
The next recession - briatx
https://www.economist.com/leaders/2018/10/11/the-next-recession
======
wonderwonder
A recession is inevitable if one looks at the state of average people and
certain economic facts. Eventually a domino will fall.

1\. Consumer debt is at an all time high. 2\. Consumer savings rates are lower
than the mid 2000's and ~35% of adults could not handle a $400 emergency. 3\.
Inflation is eating already low wage growth. 4\. Soaring rental prices for
homes 5\. High home prices 6\. business consolidation and Ch. 11's are up 63%

Sources: [https://www.americanbanker.com/news/consumer-debt-is-at-
an-a...](https://www.americanbanker.com/news/consumer-debt-is-at-an-all-time-
high-should-banks-be-worried)

[https://www.businessinsider.com/rental-prices-are-soaring-
ar...](https://www.businessinsider.com/rental-prices-are-soaring-around-the-
us-2018-7)

[https://www.businessinsider.com/chapter-11-bankruptcies-
are-...](https://www.businessinsider.com/chapter-11-bankruptcies-are-
up-63-from-a-year-ago-2018-4)

~~~
nostromo
A number of your indicators are signs of a booming economy.

Rents go up when people can afford higher rents. Consumers take out loans and
save less when unemployment is low and they feel safe in their job prospects.
Inflation was below healthy rates for a number of years, and is now where the
Fed likes it. Wages aren't booming, but they're up, and up more than
inflation.

Chapter 11s were at the same level in 2011 -- were you predicting a recession
then too?

There are also reasons to be optimistic, for example, US corporate earnings
are way up -- 2018 is up 20% over 2016 alone -- that's huge.

[https://tradingeconomics.com/united-states/corporate-
profits](https://tradingeconomics.com/united-states/corporate-profits)

I think that the article is right: while the US seems very healthy, there are
lots of international issues that could form the next recession (China
specifically).

~~~
zeroname
> Rents go up when people can afford higher rents.

Only if supply is capped artificially, e.g. in major cities where it's almost
impossible to build.

> Consumers take out loans and save less when unemployment is low and they
> feel safe in their job prospects.

Other reasons to take out loans: The wealth effect (currently fully in force),
cheap loans (record low interest), easy loans (no risk assessment), outright
stupid loans (US student loans) or loans that are necessary to make ends meet.
All signs of a market overheating.

> Chapter 11s were at the same level in 2011 -- were you predicting a
> recession then too?

There was no reason to predict it when it had already just happened.

~~~
nwah1
It goes up regardless of building restrictions in a booming economy, but
restrictions can make it worse.

This is called the Law of Rent. Land prices function like monopoly prices, and
rise whenever the value obtainable from the location rises compared to the
best available rent-free alternative. Seeing how there's usually no rent-free
alternatives, prices tend towards the entire value obtainable from the
location for an average consumer.

For instance, the value of the location may be money and time saved on
commuting. You'll generally find that the money and time you save on commuting
about equals the higher land rents, netting out to no monetary benefit between
the two options.

~~~
zeroname
The Law of Rent is about the cost of leasing the land from the owner of the
land. This is not the relationship between tenant and the owner of the real
estate.

It's not the tenant who is looking for maximum productivity from the land,
it's the real estate owner renting out places to live. A tall tower housing
more people paying individually lower rent is more productive than a small
house housing a single affluent person. Unless building is restricted
artificially, supply increases until demand is met fully, which leads to price
competition and ultimately rents that are as low as they can be.

~~~
bostik
> _supply increases until demand is met fully_

That is a very optimistic view.

What I've seen in Finland and UK is pretty much the opposite of what you
claim. In both countries the housing supply _in growth centers_ is essentially
controlled by a handful of huge developers. In an attempt to make the planning
permission system more comprehensive, it has only turned out more complex and
expensive to navigate. That means that only the largest operators can afford
to work within it.

In both countries we see developers deliberately restricting the speed with
which new housing stock enters the market. In UK, the common pattern seems to
be to sell a floor or two at a time, while the others are still supposedly
under construction. In Finland, the developers literally shut down their sales
and rather took a hit in maintenance costs than sell their available stock
while the market was too slow.

Your assumption therefore makes a crucial mistake - it stems from an
assumption of perfect markets and unrestricted housing supply. In reality
neither of those two hold true.

~~~
zeroname
> In an attempt to make the planning permission system more comprehensive, it
> has only turned out more complex and expensive to navigate. That means that
> only the largest operators can afford to work within it.

That's exactly what I'm talking about when I say "artificial restrictions".
Don't assume that the market players don't want these restrictions, it's
easier to sit on past success than fighting for sustained success. Big players
always profit (relatively) from regulation, it keeps down competition from
below.

> Your assumption therefore makes a crucial mistake - it stems from an
> assumption of perfect markets and unrestricted housing supply. In reality
> neither of those two hold true.

Of course it's an idealization, I'm talking about what would happen to prices
if these restrictions _didn 't exist_. Housing supply doesn't have to be
unlimited, demand could easily be met, we're far away from any physical
limits. You really have to ask yourself, why does San Francisco not look a
little bit more like Hong Kong? What would happen to minimum rents if a dozen
of residential highrises could be built near the center?

------
marsrover
> The efficacy of QE is debated, but if that does not work, they could try
> more radical, untested approaches, such as giving money directly to
> individuals

I'm not an economist but I feel like when a country is in a situation where
they have to give money to citizens to stave off a market collapse, said
country's economy is fucked.

~~~
TuringNYC
> The efficacy of QE is debated, but if that does not work, they could try
> more radical, untested approaches, such as giving money directly to
> individuals

For one thing, QE was a massive handout to debt holders (banks, asset
managers, hedge funds) which took (essentially public funds c/o inflation) and
indirectly gave it to the wealthy by purchasing assets at prices way higher
than "market" at the time.

Perhaps it worked, but it also created a lot of resentment. In some ways,
giving money directly to individuals would have been more fair, perhaps we
wouldn't have the current radical shift right in the US, resulting from people
fed up with the elite coastal beneficiaries of the past system.

Unfortunately, giving money directly to individuals would not have solved the
past crisis because a lot was about the downward spiral of asset prices and
how that forced more collateralization and reduced bank equity. However, a
more balanced approach that solved the mortgage issues for the common person
would have been better.

As for the country's economy being screwed. In some ways, we are now. Just
that there are winners and losers. Holders of real assets won (massive home
inflation continues.) And paycheck-to-paycheck individuals / renters /
youngsters lost. Speak to a young person now [who doesnt work at a FAANG] and
you'll find someone coming to terms they may _never_ own a home or put down
roots. Its a massive turn away from the classic American dream and social
contract. Thats pretty screwed up.

~~~
Diggity
I want to tack on this comment by adding that everyone seems to ignore the
fact that QE is essentially just printing money.

Historically this is usually coupled with run-away inflation, however since it
was isolated to the wealthy sectors of the economy (rather than the typical
economy as a whole) there is only inflation among goods in that sector
(housing etc). The big red flag is that stocks and VC are in that pool as
well.

So while there was 20 trillion dollars of growth over the last 10 years, there
was also 21 trillion dollars of debt generated.

The way I see it, QE successfully generated economic growth, however none of
that economic growth was "real" growth. There were new innovations,
particularly in the tech space, but a huge swath of them have no method to
generate real sustainable profit.

All this means we should see a MASSIVE correction in markets. Due to financial
rules, banks likely won't exit the market like 2008, but the massive number of
companies that took out cheap debt will be at risk.

Basically we have a potential repeat of 2008, but swap out sub-prime
homeowners with corporations.

~~~
marcosdumay
The US QE consisted of printing money in a moment of deflation (reducing of
the money supply), so the country would experience something close to a
monetary stability.

It did create inflation, and basically offset the natural tendency of the
market. The fact that the money was inserted directly into the capital
markets, instead of the consumer market probably caused a huge loss of
efficiency on the deflation containing goal, a bubble at the capital markets
and the requirement of collecting the money back once it starts flowing in a
non-controlled fashion into the goods. All that probably caused some
instability down the line, but the US seems to be dealing with it just fine.

~~~
Diggity
> but the US seems to be dealing with it just fine

I don't think we have seen the full consequences as of yet.

~~~
TuringNYC
This comment is spot on. We never actually "solved" the consumer crisis of
2008. We only solved the acute corporate crisis (money market funds breaking
the buck, under-capitalized/insolvent investment banks, bond liquidity leading
to a markdown death spiral.)

The problem we didn't solve IMHO is the massive housing bubble. To be fair,
solving the housing bubble involves lots of winners and losers, so the
government would rather kick this can down the road. Obama was able to keep
kicking this can for 8yrs.

While there were pops in many places, the steady state price has become
whatever a two-earner household can afford with massive debt living paycheck-
to-paycheck on a 4% mortgage. That isnt sustainable and causes numerous
problems:

\- Everyone not already in "the game" loses (youngsters)

\- Moving is difficult due to transaction costs (poor job mobility)

\- Selling will be impossible (underwater) once rates go up

\- Disposable income for spending is reduced, causing people to borrow
further.

On top of that, Fannie Mae and Freddie Mac continue to stay in an uncertain
state:
[https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae...](https://en.wikipedia.org/wiki/Federal_takeover_of_Fannie_Mae_and_Freddie_Mac)

On the other side of the fence, low rates are horrible for pension funds,
pensioners relying on fixed incomes, etc. Pension funds and asset managers
with return expectations struggle and reach for riskier assets yielding more.
(Tech, to some extent has been a winner here as one result of this has been
diversification of pension assets into VC.)

------
wilkystyle
Not related to the article, but I was overwhelmed by popups on first visit.
The amount of screen real estate they took up [0] was obnoxious.

[0] [https://i.imgur.com/GwkHKT1.png](https://i.imgur.com/GwkHKT1.png)

------
fnord77
the economist didn't even see the 2008 crash coming.

their prognostications are useless

~~~
louthy
I remember reading articles about the subprime problem in the Economist way
before the crash. I think they're pretty good on the whole at being
informative and not sensationalist.

Here's one from 2006 [1] that I found relatively easily. But there's one in my
head that I remember about an HSBC owned bank that was flailing and could
potentially start a crisis, but I can't find it right now - I just remember
reading it at the time, it was the reason I decided to wait for a downturn in
the housing market. I wish I'd ignored it and bought at the time, but with the
benefit of hindsight ...

[1] [https://www.economist.com/finance-and-
economics/2006/12/13/s...](https://www.economist.com/finance-and-
economics/2006/12/13/subprime-subsidence)

~~~
GarrisonPrime
Yup. I’m always amazed when people say nobody saw the recession coming,
because I distinctly remember multiple news stories about the subprime
mortgage brouhaha for a year or two before the bubble burst.

People hear what they want to hear, and remember what they want to remember, I
suppose.

~~~
tomatocracy
Many people saw that housing was probably overvalued and that there was a wave
of unaffordable payment hikes in the pipeline on the loans secured against
that housing coming. A falling housing market is hardly a once in 100 year
phenomenon, and many other housing markets had operated with similar products
(teaser rates etc) for many years, and continue to operate on that basis.

Many people also saw a recession coming, because recessions always come
eventually - it's a normal part of the economic cycle.

Relatively few people saw that these two things would result in many of the
largest financial institutions on the planet coming near to collapse.

Even fewer people got the timing right. And not many of those had the courage
of their convictions to actually place bets on it.

------
DyslexicAtheist
one bubble in the making is fracking, it's built on debt and has no chance of
making profits anytime soon [https://www.truthdig.com/articles/death-by-
fracking/](https://www.truthdig.com/articles/death-by-fracking/)

------
paulgrant999
we never left the recession. ignore that twaddle about the "jobless recovery".

point is, they had a depression II slated. so they did what any cunt would;
they punted.

could have been 8-9 years of pain; ex-rich people throwing themselves out of
windows.

instead, they screwd the next four generations.

it only looked like a recovery, because it stopped collapsing for a brief
period. reality they've screwed the entire country for decades.

all this nonsense about growth? is what happens when you reinflate the bubble
with QE. classic keynesian garbage.

