The Double Dip

In this commentary we will explore the possibility of a double dip recession and also how it will affect consumers who require help getting bad credit loans. When we talk about the double dip we are referring the shape of how the economy moves. The double dip pattern is known to most economists as a W-shaped recession. In technical terms a W-shaped recession is when the economy has a recession, bounces back with a short time of growth then succumbs to another bout of recessionary pressure again in the not too distant future.

The perfect example of a double dip recession is what was experienced by the US economy in the early 1980s. The economy fell into recession from Jan 1980 to July 1980, shrinking at 8% p.a. In the first 3 months of 1981 the economy went into a state of quick growth expanding by 8.4% p.a. The trigger for the double dip was when the Federal Reserve increased interest rates too sharply and caused a scare in the markets. This led to another dip from July 1981 to November 1982.

If we turn the clock back to the present time (30 May 2010) we have had a few scares. The economy took a massive trashing the previous year and we are still trying to regain ground from the terrible blow-out that the credit crisis did to the economy. Most analysts agree that if it wasn’t for the huge bail-out plans put forward by the federal government that we would be in much deeper trouble than we are now.

Some however argue that this has only shelved to problem. It is just putting off the inevitable correction that has to take place due to the rampant poor decisions made by the financial community. The funding by the governments has to stop eventually and also be paid back. As it was, the commercial entities like banks were highly leveraged and failed when they could not recoup the costs of their borrowings. The aid packages of many governments meant that governments either bought into these highly leveraged companies by accepting equity or simply lent them money. Suddenly, it isn’t the commercial entities that were highly leveraged anymore, now the governments were highly leveraged too.

I think you see the problem here. Governments have lent a helping hand but in the process they are also taking a risk. If something huge were to happen again, how would the governments have enough money to pay? What is to happen if another huge bail-out were to be needed but the budget for it just wasn’t available? The logical answer would be to borrow it from another country or simply to dilute the currency by running the money presses 24/7.

Most analysts, even those that believed that we have left the worst behind are slowly realizing that we are not out of the woods yet. Another huge event (like the oil spill) could spell disaster for the stretched government machinery, I am certain of this. Now, the question looking forward is how it would affect people looking for bad credit personal loans or even financial products for individuals with poor credit histories.

Lets first look at how to governments of the world have handled the credit crisis which caused the recession. They threw money at it to keep the credit channels open. They didn’t want a repeat of the 1930s recession where credit dried up and nothing was done for 4 years. Based on this, you can be relatively sure that the supply of money or loans will be available. It is highly improbable that the government will stop its financing in the near future. It will just find ways to throw even more money to keep credit available.

The first problem that you will face as a person with a bad credit history is the tightening regulation for sub-prime loans and financial products. The government doesn’t want a repeat of the subprime bust to happen so there have been many drafts on regulations to govern the availability to loan to those with bad credit histories. You will find that over this year, banks requirements for loans will get tighter. For you and me, this might mean that it will be harder to get loans approved if your credit rating is very.

In the macro economic sense, we will eventually find that things will be getting more expensive as the value of the world’s larger currencies like the US dollar becomes more diluted due to the printing of money to cover the bail-out packages. This will present in the form of inflation which will increase substantially compared to years before.