The Deeper the Slump, The Zippier the Recovery
The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.
~English economist Arthur C. Pigou, quoted in today's WSJ by James Grant in his article "From Bear to Bull," where he argues that the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery.
11 Comments:
No, you are confusing seeing the world as it really is, contrary to your Panglossian view if the world as "gloomy" by comparison.
The fool's assumption is that the future will resemble the past and this deep recession will spawn an equally sharp V shaped rise. Economists have coined various shapes of recession and recovery (V, U, W, L) for a reason - because we OBSERVE THEM. To suggest, as you are by attribution, that this will be a speedy recovery is naivete at its worst.
Life is a story of preying upon death. The predator's gain is the prey's loss. The scavenger's gain is the predator's loss. Much of life is a zero-sum game because of the laws of conservation of mass and energy. Economics reveals the peculiar case of mutual gains from trade, but Dr. Pangloss ignores the Broken Window Fallacy in his analysis. He also ignores looming threats. Even the predator feasting on prey must remain cautious lest they become prey.
It is ignorant and silly to utter petty platitudes like "the worst is behind us". Herbert Hoover said that once. So did FDR. There are many dangers, not the least of which is bad public policy from this government. Others include massive CRE defaults, rising foreclosure rates, falling employment, shifting comparative advantages, national debt, rising tax burdens, unrestrained entitlement programs, and 300 to 500 banks on the verge of failure.
All this cheery talk is sickening to hear, particularly when it's not coming from Obama who has every reason to lie.
Some people see the glass as half full. Others see the glass half empty. Wise people see and report six ounces in a twelve ounce glass.
Gee Six Ounces, one might think you are a bit of a Roubini disciple...
Well I'm not one buy into this supposed recovery (jobless recovery?) though I'm hoping like heck the optimists know what they're talking about...
It's easy to make up catchy phrases that sound good. But sounding good isn't the same as being true.
There are plenty of examples in financial and economic history where the deeper the slump, the longer and more difficult was the economic recovery.
A good example was the Great Depression of 1930s. In 1930, there were plenty of commentators citing history and saying essentially the same thing James Grant is saying now. They predicted an imminent economic recovery. And investors who listened to them lost their shirts in the economic decline that followed.
Another good example is the economic stagnation in Japan for the last 20 years. And this is a very relevant example, because the cause of the present crisis is similar to what happened in Japan. And many of the solutions the US government is trying now are also very similar to what Japan has already tried.
Six Ounces & Anon,
Excellent & insightful posts. Thanks for a good read :)
The way out will be zippy if the world's biggest potential market uses the two trillion dollars, it hoards, for purchases of U.S. goods and services. China's purchasing manager's should be sent to the U.S. to write two trillion dollars worth of purchase orders. Yes, this is simplistic but the dollar will be supported by adding the needed veolicity . Now is the time for China to show confidence in international trade which has to be two-way to work.
The bigger they are,
The harder they fall.
I agree with this sentiment. A year into a recession, and everybody says, "It is terrible, and never will be good again, like it was."
In boom times, all sorts of arguments are fabricated why spending triple for an office tower is totally justified.
No recession last forever. BTW, Asia is already growing again, and I read the Germany and France are posting positive numbers.
The world is still awash in capital, and venture capital is pursuing nearly very good idea in the energy sector, and many that are not so good.
We are on the cusp of a 20-year boom, a lot like the last 20-year boom, only better.
Reason about it: The credit markets are just phantoms, in many regards. We have our roads, our factories, incredible centers of learning, R&D shops, power plants etc etc etc.
Some capital has been destroyed. Big deal. The world is awash in capital.
Now, if the globe's factories were bombed, and farms wasted, and roads all wiped out, maybe I would worry.
We should be worried about imaginary losses? Credit--blips on magnetic tape somewhere?
Bernanke has it figured out: We simply create credit to replace the credit destroyed, and pump it in the system.
The guy is on target. We should have listened to him more. Bernanke advised massive overkill, vs. not doing enough. Sort of the Colin Powell doctrine for financial markets. I now sense Bernanke was right, and is right. We are lucky he was there.
We do need reforms to make our financial system far more rugged. I hope this doesn't get bogged down in politics.
For predicting the market perhaps we should use the Greek method, go to delphi and consult the oracle, or the Roman method. extispicy, or examining the entrails of a chicken.
I suspect that these methods of forecasting are about as good as the rest.
These methods at least for a time were accepted by a society as the way to tell the future, so are at least as good as modern methods of telling the future.
The accuracy of the assumption will be evident only in hindsight.
In light of the cash-flow compression that has hit the American (and European/Asian) consumer(s) and the desire to pay down debt (which may or may not translate into the actual pay down of debt) it is entirely possible that the recovery will not be as intense as hoped.
I (and this is just me) think this is the beginning of a retrenchment, and the expansion of consumer credit is likely to be very slow.
Now, I'd welcome a return to 4% GDP growth but I think we will be looking @ 2% at best; the specters of higher taxes, government health care take overs and reduced mortgage loan securitization do not bode well for a high-growth scenario.
Who knows the shape of the recovery?
MacroeconomicAdvisors models and speculates but I'll side with the L-shape and prognosticate that real per capita GDP will not recover from the Q2.2008 peak until Q4.2012.
Reinhart&Rogoff predict that this time is different.
Can you imagine US Treasury debt reaching 125% of GDP (without even including Fannie, Freddie & the FHA in the mix) by the end of 2012? I do.
Do you get the eerie sensation that the mob who controls the world's governments has decided to let the economy collapse, economy collapse to save the globe from world warming? Has the mob told our governments to tax the destitute of Bangladesh and Zimbabwe, tax the world's poor to bail out the gamblers on Wall Street, the gamblers with low propensity to trigger the multiplier effect but high propensity to prop up Ponzi Street? A reverse Keynesian Maneuver to retard growth?
U B Judge
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