Amusing Ourselves in a Dawn of Recession

"How did you go bankrupt?"

Two ways. Gradually, then suddenly."

Ernest Hemingway

The Quotes come from Ernest Hemingway in his book The Sun Also Rises, and he describes bankruptcy as a slow process where small and mostly invisible problems gradually stack on top of each other until at some point it reaches a certain threshold where it instantly collapses. 

There is also a similar phenomenon in statistical physics called the tipping point, and it's a critical threshold where a small change in a system can trigger a significant and often irreversible shift in behavior or outcomes, and it may have some weight to be linked to the economy. Gualdi, Tarzia, Zamponi, and Bouchard (2014) found that there is also a tipping point in the economy. They found that in normal situations, a small change to interest rates does barely anything, yet when the economy is near this threshold, it can instantly cause system-wide unemployment to spike. A similar idea is also expressed by Mark Buchanan in his book Ubiquity: The Science of History, or Why the World is Simpler Than We Think. In the book, he described the 1987 stock market crash as a pile of sand. Every grain comes from the humans that participate, and each one of them can either cause a small, or if it falls in the wrong place and time, can cause a massive avalanche destroying the whole pile (Cornell, 2019).

So let's take the 2008 recession as an example again. On March 28, 2007, Ben Bernanke, Federal Reserve Chairman at that time, said he did not believe the U.S. economy was heading into a recession, stating explicitly that he saw "no recession on the horizon" (CBS, 2007). In December 2007, Ian Scott, from Lehman Brothers, a company that would collapse eight months later, said, "in a worstcase scenario of recession and falling corporate profits, the stock market would likely fall no more than 10% to 15% from thencurrent levels (Barrons, 2007). Rebecca Blank, a respectable economist who would later become Secretary of Commerce in the Obama administration, in March 2008, in the middle of the recession, wrote:  "If the economy's so bad, why is the unemployment rate so low?" If you read this at that time, of course, you would assume the best will happen, there will be no recession, and even if the worst comes to happen, it would not be as much different from before, yet that's not what really happened.

In September 2008, Lehman Brothers collapsed, an occurrence that got the blame for 2008 Recession because the before and after feels like night and day. In the same month, AIG, the biggest insurance company in the US, needed to be bailed out, and Washington Mutuals declared bankruptcy. The next month, Dow Jones and S&P 500 experienced a 20% decrease in valuation, the worst in history, and 240.000 jobs were shed, leading to 10% unemployment for that year. This shows how fast a situation can change by a single event.

Can We Survive Another Recession?

The biggest reason the U.S. can fully recovered from the financial crisis is mostly because of aggressive stimulus and bailout which easily cost them more than $1,2 Trillion USD (Lucas, 2019; CBO, 2015). With how the economics are currently, I cannot imagine the U.S. pulling this kind of fund again. The U.S. debt ratio is at an alarming rate of 124,3%  and the interest alone can eat up to 20% of US spending; they don't have more room to spend (CRFB, 2024). If the next recession hits, there is no guarantee the U.S. will leave as unscathed as before. Neil Howe in his book The Fourth Turning is Here, argues that the 2008 recession has not met its conclusion and its climax has yet to arrive. The next recession might be the hardest-hitting financial crisis for the current saeculum.

With this information, how do we need to react? We are heading to one of the most uncertain times in our history. When all the recession indicators are turning red, no person can guarantee you whether the economy will go up or turn the other way. Whether it happens or not, we can only prepare for our future. Spend less and try to save more, stop getting more debt, and if you have stable income, don't try risky ventures so even when it comes to the worst, we are fully prepared to withstand the impact.

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