Wikinvest Wire

Depression more likely than "V" recovery?

Thursday, April 23, 2009

In this report from the Wall Street Journal, David Wessel looks at the prospects for an economic recovery and concludes that the "L" shaped variety is most likely.

There is no doubt where the economy is now. "By any measure, this downturn represents by far the deepest global recession since the Great Depression," the International Monetary Fund declared Wednesday.
The alphabet can help to imagine the possibilities and the path of the economy. There's the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there's the big D, not the shape but another Great Depression.
There's a good deal of detail provided on the possible paths and, in the process, some cold water gets splashed on the whole idea of a strong rebound commensurate with the rate of decline experienced over the last six or eight months.

Then again, if a "V" shaped recovery does emerge, it will likely be front-loaded with inflation.

Interestingly, the odds of another depression exceed those for a "V" shaped return to normalcy that so many pundits have been clamoring for after all the "green shoots" began to appear last month.

Here's a summary of our chances:
The odds of the V: 15%
The odds of the big D: 20%.
An unfolding depression could scare Congress to act boldly, but the L is less ominous -- and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong.

Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That's the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half.
That sounds about right, unfortunately.

Here's Mr. Wessel himself for more on the subject.


Nick said...

Sounds about right to me. It's not rocket science: people in the US have been living well beyond their means for a decade, and now their means need to catch up. The government can mitigate some effects at the expense of prolonging the recession and destroying savings by creating inflation, which they are doing. The government can also take advantage of the crisis by making sweeping changes and large spending now and creating potentially devastating long-term debt obligations, like they did with social security in the 30's, and Obama's socialism initiatives now. Fundamentally, though, none of that changes the basic issue: people need time and ability to pay off the debts they have accumulated, and that will take time, jobs, and industrial productions, and everything else is tangential.

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