Is the world already in recession?

July 30th, 2008

Share |

The answer to that question depends on your definition of recession. Sticking to the technical definition favoured by central bankers, the world growth is just “slowing.” But as we argued in Example of precisely inaccurate information,

Now, if the price index is a logically invalid number (let alone accurate), then how accurate will real GDP growth figures be for capturing the growth of output of an economy? If this figure is inaccurate, then how accurate will it be for defining when an economy is technically in recession? In that case, how useful will it be to be so precise in defining the exact point for which the economy is in technical recession?

What about the people on the streets? In a recent interview with Marc Faber at Faber Says Fannie, Freddie Should Split Up, Not Get Aid, he said

I travel a lot as you may know. And I can tell you in the last two months I was around the world twice. Everywhere I ask how is business and business is down everywhere. Everywhere it slowed down very considerably. And it is lower than a year ago. So I suppose you can say the world is in recession already.

One of our contacts in China told us stories about factories being forced out of business due to the falling US dollar and falling US demand. Many of these factories have very low profit margins. One particular factory is currently losing money. Yet, if it closes down, it will lose even more money. Therefore, it is forced to continue production at a loss. This anecdotal evidence is consistent with the numbers and our outlook (see China?s slowdown & its implication for Australia).

What will be the worst case scenario for the world economy? As we said before in June 2007 at Epic, unprecedented inflation,

Today, the world is experiencing an unparalleled inflation of asset prices. This is the first time ever that the world is experiencing asset price inflation in all asset classes (e.g. property, bonds, commodities, stocks and even art!) and in all major nations (e.g. US, China, Japan, Australia, UK, Russia, etc). We will repeat this point again: never before had such a universal scale of asset price inflation ever happened in the entire history of humanity!

Marc Faber believes that the end of this universal boom will be a “colossal bust.” As he explained in the interview at Faber Says Fannie, Freddie Should Split Up, Not Get Aid, the worst case scenario is that this colossal bust will be

… with inflation. I think there is a very good chance that we will have bad economic environment but still rising prices simply because we have money printing institutions around the world called central banks.

At the same time, Marc Faber has scathing remarks about Ben Bernanke and the Federal Reserve,

… the Fed is totally ineffective and inept organisation. That has to be said, they don’t understand simple economics. Because Mr Bernanke reads and writes about the Depression years; the difference between the Depression years and today is that commodity prices had peaked out in 1921 and they were in well-established down trend. Today’s situation is that there are 3 billion people are joining the global economy who are eating and driving around more and more and they put pressure on commodity prices. This is an inflationary environment, not a deflationary environment. And if some Fed member does not understand that, then he shouldn’t be at the Fed in the first place.

It looks like Marc Faber is in the long-term inflation camp (see Are we heading for a deflation or inflation? for the quick run-down on the inflation-deflation debate). And we must emphasize the adjective, “long term,” in the previous sentence, just in case others will think that we do not believe deflation can happen.

Tags: , , , , ,