Its all over the idiot box, Cnn, bbc, nbc everywhere else. The US is officially under recession. Interestingly enough its the big boys whose fall has made the recession more profound.
Bears and Stearns Story
Bears and Stearns was recently acquired by JP morgan(which apparently isnt feeling good about its own future) with some(read lot) help from the fed. More interesting(interesting in a bad way...) is presumed to be coming our way with doubts being raised about other big boys like lehman brother and citi group.
Wasnt it expected?
Quite frankly the recession was expected, to some degree with the sub prime crisis. But what turned a crisis into a recession? I believe the same reason what caused a financial crisis to become a cause for recession will ultimately end up putting the US economy into a longer economic depression.
Enough analysts have discussed and are discussing and probably keep discussing the reasons for US economies fall out but as far as i am concerned, someone who isnt a finance guru, the reasons are very basic.
One of the major reasons why this crisis got out of hand is because of the propaganda that was carried in the media like CNN/BBC/NBC and other news sources.
Its strange when the industry biggies and major news channels start declaring recession even before there are any visible signs hitting the common man. The inflation wasnt out of control, people were still consuming, people were still spending.
The impact of real estate and its impact on bigger financial groups(ones more into mortgages and securities) was made out to be bigger then it was.
Strangely the slow down in real estate is cyclic and it happens in every country and it wasnt the first time it happened to US. Minor recessions are cyclic too and it wasnt the first time it happened to US either.
Recessions aren't all bad
Recessions are good in way, it kills the bad companies and gives an opportunity to better ones. for example a sure fall out of recession would be people loosing jobs, these laid off workers will work for lower wages in smaller companies, some of these companies will make it big by the time recession ends(actually being one of the reasons for recession ending).
These smaller companies other wise would never get a chance to hire brilliant people, people who are required to turn a good idea into a great company due to lack resources.
More importantly recession levels the playing field for a bigger firms and smaller firms, since the bigger firms carry the weight of their size while smaller firms can cut their losses by staying leaner.
How negative media impacts confidence
Anyways back to topic, why the impact of a negative media can be so profound in US is because its population is aging, when people age they want security, when you cast doubts over an old mans bank the immediate response is to withdraw some money just in case the news guy is right and my bank is doom.
You play the report for some more time, the old man doubts his bank more and withdraws some more money.
Eventually the a banks surplus depletes and the core banking sector suffers. A sick banking sector will lead to crisis.
Recession or Depression?
So far so good, recession was on the cards anyways right, so big deal, recessions go. Wrong. I believe you cant get a secondary sector healthy like retail or travel or mining by government intervention but i am afraid even the government cant do much about a ailing banking sector.
A banking sector is the backbone of a modern economy. A ailing banking structure cannot sustain a the stress of a companies surviving in a global slowdown(by global slow down i mean people reducing spend and not stock markets plateauing or crashing)
We will still have to wait and see if this is a recession or it turns in to a depression forcing companies to quit US for other economies.
Read more about the great depression of 1930's. If you spot some signs between the last depression and this one, shout out loud, i am listening.
On a side note, actually on the main note, i also proclaim if US drops into recession and the global slow down is seen, US will cause the wars between two regions probably backed by Nato directly or indirectly, why you ask?
US was only able to get over the last economy depression when world war 2 happened when it could supply defense and material to other nations.
Even now US earns a lot of dollars by supplying arms and ammunition to countries across the world, in times of war the spending in defense only increase.
A war between two countries is the surest way for US to boost its economy, since it would supply resources for people pay US and then kill them selves up.
I'll sum up why US is into a recession in 6 sentences
1. Aging population, looks for security, consumption drops, investment drops.
2. Not enough wars around for US to supply arms and ammunition at high rates. Competition from other countries.
3. US is spending on wars of Afghanistan/iraq and other missions.
4. Media and analysts making the crisis bigger then it was resulting in doubts in the minds of consumers and investors.
5. A string of medicore (i am being nice here) leadership(bushs and clintons and others).The next president(mcCain, barak or clinton) are worse then the earlier ones.(the worse so far is harry truman (the animal that dropped atomic bomb on hiroshima killing 80,000 people in an instant)
6. Bad financial decisions(like offering loans and credit without proper documentation and down payment leading to sub prime), bad investment decisions by the same guys who are supposed to offer the common investor financial advice to change his fortunes(what an irony)
America is in trouble(atleast for a while), problem is with the wrong president, we might all be in trouble soon.
Update: Visa had a great IPO in a market assumed to be in recession.
Ps. if you spot some errors, shout and i shall correct myself.(im no US president, i can admit mistakes you know)
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