, a much greater proportion of output comes from services rather than manufacturing, and there are no service stockpiles. But more importantly, companies today view inventories as wasteful and costly, and try to minimize them by using Just-In-Time techniques. As a result, inventories don’t build up, even in the kind of blast furnace economy we are experiencing throughout North America.
The second major change is the boost to productivity brought about by computers. There is no question that computers have revolutionized business, but one simple, crucial fact has been overlooked: computers have been getting rapidly and steadily cheaper. As a result, things that could be done only by big companies using expensive mainframes can now be done by small companies using a $2,000 desktop. Everyone who can benefit from a computer today can probably afford one. Every time a computer would be useful, it is used, and as prices continue to drop, and fortunes are made creating new software to make them even more useful, productivity gains bootstrap one another. This will continue until computers become so cheap that they are ubiquitous, and the pace of software development has slowed to a crawl – which is to say, not for quite a while yet.
The final major change is in world money markets. Economic recoveries used to have to wait for injured banks to come out of shock and begin lending again before the economy could pull out of its recessionary spiral. Markets have now elbowed banks aside and taken over. South Korea’s economy tanked during the Asian flu, but, unlike some of the other Asian tigers, it took its lumps, cleaned house, and went back to work. World markets noticed, and money started flowing back into the country, even as global banks sat by and licked their wounds. First came the vultures and junk bond dealers, then the cherry pickers, until finally more conservative players returned. As a result, while it took Mexico almost a decade to recover from the peso crisis of the 1980s, South Korea came roaring back in nine months.
So, does all this mean that recessions can’t happen, that we have an anti-gravity economy? Don’t bet on it, and here’s why.
First, Japan has used JIT manufacturing for almost 20 years longer than America, but it didn’t stop their economy from cratering. No economy can withstand foolish behaviour and bad decisions, Like the Asian tigers prior to their economic problems, American consumers, businesses, and especially investors are starting to believe that they’re geniuses who can do no wrong. As a result, they are overextending themselves, and making unwise decisions on both financial and capital investments. Again, Japan shows what happens when you pour too much money into unproductive investments.
So, yes, Virginia, there will be another recession. It will come from companies that try to reach too far, and consumers who build up too much debt. I don’t know what the trigger will be this time, but at some point, someone’s going to say, ‘You know, maybe I’ll just cut back on my spending a tad,’ and the recession spiral will begin. Perhaps the combination of high oil prices and rising interest rates has already started that spiral.
Whenever it comes (and I’m not smart enough to know when) it will probably be short, nasty, and brutish, and leave people wondering how they could ever have behaved so foolishly. So put some acorns aside for the economic winter up there in our future.
by Richard Worzel, futurist
© Copyright, IF Research, April 2000
