Thursday, December 30, 2010

Although Double Dip Recession is Expected and Numbers Justify it, I still don't believe in it.

Yesterday's Housing report sent shock wave in economists in US and there are more and more people saying about Double Dip Recession. Graph Below clearly shows direction towards south in Home Prices.




US Housing Price Graph in % Change.  Ref : http://foreclosurenv.wordpress.com/2010/12/01/united-states-housing-prices-still-crashing/

In India, Graph Below shows Interest Rates rising again towards "Previous Crash" level. So definitely it's another number supporting recession.


India Interest Rates Chart
In China, Interest Rates have started going towards North, and there are reports of Real Estate crash already.


China Interest Rate Chart.


With all these Data many are already concluding that we are entering in Phase 5, 6, 7 of economic cycle and Hence Recession !!! 


However I don't believe that Recession is underway because in western world despite Stimulus, Inflation level has not been out of hand. This will give a clear license to Central Banks to have another Rounds of Quantitative Easing / have more easing under current QEII or Simply Allow banks to lend freely. In emerging markets there may not be Stimulate. And they may raise interest rates in "baby steps", Carry Trade (i.e. borrowing money from places where interest rate is low, and investing in other country) will keep liquidity high.


In 2011 / 2012 time frame I think governments across world will be busy in stimulating economies further and convince people by steps like..


1) Raising Minimum wage.
2) Encouraging Employers for Higher wages to counter higher living prices.
3) Never increasing Interest rates aggressively enough to allow bubbles blast.
4) Ask people to compromise on "Prices vs Unemployment".
5) Redefine Comfort Level of Price Index .. e.g 2 is considered as OK in US they will say let's have 5 as OK. in India 5.5 is considered as "Comfortable Level" They may say Let's have 8 as Comfortable level.
6) Asking banks to resume lending activity more generously to help economy grow again.
7) Keep on telling people that as prices are increasing, so will your wages and everything will be normal.
8) Keep on telling people that it's temporary and everything will be fine soon. 
9) At some stage when inflation goes beyond control they will introduce "Price Control" i.e. to restrict food / essential commodities at government control prices.


Concluding central banks and Governments will Prevent Double Dip. Instead by resuming Lending, they can give very good results in short to mid term of course for Wall Street !! .


It will be however very interesting to see how countries like Germany / Singapore react to all this. There is a very good chance that they may opt for entirely different path towards austerity.

4 comments:

  1. If the recession continues, more people will lose their jobs and as a result, their homes will be foreclosed. As for me, I'd rather buy a house that's not too big. Just a simple house that's low cost and easy to maintain. We have to consider that payments should be low in order to keep our monthly credit at a minimum.

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