Tuesday, April 13, 2010

A Dismal Perspective

Kevin Drum, writing in Mother Jones lists the reasons why the economic outlook is still bleak:

“1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time.

2. In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target.

3. Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult.

4. The financial sector remains fragile and there could still be another serious shock somewhere in the world.

5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely.

6. Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs.

7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road.

8. The Fed still has to unwind its balance sheet. That has the potential to stall growth.

9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse.

10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.”

He concludes, however: « I don’t expect all of this stuff to be as dire as it sounds, and overall I suspect that we are indeed going to see steady if unspectacular growth over the next few years. »

My conclusion: All this looks quite like the thirties, ten years of uncertain growth after a deep financial crisis, following a decade of exuberant growth and innovation (the 1920s), even though the 2008-2009 crisis has been much less severe than the 1929 one …

Hat tip : Tyler Cowen.

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