No new socks for Christmas

I am often asked about what I feel is in store for us in 2009. Everyone it seems has some concern because of what we have been reading about the global financial crisis. Pulse Asia documented in its most recent survey this feeling of foreboding among our people despite assurances by government that we are somewhat insulated from the turmoil. A large majority of respondents said they think 2009 “will be disastrous for more Filipino families.”

Looking at the Christmas shopping crowd the past two weeks, a balikbayan from America will probably be amazed. There seems to be no recession being felt in Metro Manila. Crowds of shoppers are eagerly spending money and I suspect that after the season is over, the malls will report another good year that surpassed last year’s record sales.

Maybe it is the OFW money that is powering all the holiday buying. Or maybe it is just the nature of Pinoys… we are among the happiest people in the world and we are not about to let a recession spoil our holiday season.

Then again too, outside of our elites who were invested in failed financial institutions in Wall Street, the financial crisis is only something we read or hear about. Because there are relatively few among us who are invested in the stock market, it hardly matters that the stock market is going nowhere encouraging.

The economic analysts and pundits seem to agree that we should be prepared for the economic tsunami that will finally hit our shores next year. European, American and Middle Eastern countries may no longer have the usual capacity to absorb our workers and may even send home not just a few thousand of them. Maybe, next year we can’t expect OFW remittances to keep the good times rolling.

Our exports are not doing well. The BPO business may stall a bit. And the army of unemployed may swell more than usual. But if Art Yap is to be believed, he told me last Tuesday that there will be no rice crisis in 2009. There will be enough supply of rice, he said, but he couldn’t predict the price level. If our government miraculously performs its pump priming well enough to be as non partisan as possible, the misery index of the masa may not rise dangerously.

But going back to the question of what to expect next year, it is really anybody’s guess. Even the most learned economists are at this time, only speculating based on past experiences with such downturns. The trouble is, we are also told that we are in uncharted waters, that we are in the midst of a historic downturn and anything can happen. The past cannot be a very good guide on what to expect.

Nobel prize winning economist Paul Krugman says we have returned to the era of depression economics but not because we are in a depression or soon to be in one. “The world economy is not in depression,” he wrote in his latest book, “it probably won’t fall into depression, despite the magnitude of the current crisis.” But even Krugman parenthetically says he wishes he was completely sure about that.

Krugman emphasizes that even if “depression itself has not returned, depression economics — the kinds of problems that characterize much of the world economy in the 1930s but have not been seen since — has staged a stunning comeback.” He wrote that 15 years ago, it was inconceivable to think that major advanced nations would find themselves persistently unable to generate enough spending to keep their workers and factories employed.

The world, he said, has become a much more dangerous place. I guess the specter of Japan’s lost decade spent in crushing deflation is at the back of the minds of economists and policymakers. During those years not too long ago, there was nothing the Japanese central bank or government could do to fire up the domestic economy. When the US Federal Reserve brought down interest rate to practically zero last week, the specter of Japan’s lost decade loomed even larger as in a déjà vu moment.

Already by nature thrifty, the ordinary Japanese who was fearful of the economy’s future, simply intensified squirreling away whatever cash came his way under his tatami mat. The more yen pump primed into the economy, the more yen ended up safely tucked in household savings. Without enough Japanese spending to kick start the economy, a traditional virtue became an unaffordable vice for the Japanese economy.

I came across an attempt of Slate.com’s “Underground Economist” to answer that question of what’s in store in our future. “Right about now,” Tim Harford wrote, “most businesses are trying to work out how their customers are likely to respond to the recession.” The best they could do is look back. He however thinks “all this speculation is an engaging diversion, but it tells us little.”

And here’s why. “Looking back to the last really nasty recession—the early 1980s—isn’t much help for low-cost airlines, cell-phone companies, Internet retailers, producers of organic and fair-trade food, and many other businesses barely imagined at the dawn of the Reagan era. The economy has simply changed too much since then for experience to be a reliable guide.”

The difficulty, he points out, is that it is difficult for anyone now to guess how people would behave when faced with today’s depressing business news. Will people hold back spending on luxuries such as travel because of all the uncertainty? Not necessarily. “A travel industry expert told me that the worse things get, the more people feel in need of a vacation. Perhaps he is right. I would not bet on it.”

He tells us that economic theory may give us a clue on consumer behavior: “Consumers should cut back their spending if they believe that their earning power will fall for an extended period of time, but if they believe the hard times are temporary—say, a short period out of work—then they should ‘smooth’ by borrowing in hard times and paying back when things pick up. Because of smoothing, consumption should not shrink as much as the economy does.”

But reassuring as that may sound, he also points out that this approach may not be possible. “This is the wrong sort of recession: Because it was precipitated by a banking crisis, consumption may well fall much more dramatically… Consumers who want to smooth consumption can’t borrow to do so.”

The second piece of bad news is related to that. “Because consumers were already borrowing heavily in the good times, both credit constraints and a long-overdue realism are likely to bite all the more deeply.”

Worried retailers may perhaps, he said, look for cues from research from the 1990s in an article by economists Martin Browning and Thomas Crossley called “Shocks, Stocks, and Socks.” They found out that “when people are unemployed, they save money in a logical way by not buying “small durables” such as socks and, indeed, clothes in general. In the short term, people get by and save about 15 percent of their household budget. When they find a new job, they replace the tired old socks. Bad news for Gold Toe, good news for sellers of needles and thread.”

That’s a good tip for all you last minute shoppers wondering what gifts to buy. Buy something people will probably not buy for themselves: a good pair of socks that could last for the entire year.

As for retailers… stay with the recession proof essentials like basic food. Stay away from socks and clothes in general for next year. That’s as good an advice as anyone can give at this point outside of praying for the best.

Jay Leno joke

Barack Obama says one of his top priorities once he becomes president is closing down Guantanamo Bay. To make sure it closes, he’s going to turn it into a bank.

Boo Chanco’s e-mail address is [email protected]