How Bad Could the Economy Get?
pic by woodleywonderworks @ Flickr
To say that pessimism reigns in the market misses the mark.
Fear and panic is a better description.
Conventional theory states that cool heads prevail in periods of excessive fear, just as hot heads lose during stretches of irrational exuberance.
There are essentially four scenarios of how this economy will play out over the next few years. At least one of them will flout the conventional notion that bad economies are time to make money.
Recovery
Only a few people out there expect a recovery–in the classic sense–any time soon. Job creation show no sign of picking up. The apparent failure of the stimulus program to jump start the economy is also disheartening. Some economists believe this means the economy will sputter along for years. Smart investors can make money on the short swings that mark languishing economies.
Double-Dip
Another school of thought is based on the Great Depression, which was actually two sharp economic drops. There are those who suggest when current tax cuts expire, the economy will shrivel–again. For the astute investor, this is another shorting opportunity, followed by another buying opportunity.
Apocalypse
It’s true that you can make money in bull markets. You can actually make more money in bear markets. But investors who are putting their money in gold and other bear hedges may be surprised if there is a ultra-severe economic collapse, or bubble burst. No one will make any money. If we face a complete economic collapse, investors should be short on everything, long on guns, ammunition, and food supplies.
Exponential Growth
Finally, the economic troubles of the past few years could be merely masking an economic miracle. It may take a few years to play out, but technologically, progress has not just continued, but increased exponentially. Moore’s law continues. Researchers in fields, such as nanotechnology and medical technology, are creating amazing new results in the laboratory. If this research can make it to the market in time, technology could restart the economy and perhaps lead to a long boom.
Do you have any predictions? Do you believe one scenario is more likely? Let us know.
Related posts:
- What Are the Hidden Opportunities of a Down Economy?
- Why The Economy Will Crash (Again)
- A Volatile Economy is Great for Traders
- Recession Over… Or Just Beginning?
- Is your Financial Situation Controlled by the Economy?
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I'm George Ulmer. Matt and I started this blog and launched the Online Investing AI business. Our goal is to develop the technology to allow anyone to retire after working for 10 years.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
I am an eternal optimist and like how your article shows the potential upside of a down economy. When things are tough, I think people tend to get more creative, be it with how to spend their money or how to innovate something.
Me too, Katy.
I think there are always solutions.
What you’re talking about is also what economist Joseph Schumpeter referred to as “creative destruction.” This is a period of destruction that leads to new growth. It’s not just economic, it can be person, creative, etc.
Thanks for your comment.
We’re probably going to see something like the 1970s. Only this time it is less likely that new energy sources will come online at the end of the decade. The economy is heavily leveraged and needs to deleverage. One way of doing this is through inflation. Unfortunately, not only the nominal economy (the dollar denominated one) is leveraged, but the real economy (the one denominated in mineral resources and oil) is heavily leveraged as well. This will stagnate real growth. Without real growth a credit based monetary system can not exist. This means failing businesses and failing consumers which means that stocks and housing are not that safe. I don’t really have a good solution other than investing in real stuff—this will surely become popular again.
Thanks for the insight, Early Retirement Extreme.
Do you really believe that new energy sources won’t come online? I think some real possibilities exist in solar and battery technology.
I really still don’t understand all the facets of the economy. I know from my own perspective.
When the public schools dropped me as an independent contractor (teaching disabled children) I
immediately fell back onto antique dealing. I have little money. I am buying things at very low prices
and reselling at low prices. But if I had more money. I would be buying high end art and designer furniture
and keeping it til the market came back. I used to work in a Museum as an archivist and I am seeing very
high end art (worth thousands, sometimes tens of thousands) sell for a few hundred and a few thousand dollars.
Now is the time to buy, if you have money that is. The market will come back.
P.S. There will be no complete and utter crash. But I do think this is a long haul – 5 years at least. Ten years maybe. It is already has a legendary “depression” feel to it. Reminiscent of my grandmother’s stories. She survived. I know I can. But there is too much a miss for a quick recovery. Everyone who has gone to college owes $20,000 – $100,000 and has no way of paying it off. Most of the thirty and forty somethings who bought houses and condos are kicking themselves because they can’t pay it back. And when the economy does recover we will all be still in debt. This is actually worse than the Great Depression. Because at least thenif you lost everything it was done – now if you loose everthing you still owe everything! I and many many people I know are stuck so bad all we can do is laugh at the farce of scrapping together enough to live and pay bills. When the economy recovers unless I think of some very innovative solution I will still be in debt.
Hey Matthew–
Thanks for chiming in.
I believe smart people make money in good times or in bad.