The schism between the old and the new in the economy was highlighted today as those who have been resisting the concept of an inevitable U.S. recession were forced into capitulation by the revision of 4th Quarter 2007 GDP, which showed a decline rather than a gain. Although the 2nd Quarter of ‘08 showed a gain of 1.9%, or $106B, this included government transfers of $145 B and defense expenditures of $29B. In other words, without these amounts GDP would have declined in Q2 this year as well.
Perhaps more importantly than whether we have satisfied the text-book definiton of a recession, we are entering a prolongued period of economic hardship characterized by continued housing declines, increased job losses and a slow-down in the Economy. As Greenspan stated today, we are nowhere near a bottom in housing prices, which has been the leading indicator of the downturn.
The continued weakness in the economy is the inevitable result of the excess liquidity of the early-2000’s and unfortunately this pain is inevitable.
However, I have recently been introduced to the economic concept of Creative Destruction which was popularized by economist Joseph Schumpeter.
Basically, the concept, as articulated previously by Hegel in more general conceptual terms, suggests that in order to create the future we must first negate the past. In Economic terms it means that sometimes in order for innovation to occur, we must first sometimes experience the destruction of old ways of doing things.
What we may be witnessing today is the failure of some of the more challenged parts of our economy as individuals are forced to make tough choices as they suffer the cut-backs required by a retrenchment in the amount of leverage in the system. As people’s incomes are squeezed, they are at the same time choosing to drive more fuel efficient cars, utilize more technological tools rather than paper products that consume trees and produce waste, and eat less unhealthy foods. As a result, companies that rely on the old way of doing things are suffering.
Even the SEC, the stodgy old guard of the federal government responsible for the regulation of publicly traded companies, today announced that Blogs can now serve as an outlet for public disclosure in certain cases. The innovation, which is a positive for social media ventures like Twitter and others, is discussed here:
This move, in the midst of another challenging day in the markets, suggest that progress, creativity and technological innovation will continue, no matter how dark the current environment becomes.
Unfortunately, there is more bad news on the horizon for home values, financial institutions, and the economy. However, if we keep this concept of creative destruction in mind, perhaps the silver lining becomes easier to see.