I know fellow readers may think that I’m crazy to write such posting. In fact I believe that if you ask anyone on the street, no one will ever like recession & of course not any of them I know will support my statements.
However in economics, I truly believe that there are always 2 sides to everything. When oil price increased dramatically to USD $ 147 per barrel in July most if not all consumers & firms suffer. But there are some that benefits such as oil company like Exxon Mobil, Shell & Petronas. Smaller firms like natural gas tank installer benefits too.
When we talk about inflation, borrowers who are on fixed rate mortgages benefit too, but not the bankers. The money those lenders received actually worth lesser, given that inflation erodes its buying power. Here the redistribution of income is from lenders to borrowers
So who benefits anyway in the case of recession?
(1) Opposition party. This is the best opportunity by the opposition to topple the government. Excuses being used are often the government has mismanaged the economy causing high unemployment, prices of goods rising, increasing income inequality etc. This is also the period where voters have strong swing in their confidence towards the government, & more often than not they easily buy words & promises by oppositions
(2) Book authors. Those authors, usually an economist who wrote about credit crunch issue seems to be cheering about this. Book companies are very willing to sign contracts with these authors & personally I predict that in 2009 there will be mass of books all talking about sub-prime lending.
(3) Economics lecturer. Being an Economics teacher, my realm is pretty much to do with jargons like real GDP, monetary & fiscal policy, national debt, currency etc. But thanks to the recent subprime mortgage crisis, my finance vocabulary has improved a lot. Why? The issue arouse my curiosity to find out what really is CMO (Collateral Mortgage Obligation), credit default swap, how bonds are rated, annuity & many others. I believe other Economics lecturer would definitely agree with me on this
(4) Students taking economics. There is no other time better than now for students to learn Economics especially Macro. I got to realise that students love for Economics grew in the classroom recently. More questions were being raised regarding the financial meltdown even though I have finished teaching that topic. Part of it is because, they are able to see things they learn in textbooks such as unemployment, recession, real GDP, national debt etc appear in major newspaper. It arouse their curiosity too in wanting to know how to apply theories in real life
(5) First time property buyer. This is not really a significant event in Malaysia. But in UK, some area had witnessed prices of property fell to more than 15%. Arguably this is the best time to hook on the property ladder, especially young for young working people. However one could also argue that this is valid provided they are able to secure loan from banks, which now seems to be much frugal in lending
(6) Stock investors. Many stocks had fallen to an unprecendented level & their PE (price to earnings) Ratio has gone down a lot. Last week, the world’s richest investor Warren Buffett said in major newspaper that this is the best time for bargain hunting. I still recall his famous quote- “ Be greedy when others are fearful, and be fearful when others are greedy”. From investment point of view, it is always the best period to invest when prices of stocks had fallen to record low so that you can dispose it off with a much higher price later & reap those profit. Anyway, I’m looking to jump into my unit trust investment. Yes, I had make lots of losses but I feel that by jumping in now, I’m able to lower down my cost of investment & hopefully I can breakeven faster. This strategy is called dollar cost averaging
(7) Hypermarket. In the period of recession, many poor people on the street turn poorer. Income is falling everywhere. There will be fall in numbers of retail sales & those who shop along high streets. Most if not all will likely turn to the most famous household name, Tesco for household goods & other appliances. There will be an increase in its profit, so long as it does not engage in aggressive & damaging price competition at the moment. Others such as Carrefour & Giant will benefit too. In UK, other household brands are like ASDA (owned by Walmart), Sainburys & Morrisons
(8) Manufacturer of inferior goods. Inferior goods are those goods with negative income elasticity of demand (YED lower than 1). In layman, it means if one’s income increases, he will consume lesser of that good. Of course it works vice versa. Here it’s actually kind of difficult to distinguish inferior goods as it may differ from an individual to another. For me, instant noodles, Tesco brand bread, biscuits in tins are considered as inferiors. But I believe I’ll be consuming that a lot (I just bought 5 packs of instant noodles, & I didn’t realise the economic rationals of doing so until I write about this)
(9) The Economist. This really gets on my nerves. I normally went to Borders a day or two after the arrival of weekly magazine The Economist, & I can still see those magazines on the shelves. But in the recent 2 weeks, I failed to get a copy of it. This is an evidence of how the America meltdown actually helps to advertise The Economist, although in a very indirect way causing an increase in its demand even though the price has not changed (Remember in Unit 1 where I mentioned price constant, only demand curve shifts rightward? The same principle applies here)