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Is recession really here?
02-21-2009, 01:23 AM
Post: #1
Is recession really here?
Hi to all

Just to start a topic for discussion, I am throwing this question to all of you, which is not actually my question but was asked on another discussion forum for accounting professionals by a designated accountant. She, very innocently, said that she does not see any difference. She said, people have same long queues in grocery stores, patrol pumps, shoping plazas, same rush on roads and everywhere. She waits for the same time to buy her Sunday brunch in her local bakery. Yes, she knew that people are losing jobs, but as per statement, it happens all the time and everywhere. So, in the end, what is the difference, where is the recession? She could not see symptoms or the effects.

In response, some people said that accountants are very stereotyped, number crunchers, do care for their own bank accounts only, and are not trained to see big picture.

Lets see, how people observe recession. All inputs are welcome.

Regards
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02-21-2009, 08:37 PM
Post: #2
 
A short response for now

Well, its official here in the UK, two quarters of negative growth. What I can see out right apart from contraction in the economy is
-Low/minimal number of Mortgages being taken out, at a minimum of 25% deposit (compared to 100% a year ago)
-Burst of the property bubble
-Mass retrenchments across industries
-Consumer hold out on big ticket spending such as vehicles, property, foreign holidays etc.

The hustle and bustle out in the Malls and on high street is per my understanding
-Purchase of low ticket items of every day use
-people moving from high worth brand items to cheap brands (you can buy a jumper for 60 pounds (mid range UK brand) to 5 pounds (Cheap UK brand)
-more people are going out window shopping and buying less (as they are not spending on other leisure activities and have to while away time anyways)
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02-22-2009, 01:46 AM
Post: #3
 
Dears,

Certainly the lady who posted th query would be innocent, as mentioned. We cannot stop eating, wearing, studying, travelling, learning, marrying, births, deaths, worships etc and all other things which are crucial and have to be done irrespective of whatever crises we may have in our economy. However, quality may go to some lower level and whenever there is some crises such fall of quality could be evidenced in everything.

Further, the crises does not affect every one and does not affect every one with same strength or fashion. It may have different qualitative or quantitative impacts on different people. This is a very long debate and the one who can see a big picture can deduce the meanings.

I, however, wonder why the crises was not visible to the lady. Is there a need to tell where this crises is, how it has affected the world and people, and what has changed after the crises.

If we say that what happens when a plane crashes and some 2 or 3 hundred people die or a bomb explode and 50 or 100 people die. All the world remain same. People woke up, take bath, go to office, work all the day and come back in their routine. What happens if some one's father dies. He does not stop sleeping, eating, bathing, having hair cuts, and what not and what not. He does not gets changed.

So there is a lot to think and concentrate about. This is not very simple and merely the rush of people in resturants or malls and offices cannot conclude that whether or not there is some crises.

I was however been questioned by a cousin, that people say there is a liquidity/financial crunch, why it is so? The issued number of currency notes in the whole world and within an economy like Pakistan are same, then where this liquidity crunch has come from. Even if people have made deposits with banks and don't invest in projects or securities, there should be no deficiency of currency notes and they will remain same. The currency notes can move from one hand to the other but are not fired out or destroyed or burried. Then wherefrom this liquidity crunch has come.

I tried to answer my cousin. However I will appreciate if the forum members also throw light on his views.


Regards,


KAMRAN.
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02-22-2009, 04:16 AM
Post: #4
 
Dear Participants

I think, we are going to have a good discussion here, and I agree with views of you people.

As a quick response and to enhance discussion, I am copy/pasting my reply here which I did there. This post was written in mid Oct, 08. Some points are time related. Please see my comments;

"Dear Friends

I am shocked to read if learned people cannot see the effects of recession. Most of the people on this thread seeing it at micro and individual level and trying to perceive big picture. First of all, its a tip of an iceberg at this stage. I hope it would be controlled that seems a hard task at this stage.

Recession is a MACRO level phenomena, but its impact is micro level. People have used monthly unemployment rates, but probably don't know impact of every percentage point change multiplied with more than 250 Million US population and on yearly basis. See how many additional total number of people would be unemplyed in next lets say two years by the time economy comes out of recession. Don't we know the effect of being unemployed? Overall consumption and spending level of the whole nation would go down in this period, which means more closure of factories and businesses, more unemployment, more miseries, more losing assets which we already had under normal conditions, less growth (GDP and GNP), worse effect on exports and imports, thus bad impact on foreign trade and spending. My friends, don't forget the size (which is top in world) of US economy and its linkages with foreign economies, thus, its overall impact on World economy and on world macro economic indicators.

We should have understanding of basic Macro economics equation of C + I + (X-M) + G. I would also recommend to read macro economic theory for cycles and recessions and their impacts, also read about the great depression and its horrible effects on public. Economists today are saying probably it is the largest recession since 1929/30's great depression.

http//en.wikipedia.org/wiki/Great_Depression

http//en.wikipedia.org/wiki/Recession

With little knowledge of economics, I would say it is a time for prayers.

Regards"

As far as liquidity crunch is concerned, it is another very interesting topic, about which I would try to provide my views soon.

Regards
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02-22-2009, 03:19 PM
Post: #5
 
Dear Participants

Both the recession and liquidity crunch, at present, have their roots in failure of mortgage companies in USA and fall of big banks. Unwise lending by mortgage companies triggered the two. Basically Federal Reserve (the Central Bank of USA) had a very loose monetary policy i.e. providing loans at very low rates, which increased money supply in the economy. All commercial banks on the globe get loans from their Central Banks at overnight rates, LIBOR, or 90 days T Bill rates, which are basically short-term loans, and lend this money at higher rate for long-term purposes. Spread between the two is their profit after deducting transaction costs. Later, Federal Reserve increased this short-term rate to adopt tight monetary policy, i.e. to contract money supply in the economy. One of the possible reasons was to make interest rates in the economy more reasonable so unproductive activities (like speculation, unnecessary spending by getting easy loans at lower rates, unnecessary investments in housing market etc.) would be curtailed. With the increase in short-term rates, the spread between long and short term rates became minimal, in results, commercial banks were less interested in lending at probably negative profits, i.e. after deducting transaction cost and bearing all risks it was no more attractive for commercial banks to lend. Another reason is, all commercial banks give short-term loans to each other from their excess liquidity. Since the fall of big banks, the commercial banks have become restrictive in lending to each other and holding money with them. Therefore, even for genuine investors, it has become more difficult to have bank loans for their projects at lower rates. This phenomena is called credit or liquidity crunch.

State Bank of Pakistan had to follow the path of almost all other Central Banks on the globe. But now the situation is very complex. At one side we have hyper-inflation due to loose money supply in the economy, unwise spending of successive Govt’s, influx of billions of $$$ after 9/11 and war on terror etc. If SBP increases interest rates (at which it lends to commercial banks and for export financing etc.), it would have negative impact on already low productivity in Pakistan. On the other side, to increase productivity, to combat with effects of US recession, and to improve liquidity position of commercial banks so they can increase lending to investors, if SBP lowers interest rates, thus increases money supply, then probable result would be more inflation. In my view, it is a quite complex situation for economy like Pakistan.

One of our major problems is we have short supply of quality experts at home including good economists and we don’t let them work independently i.e. without influences/pressures. When we have any personal sickness we go to doctor and do whatever he says, but when it comes to economy, we don’t pay attention to economists and do whatever is good for us personally no matter if it is bad for masses.

Regards
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02-22-2009, 03:53 PM
Post: #6
 
Dears

One more thing, it is not the matter of available currency notes in a specific country or on the globe. It is not that simple. In a point of time, keeping other things constant, number of currency notes remain same. We all know that we get loans from banks at some rate. Banks gets loans from other banks and the Central Bank i.e. SBP. This interest rate plays a very pivotal role in modern days economies. To affect various parameters of economy, each Central Bank expands and contracts money supply in the economy through changes in interest rates. Other methods are open market operation (i.e. Central Bank sells and purchase bonds and securities with financial institutions to increase or decrease money supply), required reserve ratio (i.e. each commercial bank has to keep certain percentage of its deposits with Central Bank, so commercial bank cannot lend to borrowers from this reserve. By changing %age of this reserve ratio, Central Bank affects money supply) etc.

We all know if interest rate very low lets say 1%, burden of loan would be minimal and we can get more loan. As compared to this, if the interest rate is lets say 20% then we would have less loan because burden is huge.

So supply of currency notes remain their, but it is related to interest rate at which the banks would lend.

The whole modern economics revolves arround fluctuations in interest rates.

I hope it helps.

Regards
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02-23-2009, 07:17 PM
Post: #7
 
Dear All,

First of all I want to make it clear that the issues of recession and inflation are the matters which lie under economics. I am agree that accountants, specially Pakistani accountants, don’t see big picture. The professional accountants who express their views regarding economics issues mostly hold master degree in economics for instance Dr.Khawaja Amjad Saeed.

Now I come at the question I have heard above mentioned sentences from many shop keeper and vegetable sellers whose education is negligible .Some years ago when the inflation was increasing day by day some people were saying that it is not influencing the life style of people in the proof of their comments they gave the examples like that market are full with people, people are purchasing luxurious items and similar comments. But at the beginning of the current fiscal year purchasing power of Pakistanis began to falling later on the world economic crunch worked as oil on fire. Now the purchasing power is falling very speedily.

Some people may say innocently that there is no recession or inflation because markets are full of people and people purchasing expensive items. But you cannot determine results only visiting markets. You should must aware from whole picture and whole picture cannot be seen without statistical data.


Here I want to quote a remarks of an a Statistician


“One who wants to determine results about any social science without statistics is like a blind man who is searching in a dark room a black cat when cat is also not in the room”

Regards,

Awais
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02-23-2009, 08:39 PM
Post: #8
 
Dears,

Certainly the people in markets or hospitals or shopping malls cannot depict whether or not a recession has hit the economy. Like-wise number of currency notes don't count when we see liquidity crunch because it depends upon inflation, interest rates, prices and other factors of money regularization by central banks as per monetary and fiscal policies.

The value of money coupled with macro aspects of infrastructrural and other developments, interest rates, loans which a nation owes, and nature/extent of expenditures and potential expenditures have bearings to liquidity and financial situations.

The world-wide ficticious property and stocks boom was a game played by stakeholders which was outrightly expected to produce such a bigbang. I was waiting for it even at micro level since the year 2005.

Further, when writer will summerize the history, he will definitely affix major part of responsibility of such crises on the shoulders of the so-called "war on terror" which has directly or indirectly surrounded more than one third of the globe almost.

Be it the issue of banks or mortgage companies or whatever, the war on terror and insane / lustful acts of America, Israel and western countries have all their contribution to the situation world is facing at the moment.

Let's see what ideas come from other members of the forum.

Regards,


KAMRAN.
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02-24-2009, 12:37 AM
Post: #9
 
Dear awaisaftab

I just wanna clarify couple of things here. The accountant I mentioned in my first post is located in USA and not a Pakistani accountant. I believe Pakistani accountants are doing a good job in given circumstances in Pakistan.

Yes, generally speaking, accountants do not see a big picture. However, in my view, it is a matter of understanding of economic events. It is not related to who has masters in economics or who has not. You better know that many graduates of economics do not have in-depth understanding of the subject matter and pass it just with rote memorization. Similarly, not all accountants are equal in their abilities. Moreover, blaming each other would limit healthy discussion.

From analysis point of view, recession and inflation are two different phenomena, though their back strings are linked. To enhance discussion on various different topics related to economics, we may start a new thread dedicated to inflation that would help readers in future too from reference/discussion point of view.

Just my two cents...

Regards
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02-24-2009, 04:25 PM
Post: #10
 
Thanking you for correcting me.

Regards


Awais
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03-01-2009, 08:44 PM
Post: #11
 
Dear Members,

From Wikipedia, the free encyclopedia

In economics, the term recession generally describes the reduction of a country's gross domestic product (GDP) for at least two quarters.[1][2] The usual dictionary definition is "a period of reduced economic activity", a business cycle contraction.[3][4]

The United States-based National Bureau of Economic Research (NBER) defines economic recession as "a significant decline in [the] economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales."[5].

Outlook Gulf

For 2009 George Abed, Senior Advisor to the Managing Director of the Institute of International Finance (IIF). Abed's figures showed the overall GDP growth is projected at about 1.2 per cent in Saudi Arabia, 2.3 per cent in the UAE, 1.2 per cent in Kuwait, nine per cent in Qatar, and nearly five per cent in Oman and Bahrain. In 2008, nominal GDP jumped by nearly 30 per cent to smash through the $1-trillion mark for the first time mainly because of higher crude output, a sharp rise in oil prices and increased investments, Abed said.

(http//www.gowealthy.com/gowealthy/wcms/en/home/news/economy/UAE-GDP-1231052789771.html)



The UAE economy is poised to grow at a rate of around 6 per cent in 2009, reported Dubai-based daily Business 24-7. The robust performance by the country's non-oil sector will help the region withstand the global credit crunch.
Figures released by investment bank Morgan Stanley show that the UAE's gross domestic product has grown at about 9 per cent annually since 2003, while GDP per capita stood at approximately AED210,000, up 130 per cent since 2003.
(http//www.thebriefonline.com/show/uae-gdp-to-grow-in-2009)

Outlook China

BEIJING, Feb 27 (APP) China was confident of achieving its 8 percent gross domestic product (GDP) growth target for 2009, Vice Minister of the National Development and Reform Commission Liu Tienan, told a press conference Friday.
(http//www.app.com.pk/en_/index.php?option=com_content&task=view&id=69442&Itemid=2)

Outlook Pakistan
LAHORE (March 01, 2009) Former finance minister, Dr Salman Shah, has said that this year Pakistan's GDP growth is expected to be less than 2 percent, lowest in 10 years, as irrationally high interest rates and tight monetary policy of the State Bank of Pakistan was holding back the growth.

(http//www.brecorder.com/index.php?currCSS=brecorder.css&currDate=2009-03-01&currMIndex=00&currSIndex=Top%20Stories&currNIndex=&currPageNo=4&query=&search=&term=&supDate=)
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03-08-2009, 01:46 PM
Post: #12
 
We are officially in recession, globally. The question is when will we go into depression. Job market is 25-year low. All the ingredients of recession are there. Shrinking economy size, rising unemployment, excessive money supply, defaulting mortgages. What's making worse worst is government intervention by buying out all the toxic assets. Citigroup's stock has already become penny stock. Don't forget we are talking about biggest commercial bank in the world. 40% of it will be nationalized. This is a vicious circle fed by greed and irresponsible gambling with investors' money. US is giving a support to falling banks but so far first stimulus plan hasn't had desired effects. Fed have cut rates to historically low levels. If all this isn't working so the big question is what will work? Obviously, there is something big coming. Also note that the mortgage default rate we have seen so far was just for residential properties, the second leg of mortgage failures is yet to come. Commercial properties haven't adjusted for their values so far. Business closure rate is rapidly rising. How much can a government print to bail out every single home or business? Not many probably. The big question is if nothing is working that what will? Govt. stresses there is an ever more need for regulation of markets but where were all these analysts when Bernie Madoff was giving people more than normal returns on investments. Hedge funds to this date have no regulation. Despite all this companies' CEOs are enjoying same perks and bonuses. If you don't know the biggest investor in US and the richest person maybe until few months back, Warren Buffet is $30 billion down. He blames it on his investment mistakes. Alan Greenspan has admitted to mistakes in formulating economic policies. What does all this suggest? It shows that when times were good everybody was reaping benefits of high returns, in bad times no one knows what to do. Why has Kuwait decided to hold basket of currencies? Some of my comments might have been what you see on TV everyday but the big question is where were all these hot shots when the bubble was forming with fundamentals being out of sight. Most of the wealth we saw evaporated was of retirees, old people.
I read all thats said above about money supply, fed fund rates etc. I think Fed shouldve tightened money supply when bubble was forming not now when its burst. Now even low rates can't help much. Consumer based growth is suffering because people are saving more and spending less. Businesses are closing due to no buyer of their products in market. If they try to get a loan or something there is no bank that can loan them any money. There is a run on the bank. Everybody wants to get out of stock market, bond market and any such thing. There is massive sell off in stock market but no buyer. Speculators have dried up people's saving after getting in and out of different sectors. If you see the pattern, first it was stock market(remember dot come bubble?), then it was housing market, now it is commodity market(remember the oil prices hitting 140 a barrel?) or simply look at grain prices. There is no increase in demand in grain in the world, how can there be in simply two years span? These highly leveraged bets can devastate economies.
TORONTOBOY, currency notes circulation can definitely increase if central bank becomes a printing press. This is exactly what is happening around the globe, there are too many notes chasing too few goods. If notes had remained the same and especially floating rate currency notes, there wouldn't be any hyper inflation in third world countries but another factor is that dollar is dominant currency in the world. Brettonwood agreement was about supporting one currency if other declines, but the question is how long can one currency support other? Can a country perpetually support other currency ignoring it's effects on its own economy?
Regarding employment, is there anything that's creating jobs? None. zip.Nothing. There is 1 out of 4 people unemployed in US at the moment. Where is govt. going to get tax from?
Now in nutshell, this disaster was bound to happen due to overspending by people. I saw people in Pakistan financing cars like they had no problem paying for them. Same is the case in US, you could easily get a 400K house without sufficient income. The thing is all that wealth has evaporated, speculators have played the same game they did back in 90s during Malaysian/Indonesian credit crisis.
I don't think it's the economists that could do anything, it's the lack of transparency and corruption of epic proportions. But that can't be blamed due to rising poverty in Pakistan.
What we should note is why have all these economic theories failed? What is so wrong that can't be fixed? Why were these corporations made so big that they caused global recession?
These are just my views based on my own findings Please don't take these as an advice or any predictability of future events.
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03-08-2009, 05:13 PM
Post: #13
 
I see I steered away from topic. Should have stick to RECESSION. Every time this topic comes up I get all fired up.
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12-22-2009, 02:11 AM
Post: #14
 
Hi Everybody,

Toronto Boy ignited a superb dialogue and others subscribed valuable inputs. I also want to contribute my views which may be argued. First I would like to articulate about that lady’s views. I second Kamran who very appropriately said that recession does not impinge on everyone uniformly. In small economies like Pakistan which is proscribed by a few hundred people and has less than 1% share in the world economy, recession is just a word, which most people don’t experience. But in countries like US, Japan, China, Canada, Italy, individuals and businesses experience the severance of the recession. May be this lady is from Pakistan where a strong parallel economy exists.

A subterranean understanding of business cycle will help us analyze the situation. If we trace economic history, world economy has to encounter a recession every 10 to 12 years and in rare cases even a depression. Black Tuesday of 1929 is citing of great depression which Americans still commemorate on the third Friday of November every year as Black Friday. Declining GDP rate, employment, business profits, household disposable income, propensity to consume, capacity utilization, inflation etc force businesses and individuals to file bankruptcies or hoard their funds. Recession is not a situation where too much money follows too few goods. This is a situation in inflation. In US and Canada prices have dropped by 30% to 40% and yet people are spending much lesser than the amount they usually spend (Statistics Canada 2009). Recession is a very complex issue, so please don’t take one-dimensional view.

Although Toronto Boy has already discussed the credit crunch in much detail but I want to take an additional position on the issue. Aggressive and imprudent lending practices by mortgage companies and financial institutions caused the recession of 2008. These companies lent money in the form of lines of credits, credit cards and particularly in house mortgage without verifying customers’ solvency. And most importantly aggressive financial management behavior of the consumers is the major source. A slight increase in interest rates made these customers unable to pay off their mortgages. One point base increase in interest in US cost $32 to each person on average. This ignited the “Credit Crunch”. Houses were available for sell for $1.00 in the US. In my opinion, in countries other US, particularly in Europe and Japan, it was a trickledown effect of direct investments in US mortgage companies and financial institutions. Weak US dollar made the situation even worse which caused the capital to park in commodity markets. Investors started hedging in oil and oil prices soaked from $54.00 a barrel to $125.00. That caused another hard hit to world economy. These days, investors and Governments are parking their capital into gold. The gold prices have hyped from $830.00/Oz to $1234.00/Oz. In Canada, recession hit auto-manufacturing sector tough because its 80% exports are to US. Whereas the financial sector in Canada was not impacted as dreadful. Most companies in Canada are taking advantage of this recession. If you see the financials of the most Canadian companies, you would notices that they are writing off their intangibles and substantiating their financials. They are also laying off expensive employees. So the causes of recession in different countries are dissimilar.

The US and other Governments are following the same footprints of 1930. They extended bailouts to the financial sector, stimulus packages for house construction and renovation; lower the interest rates, increase in government spending in public sector particularly in infrastructure etc. The economists are focusing on easy access to finance by lowering the interest rates. In most cases interest rates in US$ and Canada are Minus prime, mortgage rates are about prime plus .75% based on credit history of the individual. That is the reason that housing sector in both the countries showing positive results in last two quarters. Government spending and interest rates are of pivotal role in re-shaping the economy. In my opinion the future is not as terrible as some of us are envisaging. Most economists, CEOs & CFOs are in the opinion of that the recession will be over by the third quarter of 2010 (A Survey conducted by Robert Half).

Wish all the best for everyone.
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12-22-2009, 04:00 AM
Post: #15
 
Dear maqszaman

Very unfortunately, that lady was from USA and a designated accountant there. So, her location and qualification both caused much frustration among participants.

Secondly, you would observe that when this discussion was initiated, world economies specially of USA was in sharp declining trend, so the economist projected bleak future at that time. However, as a result of actions taken by biggest economies arround the world, I think we have crossed the trough of business cycle and just changing trend from -ve toward +ve or going to start recovery. In fact, last quarter of 2009 has shown +ve signs.

Lets hope for the best.

Regards
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