Monday, August 24, 2009

US Green shoots … and doubts

Menzie Chinn posted this graph of current forecasts of US monthly Gdp (above) on his blog Econobrowser (August 19), under the title “Stabilization and Upswing … for Now”.

Among comments on his post I found this one interesting:

"Wow, even you guys are finally seeing the green shoots. Although the stock market has already ran up 50%."

But that one is more informative:

“Stock markets are a bad indicator for the status of the economy, since perception in the markets and reality can diverge to a large degree, and this for a long time.
As for economic recovery. Massive stimulus spending by governments has to show up somewhere. Thus, no surprise here, when there is one or more quarters of GDP-growth. The more important question is, whether this is the start of a new self-sustaining cycle of capital accumulation. I have big doubts here, since I don't see that any of the pre-conditions, the disproportions that led to the global recession have been really eliminated from the system. The world is still sitting on a mountain of debt. The total debt in the US-markets (private, companies, and government debt all together) to US GDP ratio was at about 375% as of Q1 2009, far higher than the debt bubble before and during the Great Depression, which deflated back then.
50 trillion US-dollars of debt and assuming 5% average interest rate means 2.5 trillion US-dollars a year alone to pay off interest, which has to be paid from generated income, if you don't want to deplete the capital stock. To generate a nominal income of 2.5 trillion in an 14 trillion US-dollar economy, the nominal GDP would have to rise by almost 18% a year, just to maintain the nominal debt level. In reality, it would be even more, of course, since the debt isn't equally distributed. The society is split in net creditors and net debtors. The 2.5 trillion interest payment would have to come from the income of the net debtors, which is smaller than the total income in society.
If this biggest debt bubble maybe in history bursts, and I don't really see how a deflation of this debt could be prevented forever, despite all efforts by governments globally, then, I am afraid, the global recession we have seen so far is nothing compared to what could be coming.
Posted by: rootless cosmopolitan at August 20, 2009 07:59 AM “.

Maybe economists are too pessimistic, really …

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