What Lies Ahead
Last night a friend called in a panic. After the worst two day fall of the stock market since the crash of 1987, he was highly agitated. He saw thousands of people losing their jobs and everything looked bleak to him. Normally people don't turn to me for a pollyannaish view of the world but this time I was optimistic and I tried to reassure him that things will get better.
First, the bad news. I don't have a crystal ball but after what's happened this fall, it's highly likely that the economy will be weak for months and unemployment will rise substantially. Some whole industries may disappear. The huge wealth destruction this year from falling house prices, the stock market collapse and lower interest rates will take a severe toll for a long time. All of this will have effects for months and years. Housing and autos, which are big drivers of the economy, will have tough times for years.
But this too will pass and much of it will pass quicker than now seems possible. The headlines are all bleak but the positive things that are happening often don't make headlines. Recovery will take time and 2009 will be a bad year for the economy. But underneath the radar, new companies and industries will be forming and people will go about their routines. Quietly a new recovery will take shape. The good news is always less dramatic but not less important. It's not news when people go to the malls or hire one or two new employees. It's news when a major company lays off 10,000 people or closes a plant. But little by little, the economy will come back.
Among the most positive news is that governments around the world are now going all out to stem the crisis. I thought that they were behind the curve but the U.S., Europe, Japan and many others are now throwing their full weight against the downturn. The power of interest rates on government securities close to zero and powerful fiscal stimulus should not be underestimated. Much of the problem has been too much debt and lower rates over time will make it easier to service the debt.
From my perspective, the panic in financial markets and in the financial system has caught people's attention. It's not possible to know how deep the recession will be or how long it will last. But what we do know is that post-war recessions have lasted from six months to two years and unless this is something worse, we may already be half done and recovery can start as early as next year.