Feb 23, 2009

The Great Recession

Last week, Billionaire investor George Soros said the the world financial system has effectively disintegrated and the resulting turbulence is actually more severe than during the Great Depression, then compared the current situation to the demise of the Soviet Union. Donald Trump said we are in a depression earlier this month.

Scary opinions coming from two very successful and influential global business leaders. But before you get too freaked out, consider that the US Gross Domestic Product fell 46% between 1929 and 1933. The current recession has seen it fall 3.86%. Unemployment reached a high of 24.9% in 1933, right now we sit at 7.6%. The stock market fell 86.7% during the Great Depression and took over 25 years to break even. Today stocks closed at their lowest point since 1997, down 49.8% from October 2006 and more consistent with the recessions of 1973-74 and 2000-03 (48.2% and 49.2% respectively).

While the current economic situation is certainly severe and likely to recover anemically next year, to say we are in a depression is nothing more than hyperbole, lack of perspective, and panic. We are not even close to the turmoil of the 1930s, and data indicates we are not going to come even close.

Yet consumer fear continues to hold the recovery back. Consumers have lost faith in business executives so they turn to politicians, only to hear Obama constantly suggest, "If the stimulus doesn't work, there's more to come," which further destroys confidence. The broken record rhetoric encourages investors and consumers to hold off, to see if a better deal materializes down the road. Even Bill Clinton says Obama has been too negative and needs to change his tone.

Results from a poll released this morning by CNN show what is really at the heart of this economic downturn. 73% of Americans say they're very or somewhat scared about the way things are going in the United States, six points higher than in an October 2008 poll. Nearly eight in 10 say things are going badly in the country, with just 21 percent suggesting that things are going well. The survey also says that three out of four Americans are angry about the way things are going in the country.

But three out of four questioned say that things are going well for them personally.

A Keynesian "paradox of thrift" mentality is settling in. Paradox of thrift is an economic theory which simply states that when everyone saves more money during times of recession, aggregate demand falls and in turn lowers total savings in the population because of the decrease in consumption and economic growth.

Consider a leaky bucket. A hole in a bucket, representing savings, is made a little larger, corresponding to people becoming more thrifty. Initially there will be a larger flow of water out. But this cannot continue indefinitely. Equilibrium exists when the inflow equals the outflow, and the inflow has not changed. This means that the water level must drop so that the pressure forcing water out the bottom will be reduced. Less pressure means less outflow, and at some lower level of water equilibrium will be reestablished.

Three-fourths of Americans think things are going well for them, meaning that economic turmoil does not exist as much in actuality as much as it does rather in the perceptions of the surrounding economy. Consumers fear that it is a dark, stormy sky outside and that the bad weather somewhere else in the country may eventually come to affect them. That's why so many say they are angry and scared, even though they're content with their own personal circumstances.

This mindset is totally understandable. Even last week I was too scared to buy tickets to Disney World for my family for these same reasons until I realized the mindset that was causing me to be hesitant. It is a mindset that is becoming deeply entrenched, reinforced by constant negativity from the leaders who ought to provide optimism and perspective. The paradox of thrift mentality is having an unintended consequence in delaying a recovery and prolonging and making the overall situation worse than it really is.

Marketers have to be bold, both for their own survival and for the good of the economy, and unapologetic in their encouragement of commerce and consumer spending. Constantly slashing prices and offering insane deals only causes a consumer to sit back and wait for a getter offer they know is inevitable.

Despite assertions to the contrary, consumers have not lost their appetite for spending. They still have their money and are willing to spend. They are resilient. They want to participate in the marketplace. But right now they need reassurance and encouragement. And this is what marketers must do.

Get to work, it's not raining as bad outside as you think it is.