Wednesday, 8 October 2008

Talking ourselves into a recession

This morning I had an interesting conversation with a work colleague regarding the dubious present state of the financial system over our usual mug of ultra-strong coffee. I have always tried to shy away from writing social criticisms and keep my blog purely science based, but for this I'm going to make an exception. As a vaguely scientific side note, however, our coffee would normally make a good high school science experiment since it behaves more like a glass than a liquid. I'm not sure whether this is purely a factor of the percolation time, or a combined effect with the obscene amounts of sugar vigorously stirred into it, but, either way, this coffee could quite easily go undercover as treacle.

Today's caffeine fueled discussion stemmed from an
article published on BBC News yesterday. Entitled 'UK economy already 'in recession'', it is one of the millions of stories being run on news websites and in papers around the world regarding the impact of the present economic crisis on society at large, i.e. levels of unemployment, high-street spending, manufacturing, etc. The point we were talking about was not the comments on rising unemployment, etc (all of which are very valid and supported by statistics from the British Chambers of Commerce), rather that half-way down it proceeded to say 'Technically the UK is not yet in recession...'.

Hang on one cotton-picking minute! First you say we're in a recession, then you say that, according to the guidelines by which economists define recession, we're not - guidelines which have some well founded mathematical basis.

Don't get me wrong, I know full well why headlines such as this are printed. I am all too aware of the way journalists will twist stories to be more dramatic if they think it will result in more sales. The kernel of our discussion this morning revolved around the fact that, normally, the application of such writer's license effects only a limited number of people. Take, football, (soccer to any Americans reading this) for example. The amount of bad press placed on the England football team after a poor performance has many times affected the confidence of the players and therefore their subsequent performances, resulting in the demise of a number of managers in the process. But, this effect is limited to the team and their immediate circle. Although poor performances leading to us not making a major competition has been shown to cause a drop in revenue for sports bars, etc, in general terms this impact is low.

With the economy, the story is a different one. The western economy is closely coupled to the performance of the stock market, when the market is in a period of growth the economy will grow too, and vice versa. The danger of the stock market is that, to a large extent, is is driven by the mood of it's investors. If they get twitchy and start panicking then all hell breaks loose (as was seen with the Northern Rock debacle earlier this year). Unlike football, in this case any fall out from bad press can effect everybody as overly dramatic stories bemoaning the 'almost' recession cause investors to become less pragmatic and the market to plummet and the economy to wobble. As the news article itself pointed out, this then feeds back into the general public with job losses, etc, which then feeds back into the economy with less high-street spending to prop up the markets, i.e. an economic circle of death.

So, in conclusion, I ask the question we talked about over coffee. By printing and talking all this doom and gloom regarding the state of the economy, are we in fact talking ourselves into a recession when otherwise the markets would have dipped but stabilized?


pacalaga said...

I have wondered about that myself. I'm on the other side of the pond (thanks for clarifying the soccer thing) and it's so hard to tell if, left alone, we'd all save our pennies, keep our heads down, and pull out of the downturn, or if we were heading for recession anyway. Of course, we have the lovely Wall Street meltdown and Congressional interference to complicate things.

Mark said...

Very true. I wonder how much better off we'd be if Congress hadn't done the: 'Oh no we don't wanna do that! Do we? Erm, ok, since you put it like that, George, I guess we should!'. I know I'm a Brit looking in from outside, but from my point of view it bore a striking resemblance to something from a Carry-On film...

pacalaga said...

Actually, I read an article that chastised Paulson for his treatment of the "bailout". The gist of the article was that when it was presented to Congress, the consequences of not passing the bailout were very clear and ugly, but when it was presented in the media, it was vague and, well, called a bailout, instead of a "stimulus package" or a "consumer aid package" or whatever. In short, the people didn't buy it because Paulson didn't sell it right. Having not read the terms of the bailout and having a limited understanding of complex economics anyway, I can't say if that was the problem or not.