Concern about a possible double-dip recession has lurked beneath the current economic recovery ever since it got underway sometime last year. So palpable was the general relief that a recovery seemed to be happening at all after the bone-chilling 2008 crisis, that wishful thinking probably made the uptick feel on the surface more bullish for a while than it really was. From the start there were perverse undercurrents. For one thing, the recovering economy didn't seem to be creating many jobs. For another, banks weren't lending robustly, or to put it another way, creditworthy borrowers weren't available who seemed willing to borrow in much volume. Rather than focusing on inflation risk, as might have been expected in the midst of a normal recovery, the Fed appeared to be too worried about deflation to begin pushing short-term rates much above zero. It was all very odd.
But that's old news now. What's more current are systemic problems in Europe, and the fact that the stock market - which had offered one of the more hopeful signs - has reversed course and dropped more than ten percent of its value in a month. As a leading indicator, the Dow has a fickle record, but one has to wonder if it might be telling us something this time, since it appears to be confirming discordant signals there from the beginning.
Most mainstream economists at the present time don't seem to be forecasting a double dip recession. But with all due respect to mainstream economists, other than vaguely-worded hedges, they rarely predict major turning points in the economy. And a double dip recession in the current environment would be nothing if not a major turning point, much more serious than the initial downturn.
Given that this scenario is now more than a remote possibility, it behooves investors to consider what the next stage might entail should worse indeed come to worst in 2010. Specifics are always hard to envision, but this picture could not possibly be a mild one or in any way predictable.
Those of us who remember the early 1980's might be tempted to search the record of those years for clues about what to expect. That was, after all, the period for which the phrase "double-dip recession" was invented. Of course it was not really either one or two recessions at all, but more of an erratic mini-depression, brought on by the Fed's effort to combat the worst inflation experienced in America since the Fed was established. And it was a scary time. Then, as now, dark murmurings abounded about a new Great Depression perhaps lurking in the wings.
That episode, of course, ended happily. Inflation ceased its hard boil and was followed by a quarter century of economic growth, job creation, and robust asset price appreciation. If those days were to offer a precedent, it might harbinger some very good news for us at the present time.
In fact, the two environments have little in common. Analysts still sleuthing out parallels might try to concoct at least a kind of upside-down analogy, with the government’s anti-deflationary program of today corresponding to Paul Volcker’s ferocious war against the opposite problem. This line of speculation would suggest a short period of white-knuckle tribulation before moving on to happier times. Since most of us could live with short pain, even that sounds like good news.
But all parallels, upside-down or otherwise, provide at best dim lights for the future. If this brief recovery ends in an intensified downturn, we will have drifted into uncharted water. Economic water is always uncharted, of course, for the reason the Greek philosopher Heraclitus understood when, referring to bigger things, he talked about never stepping into the same river twice. But this particular river today may be cutting a new bed for itself.
This recovery, and the market rebound that went with it for a while, happened in large part because of the confidence most people gained that powerful governments were on the case. However one chooses to add up the cost of America's stimulus-bailout programs, the total is measured in thirteen figures. With Europe throwing in another thirteen-figure package, and central banks pouring on liquidity, governments have expended a massive store of ammunition in this war against "recession", if that's the right word for it. If it's all to yield nothing, public confidence will be shattered and governments will be humiliated.
And that could be when the real trouble begins. Humiliated governments become vulnerable to new politicians waiting in the wings with more extreme ideas about economic problem-solving. In the United States, centrists in both mainstream parties are already taking fire from their respective fringes. Weirdly, both left and right extremes seem to agree that somehow the Fed represents the citadel of enemy power. Should either side gain influence over government, it seems likely that our central bank could be restructured and strange ideas brought to bear on the management of our money supply. Fiscal policy too could fall into the inexperienced hands of people believing themselves on a mission. We could find ourselves flirting with either depression or high inflation depending on who were to gain control of the levers.
None of this is to say that radical new ideas aren't called for at times under extreme conditions. The problem is that healthy investment markets require a degree of predictability that may be quite lacking for a while if the economic and political center fails to hold.
It is probably too early to say with any certainty that a double dip recession is truly upon us. If such proves to be the case, however, investors may have the time of their lives for a while figuring out what to do with their money.
Disclosure: No positions