I haven't read the whole thing (since I need to reformat it), but it looks as if the argument for predicting a V-shaped recession/recovery duo is much the same argument as for a U-shaped recession/stagnation/recovery duo or even a W-shaped recession/false recovery/second recession/recovery duo, as in the early 1980s. (I think the last would be quite appropriate. ;-) )
Of course, one person's V is another's U. Capitalists may see a V in real GDP, while workers may see a U in employment and wages. It takes about 2.5 percent annual growth of real GDP to prevent unemployment from rising (because unemployment normally rises due to the normal increase in the labor force and labor productivity). Persistently high unemployment depresses wages, as some old German guy noted. Further, the article says that policy responses "promise to turn the tide by 2003." That's cutting it a bit close for Dubya's comfort, since he hopes to run for recoronation in 2004. the author (Brian Reading, [EMAIL PROTECTED]) uses the logic of "imbalances": the imbalances that were created in the 1996-2000 boom will be purged from the economy in the recession, allowing accumulation -- ahem, GDP growth -- to recover. This logic can be applied to suggest a V if the imbalances -- excessive consumer & corporate debt & unused capacity & overbuilding of houses & saturation of high-tech consumer durables markets -- are relatively small. If they are small, Fed stimulus might eventually work, without creating a new problem of excessive consumer & corporate debt in the recovery. On the other hand, if these imbalances are severe, a U is encouraged: it will take either an extremely severe recession or a long-lasting one to purge the imbalances. Unfortunately or fortunately, I lack Reading's ability to predict the future here. I don't really know how bad the imbalances are. Further, after a point, it's possible for the imbalances logic to fall apart. If the economy goes down really quickly and unemployment goes really high, the world economy might get stuck in the global "liquidity trap" that the WSJ article by Phred Dvorak refers to. (Is that really his name? Phred is a Vietnamese character from Doonesberry.) Of course, it's not really a "liquidity trap" in the sense that Keynes used that word, but instead a Fisher-style debt deflation and/or a Devine-style underconsumption trap. In the former, falling nominal wages and prices make workers' and capitalists' debts worse relative to incomes, encouraging bankruptcies and "non-performing loans," which encourage a fall in the demand for loans and bank credit-rationing (and even bank bankruptcies), which encourage falling output and prices. In the latter, capitalists try to deal with profit realization problems by intensifying the production of profits, by pushing wages down, by speeding up production, and by stretching out production, so that real wages fall relative to labor productivity and consumption falls relative to output. With private accumulation blocked (by unused capacity, corporate debt, and pessimism), this causes output to fall, so that realization problems intensify. Further, a serious recession can lead to serious social disorder, which might hurt business expectations. If we're lucky, the disorder will push the world to the left, but we've been pretty unlucky so far on this score. Could someone please reformat this article -- into nice neat paragraphs -- so that I can comment more seriously? At 06:40 PM 10/28/01 -0800, you wrote: >The following analysis from Lombard St. in the UK makes sense to me - other >reactions? > >22 nd October, 2001 >Violent US downswing followed by recovery >V-shape scenario much stronger down and up than Wall Street >supposes >A US recession was inevitable because of the severe financial imbalances >created >by the bubble economy. The V-shaped scenario involves severe deflation >through >mid-2002. But adjustment will now be swift and unlike Japan, the US will be >poised for another period of rapid inflation-free growth. >The immediate impact effect of the terrorist attack on 11 th September will >be sharp >but should wear off. That's a reason to expect some rebound before another >dip. But it >is just as probable that the US economy will be precipitated into a full and >immediate >correction of the massive imbalances accumulated in the late 1990s. I >suspect the >contraction in GDP will continue through the first half of 2002. But >recovery will >follow slowly but with gaining momentum in 2003, followed by a year or more >of >exceptional growth possibly combined with falling prices. Massive short term >gloom, >medium term boom. >Sector financial imbalances in the US always made a recession inevitable. >The >personal sector could not continue dissaving (in the sense of running a >record >financial deficit) or the corporate sector massively misinvesting. The >growth in debt >both entailed was simply unsustainable. So when investment collapsed and >savings >recovered, the economy would suffer a slump in private demand. The magnitude >of >the potential slump can be gauged by looking at the behaviour of the private >sectors' >financial balance since 1947 1 . This is the excess of private investment >over private >savings and hence equals the amount to be financed by borrowing, or, in the >case of >the personal sector, by selling assets such as company shares (which it has >been >doing). In 00Q2 the private deficit reached a record 7.3% of GDP. By 01Q2 it >had >fallen to 6.2%. Really big deficits only emerged in 1998 and the private >sector's >average financial balance from 1947 to 1997, half a century, was slightly >positive, >0.3% of GDP. So, if the balance returned to its long run norm, some 6.5% of >GDP >would be subtracted from private demand. But in recessions the private >sector >normally moves into surplus in order to reduce debts and restore its balance >sheet to >health. The surpluses during the 1970s, early 1980s and early 1990s >recessions all >peaked above 4% and restoring balance sheets to health will require more >this time >round. It is thus a conservative estimate to assume that the surplus will be >at least >3.5%, meaning a 10% cut in private demand. >The more rapid the adjustment, the shorter the recession but more severe the >fall in >private demand. The greater the improvement in the current account, from >imports >falling relative to exports, the lesser the impact on GDP. But it is >axiomatic that the >improvement in the private sector's balance must be matched by a >deterioration in the >public and overseas sectors'. Here, to steal words from Andrew Smithers, the >1 Here taken to be equal, with sign reversed, to the public and overseas >sector's balances. It therefore >includes errors and omissions. >government can choose to allow the recession to cause a budget deficit or >can run a >budget deficit to impede the recession. Put simply, the recession will cause >a cyclical >deterioration in the US government balance, which can be reduced however if >taxes >are cut and spending increased to cause a structural deficit instead. The >more the >deficit is structural, the less it will be cyclical and the less severe the >recession. Hopes >that, in the short term, the government can do enough to prevent a US >recession are >forlorn. The speed with which the private sector can adjust its position, by >saving >more and investing less, is far greater than anything the government is >likely to do by >cutting taxes and raising spending. Equally, although the recession will >have a big >impact in reducing imports, exports will also suffer a severe setback from >recession in >Asia and Japan and weakness, if not recession, in Euroland. If the private >sector >adjusted its balance in a single year, there is no way that the government's >structural >balance could deteriorate by anything approaching 10% of GDP, although an >improvement of say 2% of GDP in the US current account would help. >Following on my Daily Note on forecast revisions Wednesday last week, the >consensus forecast implied a US output gap at 4.2% of GDP in 02Q4, down from >a >surplus of 0.3% in 01Q1. This 4.5% swing will cause the US structural >deficit to >deteriorate by little more than 1% of GDP. Obviously the private sector >adjustment >could be spread over two or three years, not one. The current account >deficit >improvement could then contribute 3% to 4% to the adjustment process, with >the US >moving back closely to balance. But this would still leave an adverse >movement in the >public sector's balance of 6% to 7%. If caused solely by a cyclical >deterioration, the >result of growth remaining well below potential, the output gap would have >to >increase to an unbelievable 20% of GDP - implying a massive recession since >the >level of GDP would have to fall 20% below its potential level. Of course, >the >elasticity of the cyclical deficit to the output gap, here assumed to be >0.25% (i.e., each >1% change in the output gap causes the government's cyclical balance to >change by >0.25%) would probably be much greater the larger the negative output gap. >Still this >arithmetic is frightening. It describes the anatomy of a debt-deflationary >spiral in >which individual and corporate efforts to improve balance sheets are so >deflationary >for asset prices that they make them worse overall. > >The only escape from such an ugly situation is really aggressive monetary >and fiscal >easing. This is precisely what the US authorities have embarked upon, both >before but >especially since 11 th September. It will not be sufficient in my view to >prevent a V-shaped >recession, but it does promise to turn the tide by 2003. Looking then at the >situation in that year, two facts are obvious. First, there will be a large >output gap and >unemployment will have risen above its NAIRU level. Both imply the >elimination of >domestic inflationary pressure. The recession will be far more severe than >that needed >to reduce inflation to a tolerable rate. Indeed inflationary pressure will >also be curbed >by weak world oil and commodity prices. The dollar may weaken, although this >is >still debatable. Certainly the Japanese yen will not be allowed to soar. >Instead >diminished private capital inflows into the US will be partially offset by >increased >official flows from Japanese foreign exchange market intervention. But in so >far as >the US trade-weighted dollar weakens, the effect will do more to lower >prices in >countries whose currencies appreciate than to raise prices in the US. In a >world >buyers' market a big country's currency depreciation does not mean >inflation - and >none comes bigger than the US. >As the adjustment in private sector balances approaches completion, the way >will be >open for US growth to exceed potential once more. This is still of the order >of 3½% >with 1% coming from labour force growth. The 1990s improvement in >productivity >growth, to about 2½%, did not take it above rates achieved in the 1960s. It >looked >good because the 1970s and 1980s were so bad. The US in 2003 and 2004 could >achieve 5½% a year growth and still the negative output gap would not be >closed until >2005 at the earliest. The fall in unemployment towards NAIRU would lag the >decrease in the output gap and probably not be achieved until possibly 2006. >This >boom would be accompanied by falling prices. The recovery in productivity >and the >weakness of wage pressure implies a sharp recovery in corporate profits. >Meanwhile, >falling prices would be boosting real incomes despite weak nominal growth. >The implications for both Wall Street and the dollar are obvious. The new >economy is >not dead. In the exuberance of the bubble days it was exaggerated and >misunderstood. >Because the bubble led to such extreme financial imbalances, it was always >nonsense >to suppose the cycle had been abolished and the US could enjoy continued >rapid non-inflationary >growth forever. It was equally ridiculous to extrapolate forward the public >sector surplus so that Federal debt could all be repaid. Such an >extrapolation involved >a similar one for the private sector deficit. Technological revolutions, of >their nature, >are inherently unstable. The 19 th century history shows that they cause >long cycle >large fluctuations, not merely in output but also in prices. >There is nothing new in my analysis. But until now it has made me seem a >prophet of >doom - predicting a serious V-shaped US recession when the consensus denied >the >possibility. The danger now is that the consensus may become paranoid, >seeing >dangers of depression as in the short term the situation turns out worse >than currently >expected. But now is the time to be optimistic. The adjustment will be >painful, but the >prospects thereafter are exciting. Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
