Tobold's Blog
Monday, August 29, 2022
The economics of recessions

By now it has become pretty evident that the global economy is heading for a downturn. Inflation fighting necessitates higher interest rates, which is turn lower demand, and make living on borrowed money less feasible. But in the 14 years since the last big global downturn, a lot of new things have popped up, and there are parts of the economy that have never been recession-tested. We are pretty certain that consumers in the coming years will be spending and investing less, but what will they spend their reduced discretionary income on?

The most basic theory is based on Maslow's hierarchy of needs: You spend money first on food and shelter, before you spend money on aesthetic needs or needs of self-actualization. But past recessions have shown that actual spending isn't completely following that model. There is for example the Lipstick Effect, the observation that cash-strapped people still spend money on small luxuries when they can't afford big luxuries anymore. Investments have their own pyramid of preference: In times of crisis, people prefer investing in value investments rather than in speculative growth investments. This is why currently crypto currencies and tech stocks are doing much worse than stocks of solid companies that pay dividends.

One area which is new to recessions is streaming services. Netflix just started the transition to a streaming service in 2008. Now the average American household is subscribed to 4.7 streaming services, with the number already having stopped growing. It isn't too far of a stretch to assume that many people might well cut at least some of those subscriptions.

To me streaming without a subscription looks even more perilous: The economic model of YouTube is a mix of advertising revenue, and people voluntarily paying for channels they like, either by voluntary subscriptions or by tips. Advertising revenue traditionally declines drastically in recessions. And somebody feeling the financial pinch in his daily spending will surely be less inclined to tip his favorite YouTuber ten bucks, especially since he can still watch that channel without paying. With "YouTuber" these days being the most common answer when kids are being asked what they want to become when they grow up, that idea might actually be even less viable tomorrow than today.

To me it is pretty clear that the economic headwinds will have consequences for some of these new businesses. Fortunately my income as an "influencer" is so close to zero, that I don't have to worry about it. :) But the idea that you can live of talking about your hobbies on YouTube has never been the most solid economic idea, and the percentage of people for who that actually works might well shrink dramatically in the future.

The coming recession will be interesting because there are so many industries that have cropped up over the past couple decades that grew through profit loss and were just now finally turning in profit generators.

I'm talking about ride share companies, food delivery, and home rentals.

All these are heavily dependent on people having expendable income and also being willing to pay an extra premium for convenience. If we truly enter a full blown recession or even worse, a global depression, I don't see how companies like Uber and Doordash continue to exist.

Where I live you're already paying extra for food order through a food delivery service and that's before you even factor in the fees and driver tip. Airbnb is just as expensive, if not more so, then a 3 or 4 star hotel.

As a millennial who has seen the prospect of owning a house go from "next 2-3 years" to "maybe never" I wouldn't be too upset at seeing things like airbnb go bust.

I feel like youtube/twitch tipping is going to stay even in recession; parasocial connections to streamers aren't that weak. They don't need to be great; they just need to feel better then alternatives in modern atomized world - and those alternatives might suffer in recession much more. And average tips aren't big enough for most to think "can i afford it" - even in recession most working people will be able to.

Ad revenue certainly can suffer though.

We are pretty certain that consumers in the coming years will be spending and investing less, but what will they spend their reduced discretionary income on?

The idea is that saving is more conducive to overall financial health. The pendulum has to swing back in the direction where investing in interest bearing accounts are more lucrative again. Instead of giving your money away by spending that discretionary income, let banks and other entities use it while paying interest on it. People have been brainwashed into thinking that when the Fed's talk about raising interest rates, that it only applies to forms of credit. Imagine how good our economy would be if people started saving money again instead of trying to keep up with the Kardashians.
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