Economics 102

So this is the way the rise of the birks-strutting, semi-insta-famous, latte-sipping, avocado-obsessed millennial ends, not with a boomer, but with bat consumption and authoritarian whistleblower-silencing. Considering we’re teetering on the footsteps of a global recession, it seems fitting to write another all-things-economics article.

Recession

In Economics 101 we talked about GDP and when you officially fall into ‘recession’ territory. The economy needs to grow. It just does, trust me. Imagine if you will a dystopian society where every gap-year Euro-traveler absolutely needed to acquire a pair of unfashionable sandals. We call this dystopian society the Western world. Now imagine if in the Western world, there were 1,000 gap-year travelers keen to ‘find themselves’ in a Barcelona beach club in 2020. Birkenstock would order just enough materials to supply those 1,000 customers. If in 2021, there were 1,030 travelers in need of those sandals (a 3% increase in demand), those travelers would just have to go without. Well that’s just disastrous. Whatever would those extra travelers do if they had to wear respectable footwear on their holidays?

Let’s take it one step further. What if Birkenstock produces fewer than 1,000 pairs of sandals in 2021? The economy (if Birkenstock was the only active final producer of goods in the economy) would shrink. Why is this bad? As we demonstrated above, there would be a shortage of goods in demand in the market. Birkenstock may not need as many staff to manufacture and market its sandals. This increases unemployment. Birkenstock would also be ordering fewer resources from its supplier of materials – which as you can imagine, has a domino effect on unemployment.

Most countries have a net population increase every year. If the population is growing and GDP is falling, there is a doubly-harmful effect on unemployment. Unemployment then weighs on tax revenue. Not only are the unemployed not contributing positive net tax revenue to the government, they are also claiming welfare benefits from the government’s existing tax revenue. This means the government has less income to finance large infrastructure projects which means the government is employing fewer workers and the unemployment domino effect nightmare continues. See why I said just trust me? Are you happy? See what you’ve done? Recession is never a place you want to be.

Everyone is saying we’re in a recession. Everyone is wrong. A recession as we know is simply defined as two or more consecutive quarters of negative GDP growth (so 1,000 birks in Q1, 970 birks in Q2, 940 birks in Q3). This horrifying pandemic really didn’t kick into gear until last month. Therefore, by definition, we haven’t yet had two or more consecutive quarters of negative GDP growth, and therefore, we are not yet in a recession. Is a recession coming? Most probably. What exactly did you expect would happen after you banned all the people from buying all the smashed avo?

Depression

What is a depression and how does it differ to a recession? A depression is just a recession but longer (and usually harsher). You won’t know you’re in a depression until it’s come and gone, because you need extensive quarters of negative GDP growth (or multiple consecutive recessions) to realise a depression (and again, we don’t have nearly enough economic data to define a depression yet). It’s only ever happened once in all of financial history. So again, all those doomsday-sayers insisting we’re not only in a recession but in a depression, are also, technically, quite wrong. Even just predicting a depression is coming is negligent because there’s no way you can forecast that far ahead – especially when there’s so much uncertainty re vaccines, treatments, easing of social distancing restrictions and further government welfare measures.

What will a recovery look like?

You may have heard some economists use the terms “V-shaped recovery” or “U-shaped recovery” or most recently, even “W-shaped recovery”. What shape it will end up looking like nobody can say for sure, but here’s what they all mean:

  • “V-shaped recovery” – a V-shaped recovery means the economy suffers a sharp but short downturn and quickly reverts to normal or even higher levels of average GDP growth. In this context, a V-shaped recovery is most likely if a vaccine soon becomes available (something scientists are growing more skeptical of everyday).
  • “U-shaped recovery” – a U-shaped recovery means GDP growth continues to slow and unemployment continues to rise for an extended period of time and return to economic normality is a slower and more gradual process.
  • “W-shaped recovery” – just picture a V-shaped recovery (or if you’re really unfortunate a U-shaped recovery), twice.
  • “L-shaped recovery” – there’s one type of recovery that hasn’t been the subject of much media attention and that’s because we don’t talk about L-shaped recoveries, they’re terrifying. An L-shaped recovery is characterised as an economic downturn with no eventual return to normal levels of average GDP growth.

Hedging your risks during a recession

Certain industries are more at risk of downturn than others during a recession. When you’re short on discretionary funds or you’re managing just fine but you don’t know how long you have until you’re asked to step down from your job or are made redundant, you tend to preserve as much cash as you can. Manufacturers of luxury goods are often the first casualty. Services which provide ‘experiences’ such as tourism businesses (not that anyone’s travelling at the moment) or the live events industry (not that anyone’s going to concerts at the moment) follow. Here are a few things you can do to hedge your risks (these are just suggestions – not to be considered financial advice – see all of the disclaimers under Conditions of use):

  • Be an essential worker. Not all businesses are essential. Hospitals are essential. Supermarkets are essential. Birkenstock is not essential. Just like, you know, upend and radically shift all your career plans.
  • Understand that cash can be king. Cash is one of the worst assets you can hold unless… everything else is crashing. If the other, more riskier assets are losing value, holding cash isn’t the worst option.
  • Read up on short selling (as well as the terrifying risks). Some hedge fund managers have scored billions betting against the market.
  • Read up on companies you might want to invest in. You may have always thought about investing in certain companies but held back fearing they may be too expensive (we have after all had a fantastic bull run since the GFC). This pandemic has an expiry date. Have a think about your level of risk-aversion and where you think markets are going. If your risk profile allows it and certainty returns to the market and you’ve done your due diligence, you may be able to score shares in some quality companies at a discount.

Solution

Are we mismanaging this? Absolutely. Would I dare explain why? Absolutely not – for there is no greater shame than being dubbed a “Karen from Facebook”. Is there a solution which could quell public health concerns as well as economic concerns? Absolutely. Would I dare explain myself? Also absolutely not – because the solution involves disproportionately inconveniencing certain demographics in society. And well, who wants more intergenerational warfare?