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Thoughts on Recessions

by Roger Bourke White Jr., copyright November 2007

The end of the good times

A recession marks the end of a boom.

In boom times, things are growing. In a recession those things that were growing in the previous boom stop growing -- the good times are over.

Usually, those good times are over for good -- once a sector stops growing fast, it is unlikely to start growing fast again. The magic is gone, for now, and the magic is going to move to another sector of the economy.

The recession which follows a boom is a time of searching. The economy is searching for the next boom sector. Economic things change during a recession, and economic, business and technological things are experimented with to find what is popular and what will grow fast. During a recession, people actively and intensively search for the next boom.

When a recession is mild and ends quickly, it is because replacement boom sectors were easy to discover and easy to exploit quickly.

If the recession is deep and long, it means that boom sectors took some time to discover, and exploiting them was not quick or easy. The Japan recession of the 1990's is a good example of not finding a quick replacement. The Japanese economy searched and searched for its next boom sector.

The importance of positive feedback

A boom is a time of positive feedback. Without positive feedback, you can't have a boom.

In 1800's America, building railroads was at the heart of many boom cycles. Railroad building is labor and capital intensive. It is this labor and capital intensiveness which makes it a "heavy" industry. This intensiveness of this is actually a discouraging factor in boom-making, railroading costs a lot of time and money. But in that era those negatives were more than compensated for by the positive feedback of making many kinds of manufacturing so much easier and cheaper. The net result: when a railroad came to town, all sorts of things got a lot easier to do in a town, so business grew. This is why railroad building was a boom industry in the 1800's.

In the 1900's, the automoble replaced the railroad as the center of positive feedback in transportation, and the auto industry replaced the railroad industry as America's chronic center of boom.

What had positive feedback after the Telecoms? (Hint: not housing)

In this light, lets look at America's last boom.

America came out of the last recession -- the Dotcom Bust recession -- quickly because housing was strong. Housing didn't let up even when the busting telecoms were tanking the rest of the economy.

(I still remember what a mystery that was to me at the time. I could never come up with a good answer as to what population demographic in the US was powering this powerful demand for housing. To my perception, the demand was coming out of thin air.)

This last boom looked like it was a "housing boom." However, we now discover it wasn't demand for housing that was powering the boom, it was demand for a new style of finance that was powering the boom. This last boom could be more properly labeled the Structured Finance Boom.

Now the Structured Finance Boom has run out of steam. Running out of steam does not mean that structured finance will disappear. It means that structured finance will become just another tool, like stocks, to enable some other sector's boom growth. We now have to search and find out what the next boom sector will be.

Housing, it turns out, was not a boom sector after all. But housing was affected by this boom in an unnatural way. Personally, I don't see the housing market doing any interesting growing for the next ten to twenty years. Housing is now a "Japanese Economy of the 1990's." It is searching for its next boom market, and it will have to search long and hard.

What has positive feedback now? (As in... What will the next boom be?)

What will the next boom be?

As of now there is nothing scientific about picking booms before they happen. It's still feels a whole lot like picking horses at a horse race. It is a whole lot like creating startup enterprises.

There are usually lots of good possibilities. Usually what makes a distinctive boom is some positive feedback in the boom market. (too much positive feedback too late in the cycle and you get a bubble, but early positive feedback helps growth and market share.) It was the growing popularity of Structured Investments with big investors such as pension funds that was the positive feedback of the last boom.

So, look for something that is growing, and that also has positive feedback potential.

Second, look for a new twist: either a new market, a new finance method, or a new technology. This will let businesses provide new services and get new kinds of money. Looking at recent history, the rise in popularity of structured investments was due in part to the reduced popularity of stocks that came about because of the increased regulatory burden of the Sarbane-Oxley Law, which was designed to protect Americans from the Enron-style excesses of the Dotcom Bust. (Watch for similar panic-induced blunder legislation springing from the legislature's response to the Sub-prime Meltdown which will reduce the popularity of mortgage lending.)

Some possibilities that come to mind:

A "Green industry" boom. This may happen, but I don't see a positive feedback link, so I think the industry will grow, but I don't think it will become a boom sustainer.

An entertainment industry boom. There has been so much technological change in entertainment over the last decade that it could happen. What needs to change now is the intellectual property laws. These need to be changed to break the hold of oligarchs, such as Disney, Time Warner, and the record companies. Shortening copyright protection duration would be a big step in the right direction.

Sadly, an anti-terrorism boom is a possibility. It has demonstrated a lot of positive feedback potential. The problem with an anti-terrorism boom is that there is no inherent economic growth involved.

These are some possibilities.

And that's what I have for now, folks.


Update: Here is an editorial Six Steps Toward Financial Reform by Maurice R. Greenberg in the March 4th, 2010 Wall Street Journal which in the closing paragraphs talk about recession dream changing when it talks about how America's position in the financial world has changed.

Update: Here is an editorial We're Governed by Callous Children by Peggy Noonan in the October 29th, 2009 Wall Street Journal that also reflects on rescession thinking.

Update: This 19 Aug 15 Forbes article, The Robot Roughnecks: Out Of The Oil Bust Comes A Golden Age Of Drilling Technology by Christopher Helman, gives a 2010's example of dream changing.

From the article, "But where others see disaster, Clay Williams, CEO of NOV, sees opportunity. Busts have a bright side: Oil companies get interested in learning new tricks. “In the $100-per-barrel world there’s not much incentive to do things differently, because everybody’s making money,” he says. “But in a $50-per-barrel world, reality sets in and our customers say, ‘How can we do things differently? How can we make the economics work?’ ”"

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