What Does the Recession Really Mean?

Here is what I wonder about...on a vast, global scale, what does a recession and economic crisis really mean? I think I have a decent grasp of capitalist economics 101. I understand that if a person, or demographic, or maybe even an entire country, has over-consumed and under-saved, they will have failed to accumulate the capital necessary to invest in a future. I get that, for the scope of an "open system".

But in scientific terms, the global economy is a closed system. There is no external creditor to borrow from. So I can't quite get my puny mind around what the implications are on a global scale. Why does there have to be a crash? Why can't we all just more or less keep doing what we have been doing?

I mean, I could understand a global economic crunch caused by a non-economic event, like war, or by a critical resource shortage. That I get. But I don't really, deep down, understand what is different, except that there is a crisis of confidence. Is it that simple? That could do it--if one day we all wake up, and decide to not spend a dime, that would cause the gears of commerce to grind to a halt. Paul Krugman alluded to that in his "Consumers Capitulate" column.

Or is the explanation more subtle? Have we felt flush for years, and been too willing to spend money on frivolities, such as meals out or manicures, for example? And now, as we come to realize that our net worth's aren't what we thought, and our incomes aren't going up like we thought they would, are we generating an economic dislocation, by suddenly shifting our consumption preferences? So we have too many restaurants and cosmetologists, and too few appliance repairmen (to keep our old appliances going, instead of buying new ones)?

Consumers Capitulate

Krugman: To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. ..So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way. So this looks like the beginning of a very big change in consumer behavior. And it couldn't have come at a worse time.

It always does come at the worst time.

Modern-Day Pirates

I have read a lot recently about modern-day pirates, particularly off the cost of Somalia. Here's what I don't understand--why can't large shippers use technology to foil them? Just like banks have panic buttons by every teller, a ship could have multiple panic buttons, that wirelessly set off a dozen hidden transponders.

More Mortgage Problems

I am afraid I agree with this article, that lays out a reason why the mortgage crisis will continue unabated:

It seems that the majority of investors, economists, and governmental leaders are overlooking a very important right hand side of this mortgage rate reset graph. The subprime loan reset period (represented by the green bars) may be nearing the end, but the lightly-shaded yellow bars represent $500 billion worth of option-ARM loans expected to reset from mid 2009 through 2012.

I also think the author is overlooking another factor, which is that 5/1 and 7/1 ARMs for non-subprime borrowers will also be re-setting in the next few years. The results may not be quite as catastrophic, but there will still be a lot of rate jumps, particularly if prevailing rates go up between now and then.