Mind the dips

Flicking around business media on the weekend, one phrase kept being repeated – beware the double dip.

After I figured out that the pundits weren’t talking about the problems with running an ice-cream shop in the middle of winter, I soon learned that commentators are becoming increasingly anxious about the prospect of the United States entering a “double dip” recession.

The US recession officially ended last year and we even saw some small growth last year, but the incredible weak state of the housing market and the labour market suggest that growth is once again going to stall – which would obviously be terrible news for the global economy.

Whether it actually happens or not is probably beside the point, to some extent. While there would be a big psychological blow if the US was again to go into recession, the fact is their economy remains in terrible shape, and it’s hard to see it bouncing back any time soon.

As Alan Kohler put it brilliantly on the weekend, the US central bank has kept rates at basically zero for 18 months, it has printed $US2 trillion of new money and still unemployment remains just below 10%.

Kohler argues the long-term prospects look bad, as is among many tipping a long period of extremely low growth and deflation – the sort of conditions that have crippled Japan for the past decade.

It is certainly hard to see how the situation in the US will turn around.

I am currently reading Michael Lewis excellent book on the sub-prime crisis, called The Big Short, which explains the conditions (by which I mean tricks and deceptions) by which lenders, ratings agency and Wall Street turned home loans to very poor people into supposedly risk free, triple-A bonds.

While this storyline dominates the book, there is a worrying underlying message too – that Americans have been living on debt for generations and are now being forced to pay an awful price, living in a society where jobs are scarce, debt levels are high and things are generally pretty bleak.

What’s the message here for Australian entrepreneurs?

Well firstly, give thanks that you’re not in the US.

Secondly, realise that while Australia is coming out of the GFC very nicely, the long-term prospects for many parts of the world is mixed at best and vey worrying at worse.

If the United States is to face a long period of low growth, Australia will feel the effects of that, particularly on our sharemarket where sentiment remains closely connected to Wall Street.

It is for partly these reasons that the RBA will leave rates on hold tomorrow – these global problems make it hard to get a read on the local economy’s progress.

Unfortunately, that’s likely to be an on-going problem.