Double Dip Phenomenon: Negative Growth

     Originally published in the CA and NV Examiner 10/15/2010 issue

     In my recent articles I have covered various current Administration’s policies that are anchored on the demand side, i.e.,  Keynesian oriented Obanomics. I have referred to various stimulus programs that are geared towards inspiring spending in the economy to subsequently give incentives to producers or manufacturers to increase their productivity. In turn, this should ultimately lead to positive economic growth. However, inspite of such programs, as in the Cash for Clunkers, and the like, the economy is achieving a very insignificant growth, at worse, maybe even negative growth. Some experts, especially on the side of the Administration, maintain that the U.S. economy is in a very slow but steady recovery. On the other hand, we cannot summarily dismiss the pessimists who are saying, which is not really surprising, that we are in for a negative growth or sometimes referred to as double dip.

     Why is there such an economic phenomenon as double dip or negative growth? Can we put it in proper perspective, against the backdrop of today’s economy, so that the layman and the readers of this column can understand why we are or could be in such a situation? I would like to give credit to Derek Thompson and Daniel Indiviglio, who helped me, through their research, put my points and ideas together.

      Okay, here goes my simplistic inference why we experience or will experience a negative growth, or double dip, in the economy. The explanation I am giving here is not really a cause and effect but merely an attempt to trace the roots of this phenomenon vis-à-vis today’s economy.

      Let’s start with the biggest concern of this Administration: The Housing Market.

     We all know that the housing market is plagued with weak sales.  The end result is a mounting real estate inventory. There’s just too much supply with a very weak demand. The immediate effect is for builders to shy away with construction of new homes since there’s a tremendous competition with home resale. New home prices are depressed thereby reducing construction jobs. Unemployment, lay-offs ensue and the sister industries directly and indirectly linked to housing are hardest hit. This domino effect will lead to more and more economic crisis, the most outstanding of which will be a soaring unemployment rate.

     Consequently, the decrease in home prices will make it even more difficult for the homeowners to sell their homes to avoid foreclosures and pan the market with more and more defaulting homeowners. The average American realizes that a lower home value effectively depletes the value of his wealth so he is encouraged to save more and spend less. The stock market goes down, the credit market tightens, and private investors and homeowners cut down spending. The resultant economic phenomenon joins us at this point. Growth in the economy turns negative.

     The residential market’s problems are indeed worsening. It will continue to become worse before it gets better. The foreclosures will continue as millions of homeowners have started defaulting or have already defaulted on their mortgages.  Even if we reach the point when foreclosures will start to decline, waves of defaults will follow as participants in the loan modification programs re-default, now at alarming rate of about 50%. Home and commercial real estate values will continue to decline as well as the assets that back them up. The banks who have big exposures to these toxic assets are in for another bout of losses. The investors who put in their money in these endeavors will start to question the stability of these banks. The stock market takes a dive and again the credit market is frozen. At this point again, the above economic phenomenon joins us. We experience negative growth in the economy.