by Roger Bourke White Jr., copyright October 2015
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 next. 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.
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, cheaper and more effective at profit making. 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. It brought positive feedback, and this is why railroad building was a boom industry in the 1800's.
In the 1900's, the automobile 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.
In this light, lets fast forward to the 2000's and look at America's boom during that era.
America came out of the previous 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.)
Because of the robust housing market, this boom looked like it was a "housing boom". But the bust of 2008 revealed that 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, new finance inventions such as CDO's. This 2000's boom could be more properly labeled the Structured Finance Boom.
Finance was half of the root of this boom. The other half was the War on Terror mania that flowed fast and furiously around the US and the world following the spectacular and deeply frightening 9-11 Disaster. The bust of 2008 was also going into the hangover part of the 9-11 panic and blunder cycle.
The Structured Finance Boom and the 9-11 Mania both ran out of steam in 2008. This was a double whammy and the result was a deep bust, The Great Recession. Structured finance will not power the next boom but it will become another tool, like stocks, to enable some other sector's boom growth.
The Great Recession was about searching to find out what the next boom -- the next positive feedback mix of industries -- would be based on.
What boom is following the Great Recession?
This one has taken a lot of searching to discover. China and other BRIC growth provided a partial answer for a while. That lead to a commodity boom that lasted until 2015. But then the Chinese economy underwent a dramatic shift away from investing in commodity-intensive infrastructure projects and the world commodity boom ended.
Once again, in 2015, the world was facing the question: What will the next positive feedback mix of industries be? What will be the foundation for the next boom cycle?
As of now there is nothing scientific about picking booms before they happen. It 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. As one or a few get worked out and prove themselves, the boom gets under way. That is the first step.
Second, there will be 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.)
Booms are times when a community has latched on to a positive feedback industry and is growing by exploiting all the opportunities it is creating.
At some point the Law of Diminishing Returns kicks in and the positive feedback declines. The community heads into a recession.
The recession is a time of dream changing. The community searches for a new Big Dream, a new mix of positive feedback industries to invest in. When it finds them, the next boom gets underway.
There is nothing certain about this discovering-the-next-boom mix. There is no guarantee about how long it will take or how successful the next mix will be. This makes recessions very scary and very frustrating times to be living through.
The one certainty is that what comes out the far side will be very different than what the previous boom mix was.
This 4 Mar 10 WSJ editorial, Six Steps Toward Financial Reform by Maurice R. Greenberg, in its closing paragraphs talks about recession dream changing when it talks about how America's position in the financial world has changed.
This 29 Oct 09 WSJ editorial, We're Governed by Callous Children by Peggy Noonan, also reflects on recession thinking.
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 in oil drilling.
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?’ ”"
-- The End --