Thank you for the detailed explanation. While this may not be a inventory recession in the technical sense, I have been observing the people around me and was coming to the conclusion that many already have too much “stuff” and with the current uncertainty have decided to forego buying more “stuff”. Also, some things are lasting a lot longer.
For example I had a 1986 Dodge Caravan. I had heard and sadly experienced that around 100,000 miles systems would start to fail. My current 1996 Caravan just crossed the 100,000 mark, and I am told many are doing well to 200,000. Pause to knock on wood. OK, I’m back. Since as a retired person I only drive about 3,000 miles a year, it will probably die of old age and salt rust before I need a new one. Thus I will avoid buying a new car for quite some time, hopefully for me if not the economy.
I didn’t mean to imply that there is no inventory recession. There is. But there are two principle types of recessions, inventory and credit/debt. The recessions we have seen for the past 75 years or so have been inventory recessions. These are caused by the central bank artificially manipulating the interest rate of loans, which sends signals to the markets. When the interest rates drop, money is cheap and easy and there is a lot of it. People misread this as being a sign that the economy is booming. People borrow thinking there is an increase in consumer demand when there is not. They hire workers, increase production, and then watch their output accumulate as there is no market to purchase the goods. They then have to reduce their headcount and sell at a reduced profit (or loss). These are the mild types of recessions.
The last time we saw a major debt-based recession was the 1930’s.
Unfortunately, debt-based recessions also cause inventory recessions. That is why unemployment is NOT a lagging indicator of this “recession” as many economists inaccurately claim. That is true in an inventory-based recession, as the last thing to happen is that companies re-hire after they’ve cleared out their inventory. In a debt-based recession, unemployment is a leading indicator. Businesses are letting people go as they try to adjust to the credit expansion and the debt overload. Those unemployed then stop purchasing which causes further contractions in the economy, which leads to further unemployment.
We are experiencing both types of recession at the moment, and it is only going to get worse. Much worse. Because we have not cleared the debt saturation and bad loans out of the economy.
I’ve had my tag for quite some time. I advise that everyone prepare for very hard times.
As I’ve been saying, we are at the brink of a global economic depression that will make the 1930’s look like the Roarin’ 20’s.