Economy | - Part 10

Christina Romer Sums It Up

Appearing on Real Time with Bill Maher on Friday, shortly after the announcement that Standard & Poor’s had downgraded the U.S. credit rating, Christina Romer, former chair of the White House Council of Economic Advisers, reflected on our current condition.

I suppose this would just be funny rather than both funny and disturbing had Romer not uttered the line with a giggle in her belly and a twinkle in her eye. As it was, viewers were left with the impression that: a) she’s quite happy to be thousands of miles away from Washington, and b) we really are ‘Pretty Darn F**ked’.

Not Just Semantics

Kenneth Rogoff, co-author of This Time is Different: Eight Centuries of Financial Folly, makes a number of very good points in this commentary at Project Syndicate, points that, with the latest downturn for the economy, may finally sink in with policy makers.

Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.

Conventional recessions and deep financial crises are fundamentally different, Rogoff goes on to explain, lamenting the policy makers lamenting that stimulus programs haven’t been big enough when, in fact, the emphasis should have been placed on ridding the financial system of the bad debt that accumulated prior to the crisis.

Tagged with:  

Have You Seen M3 Lately?

Ambrose Evans-Pritchard mentioned the remarkable resurrection of the M3 monetary aggregate in this story at the Telegraph today, hopeful that the rising number of dollars will help resurrect the U.S. economy. Since I’d not seen it in some time, it seemed like a good idea to look up nowandfutures for the latest chart.

I’m not sure this is good or bad – Ambrose seems to think quite bullish for us Americans. But, anytime you get the money supply growing at a high multiple of the growth in the population, you’re asking trouble, and that’s what we got in 2008.  I wouldn’t be surprised if this generates a little inflation trouble here in the West in the not-too-distant future.

Tagged with:  

Debt Crisis Over, Economic Crisis Returns

I’m starting to think that the whole reason the debt ceiling debate was extended to consume most of the media’s airtime last weekend was to divert attention from the dismal report on Q2 economic growth on Friday and the horrendous effects of data revisions going back three years, the most important having to do with the economy’s current trajectory.

There’s more on this subject in Tales from the GDP Revisions at EconBrowser, a post that also includes a comprehensive set of related links. In summary, the recession was much deeper than previously believed, the recovery a bit weaker, and the most recent trend shows a fairly disturbing deterioration in that recovery.

Tagged with:  

GDP Report Stinks Up the Place

In the “advance” estimate for the second quarter, the Commerce Department reported that real economic growth in the U.S. increased at an annual rate of 1.3 percent, far below consensus estimates of a two percent rate, and, as part of the annual data revisions, growth in the first quarter was revised downward, from a 1.8 percent rate to just 0.4 percent.

If not for the massive downward revision to Q1, analysts would be talking about Q2 being the worst quarter for growth in the U.S. since the recovery began two years ago, but, on a relative basis, now economic activity in Q2 doesn’t look so bad.

Personal consumption grew at just a 0.1 percent rate, the slowest since early-2009 when consumer spending fell at an annual rate of 1.9 percent, and government spending contracted at a 1.1 percent rate, its third straight quarter of  declines.

The biggest positive contributions came from private domestic investment and net exports, the former contributing 0.87 percentage points to the growth rate and the latter contributing 0.58 percentage points, in what can only be described as an absolutely dismal account of the U.S. economy during the first half of the year.

Tagged with:  
Page 10 of 26« First...8910111220...Last »
© 2010-2011 The Mess That Greenspan Made