Economic slowdown

These days every time I switch the TV on there is always an ongoing rhetoric of companies cutting jobs worldwide. A few days earlier we find out we have been in recession since the beginning of 2008 and even though we had hints being dropped by all the important players of the economic game, everyone did not want to hear the dreaded –“R” word –recession,  as if ,naming it would make things worse. The situation is bad already, the sooner we all start to accept it the easier the transition will be in our own minds. This will also lead us all to spring into action plans that need to be done for our own survival in these tough times. 

The question that comes to mind is why all of a sudden are companies having all kinds of layoffs? Layoffs have become so much of a part of daily life that some people in New York were having pink slip parties. It seems like the writing is on the Wall and everyone is waiting for that final phone call/ page which will lead to the exit ceremony. 

Going back to the question. Why so many layoffs everywhere? The simple answer is that consumers are not buying. In my mind it drives back to the housing market which in my opinion is a significant contributor in North America. The Lenders in North America loosened their purse strings so that everyone could buy whatever house they desired irrespective of what kind of income they had. Creditors wanted more and more people to access these credit options so that they could make more money through interest schemes. This led to a lot of people buying houses who either could not afford to pay the monthly payment or if they could afford to make a mortgage payment, they bought a bigger house so that they could make money off it by selling it at a higher price. Lots of people saw this real estate industry as a good way to have an income and as a result got into full time assuming that the housing and real estate prices would always go up ignoring the basic economic law of supply and demand. The law states that if Supply exceeds demand, prices will fall and if demand exceeds supply, prices will rise. 

In the mad rush to supplement income and under the assumption that housing prices will always rise, people kept changing houses to make profits on the selling price, people invested in real estate in the form of houses , land with the hope of profit. Developers invested money into developing unutilized lands for more condos and real estate. Builders build more and more subdivisions, which led to more strip malls, gas stations, more community banks. The manufacturers of housing material and housing related material like paints, windows etc.. also experience the boom which led them to believe that they need a lot of capacity,  as demand for products would keep going up. The demand did not keep going up, as the whole system reached a point where we had too many houses and too many subdivisions , too much investment in development and supply tipped the scales with demand . As we know by now , when that happens prices will fall .What also happened is as a result of the real estate boom , mortgage securities sold like hot cakes and people started investing their savings into it as that was the realm of the investing world which would always give a good stable return and the individual would never lose money. It was not as risky as stocks or mutual funds and one would make more then if they had their cash lying in a savings account. The myth was that the value of the mortgage backed securities would always keep rising as the value of houses would always appreciate. That myth my friend has been busted!

 

What has happened is that as a result of this crash the lenders have accumulated a lot of bad debt and in August 2008 , the financial giants which had bloated like massive hot air balloons felt the pin prick , slowly but surely the hot air started leaking bringing all of these financial giants crashing down and taking down along with them all of the people that had created this mess. As president Bush , clearly stated in his national address , to have a strong economy there must be easy flow of credit to the consumers. If the flow breakdowns, people will not have the ability to buy goods and services and the whole economic system will collapse. The US government then signed on the $300 billion dollar bail out package for the big financial corporations to stem the tide of failures of banks which were falling like Dominoes then. This also meant that banks would change the process they did their lending, which is what they should have done originally. They simply waited too long to make these changes.

 

Soon after this the auto industry crisis came to the forefront the Big 3 were running short on cash for operations because NO ONE was buying their cars. It is not that people stopped buying GM, Ford and Chrysler overnight, this started in the 1980’s ,their competition started selling better quality cars which drove down the cost of ownership. With more and more positive experiences from consumers, the Japanese manufacturers saw more and more sales while this translated inversely for the Big 3. Even though they realized this problem back in the 80’s, one might wonder why have not they addressed it ? They have tried to for sure , it is just that while they were addressing these problems with the resources and time, their competition just kept pulling ahead with new designs, modifications and new technology , they did not rest on their laurels. In the true spirit of continuous improvement they relentlessly kept “driving” ahead. The gap therefore has never been quite bridged and this led to the current crisis. One might argue that if the housing market crash had not knocked the wind out of the consumers, this crisis would not come up so quickly. I would agree with that but would point out that this crisis , surfaced quicker because of the housing crisis and maybe it would have surfaced a few years hence .This crisis can potentially be very damaging as the Big 3 crisis affects tiers of suppliers and suppliers of suppliers  who will suffer heavy financial losses and face massive layoffs.

 

The only positive and negative in this scenario is that it has distracted the world from the energy crisis. As consumer and industrial demands have fallen, crude oil process have dropped to rock bottom prices. This means also the gung ho efforts and resource allocation decisions of the US to invest and research into renewable energy has been out aside for now. This is exactly what happens every time the subject of transitioning into renewable energy comes up . A bigger problem emerges and this gets pushed back . The day will soon come when we will have high gas prices along with everything else and that is when we are going to regret not having paid more attention to getting rid of our addiction to crude oil. To draw a simple analogy, smoking is an addiction that kills eventually. People do not try to get rid of their smoking addiction because they have other important things to take care off, take care of a family, make enough money etc…since the ill affects is not easily visible on a day to day basis it is a harder addiction to get rid off. Using gasoline for transportation is slowly but steadily destroying our environment but as we cannot the detrimental effects on a day to day basis, we pay scant attention and hope that the problem never surfaces. 

I am sorry I do not have a positive message at the end of my opinions and observations. I can only say that the world has survived many a recession . This however does not apply to all individuals , a lot of people will suffer and life as they know it today will change to something that they may not like or they are used to. This is a period where everyone will act with caution and hope that we have already seen the worst and we are  downhill in our economic journey’s from here on.