Green Shoots? – Don’t believe the hype!

Are the green shoots really fresh new growth or has the wilting of the plant merely slowed for a while?

US Federal Reserve Chairman Ben Bernanke coined the term “green shoots” in an interview in March and since then everything has indeed appeared (continuing with the gardening metaphor) to be getting rosier.

Job losses appear to be slowing in the US. Stock markets worldwide have made large gains. House prices in Australia after a dip are on the up again. Here in New Zealand ASB bank business weekly reports on 6 July 09 that“Although some parts of the economy will remain under pressure this year, the housing market – one of the first areas to slow back in 2007 – is on the road to recovery.” They also report that car registrations are on the up in June and both consumer and business confidence has also improved.

So have we turned the corner on the biggest recession since World War II or the Great Depression depending on who you read and believe?

Seems here on the street in New Zealandwhile we may be cutting back on extras and luxuries most people say,“What recession?” (At least as long as you’re not one of the 5% unemployed).

[Coincidently and somewhat bizarrely as I write this on a Monday evening I have just been interrupted by a cold call from a local Real Estate agent. She tells me that a house nearby had sold for $750,000 which was $50,000 above government valuation! Green shoots indeed! Everything is on the up again it seems.]

But where is this recovery coming from? Why do people suddenly have more money to spend?

Unemployment rates are still rising albeit more slowly in some countries like the USA. Production rates remain low. Factories in China and the like are idle and empty.

Here in New Zealand as almost everywhere, record low interest rates have been the precursor, leading most people to think now is a great time to borrow for a house. Government stimulus packages worldwide have also served to inject new money into the global economy. And the US, UK and Europe have been printing money to pay for bailout packages and the like.

But the question to ask is, if it is widely accepted that too much debt got the world in the current crisis, how will more debt get us out? How can the problem also be the solution?

Looking at it logically – If as a household my family’s expenses exceed my income and we can’t pay the interest bill on our mortgage, should I go and get a bigger mortgage and buy another house to stimulate growth within the family’s finances?

This example might sound absurd, but this is effectively what government responses have been. If this solution won’t work for my household, then why will this same solution work on a national and global level?

Using the above example could we perhaps compare the current green shoots in the global economy to the after effects of my family getting a bigger mortgage and having some extra cash to play with for a while, without making any other changes?

At some point the money will run out and the family will be in bigger trouble than before. So we run off for a bigger loan knowing full well we can’t afford to repay it, but the kids will look after it someday – won’t they?

Could it be that the global economy is at the moment just “spending the money from the second mortgage?” And so could more trouble be just around the corner?

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