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What If the Recession Does Turn Into a Depression?

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It’s far from certain — it’s even a fairly remote possibility — but the possibility of an economic depression is being discussed more and more these days. As is to be expected, the discussion tends to be centered around how much of what we’re used to having could be destroyed. As worthwhile as it is to brace for the damage an economic depression could wreak, this is Thanksgiving weekend — a time to reflect on what we do have, and what opportunities we see ahead. Not “opportunities” as in exploiting those in need during hard times, but as in adapting to and serving changing needs.

int-basicA recent story in the Boston Globe that looked at the social changes a depression could bring got me thinking about how web companies might respond. The core strategy of the web’s biggest successes to date — make it faster, cheaper, more useful — doesn’t have to evolve much to respond to the dramatic shifts we’d see.

In the Globe’s article, staff writer Drake Bennett sees a 2009 depression unfolding differently from the 1930s: not bread lines, but long lines at emergency rooms; not migration from dust bowls to California, but an exodus from exurbs to cities. Durability would trump fashion, frugality and escapism would rule, and people might grow more isolated.

Again, this is all a mighty big “if,” and just speculation. But let’s imagine for a moment that a depression does descend upon us — how would the web adapt?

Let’s start with escapism. As Bennett noted, “The Depression was, famously, a boom time for movies.” As the current recession deepens, online video is already providing a contemporary equal in Hulu and other sources of free content.

The proliferation of online video, however, leads us to the issue of isolation. Here another recent web obsession, social networking, could come into play. Networks that pull people out of their houses —, say, or those that recruit people to do volunteer work — could become new stars.

The economic malaise is increasingly leaving thousands of skilled people with time on their hands. But the open-source ethic and user-generation spirit that has defined the web could be harnessed for group creation of new technologies as well as a new generation of entrepreneurs. Even a depression wouldn’t diminish the web’s power to help us promote our talents, so it could still churn forth labor-of-love innovations.

Free content, of course, will become more sought after than it was in the boom times. And while it will be difficult to generate revenue with a free (see: ad-supported) model, such an approach could become a way for cash-rich companies to build market share: Google (s goog) is the most obvious beneficiary, but a free model could also offer leverage for Microsoft (s msft) and even a life raft for Yahoo. Bartering could become more popular, which makes eBay’s (s ebay) current traffic decline hard to understand. Perhaps it will open a door for a rival upstart.

A quote this week from Lawrence Summers (yes, in declining to regulate derivatives in the 90s, he helped sow the seeds of this mess; and yes, he was also tapped to help clean it up) summed this up well: “All financial crises end — and when they end, they end in ways that create spectacular opportunity.”

Whether this financial crisis ends with the economy recovering quickly or stalling for years, web companies will end up with more than their share of opportunity. Either way, now is as good a time as any to begin wondering what those opportunities will be.

Chart courtesy of MarketWatch.

19 Responses to “What If the Recession Does Turn Into a Depression?”

  1. what % of the world’s people do you think will get pulled out of their house by or start using hulu, should there be a recession? you think farmers in Bangladesh or whatever will?

    perhaps a “this piece is only relevant to the starbucks crowd” title at the top wouldnt be out of place.

  2. Fixing this credit crises.

    The way I see it, the credit crises is ultimately caused by unpaid consumer debt. But this credit crises is feeding on it self because the unavailability of credit to the consumer is strangulating economic growth causing unemployment and decreased overall wages. This will ultimately cause even more unpaid consumer debt. and cause an environment of even tighter credit and continue to put even more of a strangle hold on economic growth and ultimately the inability to pay off more debt.

    Another words, the worst this economy gets the more of unpaid consumer debt. there will be which will beget tighter and tighter credit.

    The Fed believed that increasing liquidity to banks would spur economic activity by the banks lending to the consumer, but the consumer is already in debt and unpaid debt is what put this “snowball” into motion.. Banks are not going to lend money to a consumer already in debt. Now you have a consumer that is not only in debt but also has no credit. Then comes a sharp decline in economic activity and therefore decreased economic output. You see where I am going with this.

    The Fed is not accustomed to fighting deflation. Deflation is a situation in which prices of goods fall, consumers then have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity – contributing to the deflationary spiral.

    This current deflationary spiral is accompanied by an environment where the consumer can not obtain credit no matter how low prices go. Prices are going to decrease to the point where the consumer will only be able to pay in cash if the consumer remains unable to obtain credit. In the meantime the economy will be contracting into a vacuum bringing with it the consumer who had excellent credit only a year ago.

    How do we break this cycle?

    This cycle has to be broken while preserving the free market.
    And, it needs to be broken with as little government intervention and bureaucracy as possible.

    Our government knew earlier this year the most profound way to stimulate this economy was in the form of tax rebate checks and wasted no time passing the bill, but the amount was hardly enough. What the tax payer did with the money was either pay off debt or save the money, which is precisely what needs to be done FIRST to save this economy. So, the tax rebate was exactly the medicine this economy needed but is was hardly enough. So I ask you, what else can possibly be done to boost consumer spending and confidence that would be more effective than returning money directly into the tax payers/consumers hands? Nothing.

    The consumer needs a larger tax rebate. How about $250 Billion every quarter until the economy climbs out of this disastrous “black hole”? The deflationary spiral is going to spin out of control if the consumer is not saved.

    When consumer debt begins to be paid back money will begin to circulate into the banks. This would free capital for banks to start lending. The important point here is that debt gets paid,and banks regain confidence to start lending again to a consumer no longer in debt.. The government almost has it right except that direct infusion of money to the banks does not pay off debt. Re-capitalizing banks will give them cash to lend, but not to a consumer already in debt , stressed for cash and has NO CREDIT.

    The government can not save every consumer. But as a whole the consumer has to get it’s head above water.

    Think of the invisible hand of consumer sovereignty. The consumer will guide this economy out of this recession with a little capital and some tax relief.

    Who else deserves tax payer funds more that the tax payer?

  3. As the low revenue in youtube and most also-ran clones show, you can’t rely on free content for anything bigger than music and pics, since the share mediocrity of most of it, combined with the bandwidth costs of videos pretty much kills any hope of self-sustainability this business has to offer.

    You talk about ads, I talk about a society where consumer spending would be at an all time low, and therefore ad spending too.

    How do you plan to sustain an entire industry of free content?

  4. selfdefensedelhi

    dude ur scaring me here … what will happen to my limo hire business then, limo hire business is great for good times i dont want to use my limo cars to be used as boot shops :(

  5. Jeff Nolan’s comment about “government action” during the Great depression are good. Here’s a study by UCLA that says FDR’s “programs” lengthened the Depression by 7 long years:

    As far as i can tell, Obama is still clinging to the idea of raising taxes and pushing more regulations. What he should do is come out and say that he’ll push for a tax cut, that he won’t raise taxes , that cap gains taxes will be cut, and that regulation changes will be minimized.

    The fact that things are so bad and he HASN’T come out against raising taxes is telling.

    Hints of it aren’t enough. Right now business has no idea what they’ll do. As Obama’s background isn’t Democratic Capitalism (he doesn’t talk about it either), we can expect more Socialism and regulation to slow down business. Who wants to invest when the biggest threat/risk isn’t the market or competition, but Washington liberals???

    Unless Obama gets a crash course in Democratic Capitalism and he reins in the Democrats, we’re in for a long haul of deflationary messes reinforced by laws and regulations from Washington. Cash iz king for the foreseeable future.

  6. It’s important to remember that the majority of workers are employed, the wave of people starting home based businesses that aren’t counted correctly in the stats is expanding and the global economy is more interdependent than ever before.

    With a good marketing strategy, a small business can grow by 200-300% a year in any economy. Often a small change opens up huge opportunities. Rarely tied to what’s going on in the macro scene.

    If your income is tied to something without these opportunities, time to change or reinvent yourself. Regardless of the world situation and what govenrments and large multi-nationals do, there will always be opportunities

  7. You are looking at financial market data as a proxy for output and productivity. The real story of the Great Depression was twofold and the stock market crash in 1929 was a sideshow, not the real event. Depressions happen when output and productivity decline precipitously, in the case of the Great Depression as much as 1/4 of economic output was eliminated across the globe. Today we are looking at contractions in the 1-3% range for the forward 12 months.

    The second lesson of the Great Depression was how government action, in that case the New Deal, can actually prolong an economic downturn by depriving the private sector of capital. In the 1930’s economic output had rebounded by 1934 but in 1937 we were in another deep recession that was only snapped with the arrival of WWII and by 1943 practically every New Deal program, big exception being Social Security, was unwound.

    A.B. Dada makes some very good points but fails to point out that with the move to massive imports of Asian goods in the 1980’s and of course foreign oil, the Treasury had no choice but to run deficits financed by recycled dollars from offshore. Raise rates and strengthen the dollar by running down deficits through higher taxes which ironically strengthens Asian trading partners while dampening growth and accelerating offshore trends, or weaken the dollar and keep interest rates low which stimulates growth.

    Lastly, keep in mind that the U.S. is far from the most exposed country right now. Look at the UK which has very high debt and government that consumes nearly half of GDP as one of the most at risk countries and Russia which is being crushed by cheap oil, a lot of Euro denominated debt and has been forced to defend their currency with their U.S. Dollar reserves. We are actually in pretty good shape when compared to the EU, and China has it’s own issues with slowing growth and interest rates.

  8. So, let’s say there is a depression. I think the biggest change for the web would be people falling back to dial-up access instead of paying that $50-$60 per month bill. A depression may be the best thing that’s happened for AOL in the last several years.

  9. Recession data is based on faulty data.

    Our governments, all of them, lie about consumer price increases (due to monetary inflation caused by the central banks). When you ignore the true costs of living increases, you ignore the reason GDP “growth.” We’ve actually seen our GDP shrink for over a decade. Because of this, we’ve been in an endless recession, which the Federal Reserve tries to fix by printing more money, causing bigger booms of malinvestment, and much larger busts.

    As an Austrian Economist, we’ve been prediciting every crash, and have been spot on with all of them, including the dotbomb and the housing bubble.

    With the Federal Reserve inflating money like no tomorrow, and the Treasury, Congress, and Executive branches being just as complicit, the next boom will have the most destructive bust imaginable. What will the next boom be? Who knows, but with the money primarily being used to buy banks, and not bail out debtors, I’d imagine it will be in manufacturing and not consumer or investor goods.