September 26, 2009

Double Dip Recession Very Likely, From An Unrepentant Communist Blog, first posted Thurs, September 10, 2009


Much media blather about positive economic data from the USA and the prospects of 'green shoots' in the the EU, notably a recording of the fact that Germany and France had stopped shrinking in growth terms, ignores the fact that so much of the steam now apparently being picked up by the world economy is driven by entirely artificial 'monetary and fiscal easing'. This is in fact a posh way of describing the process of 'printing money'. The problem is, what will happen to this 'recovery' once it is no longer sustained by this artificial stimulus.. The stimuli will have to be curtailed, its just a matter of timing. Leave the money presses rolling for too long and you will certainly generate inflation, stop too early and the sickly weak recovery shoots will wither.
Two notable economists, Nobel prize winner Joseph Stiglitz and Professor Nouriel Roubini of the New York University, have alerted us to this prospect...

"Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.

Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest.

Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.

Fourth, the financial system – despite the policy support – is still severely damaged. Most of the shadow banking system has disappeared, and traditional banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalised.

Fifth, weak profitability – owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest.

Sixth, the releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Seventh, the reduction of global imbalances implies that the current account deficits of profligate economies, such as the US, will narrow the surpluses of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel. "

In addition , Joseph Stiglitz, winner of the 2001 Nobel Prize in economics, has warned that the global economy could suffer a double dip, a pronounced rebound giving way to another slide.

'It is difficult to know whether or when there will be a W,' as such a course of events is often described, Stiglitz said.

Stiglitz, a former World Bank chief economist and an advisor to US former president Bill Clinton, said household balance sheets had been 'destroyed', which has meant that savings have gone up from zero to 7-9%.

A rising savings rate cuts into consumer spending, which is responsible for roughly two thirds of US economic growth. An 'inventory adjustment' is under way, as companies build up their stocks, Stiglitz said.

But 'because of the uncertainties, people are not hiring, unemployment is very high and foreclosures are likely to remain high,' he said.

Stiglitz has been a sharp critic of policies advocated by the International Monetary Fund, contending that they aggravate crises and impose public hardship.
Posted by Gabriel

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