(Drivebycuriosity) - A prosperous decade is ending, the 2010s are the first decade without a recession in the US since the 1850s. I think this belongs to a long term trend: The graphic below shows that over time recessions became less frequent and less severe. Prior to WW2, there were many contractions when the GDP contracted 20% and more. Since WW2 there was no recession when the GDP dropped more than 6%; the recession 2007/09 was relatively mild & short compared with the contractions of the 1920s & before.
( twitter)
Everything is getting better over time, a result of a general learning process. People are able
to learn from their mistakes and they try to get better, that includes
politicians, public institutions, banks and other corporations.
The US Central Bank (Federal Reserve) and other institutions
had learned from the Great Depression and the contractions before which explains the development since World War II. For instance the stock market
crash from 1October 19, 1987 (Black Monday) - a drop of 22% over night - didn´t start
a recession, because the Fed responded swiftly and "encouraged banks to
continue to lend to one another on their usual terms" (federalreserve).
The US economy grew 3.6% in 1987 and advanced 4.2% in 1988 in spite of
the stock market turmoils.
The 2008 crisis didn´t turn into a fully
fledged depression in the 1930s style thanks to the Federal Reserve and
other central banks who cut interest rates close to zero and flooded the
markets with money in the following years (QE). The Fed had also learned from the inflation of the 1970s. The monetary authority is aware of the risk that the economy could
overheat and then suddenly implodes (boom & bust) and is trying to
smooth the economic development. In this case the Fed is responding gradually by hiking interest rates in small well dosed
steps before inflation gets out of control.
Others learned as well. During the
recessions of the years 2001/02 and 2007/08 companies restructured and
reduced costs significantly in order to survive. Now they are much
fitter and more flexible & efficient than before. The 2010s benefited also from the technological progress.
We are experiencing a new industrial
revolution. Advances in
Internet, mobile computing, 3-d-printing, robotics, nano- &
biotechnology and other technologies are reducing costs, raising
efficiency
and creating new markets. Companies are getting even more flexible, efficient & productive which reduces the risk of a recession. There are also tailwinds from China, India & other emerging markets. Even though
China's economic growth rate slowed to about 6% the catching-up process there and many other emerging countries is supporting the global economy.
I think we have entered a very long recession-free period. Australia’s economy entered her 28th year without a recession (reuters). They broke a record held by The Netherlands, which didn`t have a recession between 1982 and 2008. The economies in the US and other Western countries are dominated by the service sector. Services contribute about 80% to the US economy and are still growing faster than manufacturing. Service industries like health care are much more stable than the cyclical manufacturing sector (steel, computer chips, cars) where boom phases and over-investment could lead into bust periods; so the whole economy is getting more stable over time.
It is still possible that we will have another recession some day. But I believe
that the next downturn will be less severe than the recession from 2008
because the Fed and other central banks have already learned from the
2008 crisis. They have been refining and advancing their instruments
(like negative interest rates, assets purchases) further and are better
suited to response to a banking crises. The regulators are learning too.
New laws (in the US the Dodd-Frank Act wikipedia)
require the banks to hold more capital to collateralize their loans and
they have to pass strict stress tests.
Everything is
getting better over time - even the crises.
Stay tuned!
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