I thought I was sending this to pen-l, but it was only to Sabri. Pen-l may be interested.
>Date: Tue, 30 Oct 2001 11:47:40 -0800 >To: Sabri Oncu <[EMAIL PROTECTED]> >From: Jim Devine <[EMAIL PROTECTED]> >Subject: Re: A sharp V-shaped economic downturn and recovery? > >thanks for this. I have a few comments on the Brian Reading article from >LOMBARD STREET. > >1) the article is on the pessimistic end of the mainstream. The bears are >back in town! > >2) nonetheless, I find his "deficit flow" model to be inadequate. As I >interpret his Godleyesque theory,[*] the private sector (consumers + >corporations) have been dissaving too much (running too large a deficit), >so that they adjust to a more reasonable saving rate. The process of >adjustment lead to the recession (though that word's use isn't official >yet), but eventually the economy recovers. The problem with this is that >Reading doesn't take the stock of debt resulting from the previous >debt-led growth process into account. The rise in saving (fall in >dissaving) leads to a fall in GDP which _in turn_ causes the debt/income >ratios to rise (since the stock of debt won't fall until saving is >sustained). He misses the last step, which makes any recession much worse. > >3) I don't agree that "a big country's currency depreciation does not mean >inflation -- and none comes bigger than the US." It's possible that the >dollar could depreciate sharply, in which case, there would be an >inflationary surge. A big fall makes up for the buffering effect of the >economy being big. Even with a mild fall, dollar depreciation broadcasts >stagnation to the rest of the world, which then feeds back to hit the US. > >4) "The new economy is not dead." I'm not totally convinced that there was >a "new economy," i.e., a significant rise in labor productivity growth in >the late 1990s, which lowered the NAIRU (or shifted the Phillips Curve to >the left, if you wish). Not only are the data shaky (and the period >discussed too short), but the NAIRU/PC shifts leftward only if wages don't >grow as fast as labor productivity. It's the stagnation of wages relative >to productivity -- and temporary effects of high dollar exchange rates -- >that allowed the US to have high demand growth in the late 1990s without >old-style Phillips Curve inflation. > >5) the slow growth of wages relative to labor productivity also meant a >rise in consumer debt loads (until the end of the 1990s, when the >corporations took up the torch and started _their_ unhealthy debt >accumulation) and also the existence of an underconsumptionist undertow. >The latter meant that the demand growth couldn't occur without the >unhealthy expansion of private-sector debt and the rise in the US external >debt. This also encourage the Fisherian debt deflation and Devinian >underconsumption trap that I discussed in my previous missive on this article. > >[*] it's interesting that Reading doesn't cite Wynne Godley. > >At 03:24 PM 10/29/01 -0800, you wrote: >>http://www.lombard-st.co.uk/dynamic/research/showheadline.asp >> >>Dear Jim, >> >>If you go to above address, the article is there. Scroll on that page down >>until you see the item: >> >>-Violent US downswing followed by recovery >> >>and then click on the link <daily note> under this heading. >> >>I would be very much interested in reading your further comments. >> >>Best, >>Sabri Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
