Musings on getting out of recession

People are asking if the current concerted actions by the global financial authorities will work. They are forgetting to also ask what they are meant to be working for.

Current actions are to stop a complete meltdown of lending and hence the stopping the end of the capitalist economy as we know it. The actions are NOT to stop a recession per se. There will be, and probably is already, a global recession. (We won't know for certain because there is a lag in publishing of quarterly growth statistics).

So "How deep will the recession be?" is a better question.

Deep. Would be the most simple and obvious answer.

We are now living in a much more complex and interlinked global economy than was the case during the crash of 1987. And indeed the FTSE itself is a different beast as London has become more pre-eminent the FTSE is less of an indicator of the UK economy having, for example, many financial institutions and firms from primary industries as its constituents.

Despite that complexity I wouldn't mind betting that recovery will be linked to the valuations in the housing market. It's a safe bet that the UK and US housing markets have not yet bottomed out. Valuations in those markets were inflated by dodgy lending (hence the mess we are in - as we all know). However the bubble must fully deflate to more realistic levels of housing valuations and then be depressed further because of lack of demand being caused by recessionary factors in play at that time. Essentially when house affordability (measured by comparing average house prices and average household incomes) hits about 1998 levels, think about getting back onto the housing market roller coaster.

The US and USA will suffer most as we have made the silliest loans possible for silly people to take up. These economies will recover slower than other European markets and of course slower than Asian markets.