Recession: Beginning of the end or just the beginning?
Posted
Dec 01 2008, 12:45 PM
by
Anthony Mirhaydari
Rating:
As Kim mentioned, the big brains over at the National Bureau of Economic Research just announced we're in a year-old recession. This could actually mark the beginning of the end for this ugly period of economic history.
As I wrote in October, one of the strongest predictors of when a recession ends is it being officially recognized. Maybe the realization of just how bad things have become acts as a cathartic event of sorts -- marking a low point in sentiment that can only be improved. The recovery normally begins within months.
History dating to 1857 suggests this recession will probably last 17 to 18 months from peak to trough. One particularly nasty outlier is the economic contraction following the Panic of 1873, a period known as the Long Depression that lasted 65 months -- nearly 22 months longer than the Great Depression.
The situation in 1873 is eerily similar to the one we face now, and could portend a much longer downturn: Massive credit expansion backed by real estate, fancy new investment instruments, a rising low-cost economic powerhouse, and a dramatic tightening of interbank lending which led to a contraction in general credit availability.
For the optimists: Assuming the current recession is of average length, the happy days of normal economic activity will return along with the warmth of summer in June or July. As a leading indicator, the stock market should begin to turn a few months prior to the actual economic recovery. February would be good time to roll back into pro-cyclical investments and reduce exposure to safe havens like U.S. government debt and gold.
For the pessimists: According to Scott Reynolds Nelson, a professor of history at the College of William and Mary, "the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India."
Although economic policy and international coordination have improved greatly since those post-Civil War years, the possibility of a protracted downturn mirroring the Long Depression cannot be ruled out. If this is the case, then we face another four years of economic misery. Plan accordingly.
Feel free to comment below. I can be contacted at anthony.mirhaydari@live.com
Related reading:
Surprise! We're officially in a recession
Recession to end in June?
Will this be a depression?
We didn't learn the lessons of 1907
