THE AUDACITY OF HOPE TO BEAT THE RECESSION:
This week (October 12-16, 2009) Dow Jones jumped over 10 000 points. When the Dow Jones industrial average first closed above 10,000 it was on March 29, 1999. At that time, the American economy was in its eighth year of uninterrupted growth, and the jobless rate was only 4.2 percent. For comparison, the unemployment rate in U.S. is now at 9.8 percent, and the employment as a share of the population is at its lowest level since January 1984. That is why the media reported the latest news from the Wall Street with sober optimism.
The recovery of the world economy is slow and tense. People over the world try to see the good in generally bad news: For example, the decline of Chinese export is slowing, which commentators and economists interpreted as a good sign. Slowing of export decline makes "most people accept that China is now enjoying an economic recovery" (BBC, Chris Hogg). Same with the slow improvement of German economy - it is recovering, but recovery is in the future, perhaps in 2010.
This week the American bank JPMorgan Chase said that its profits surged to $3.6 billion in the third-quarter, well beyond the expectations. But the American biggest bank, Bank of America, posts 2.2-billion loss because of bad loans.
On Friday, the Obama administration said the deficit for the fiscal year is $1.4 trillion, the largest since 1945. At 10 percent of the gross domestic product, the 2009 deficit is the highest since the end of World War II, when it was 21.5 percent. The economists generally agree that the deficit should not exceed 3 percent of GDP.
Yet, after all these contradictory news, we learned about one virtual place of real success. This week Google reported a record $ 1.64 billion profit. It seems that the internet advertising market is bouncing back from the recession, the commentators said. But even in this success there are unpleasant facts: Internet advertising is cheap, Google is Internet monopolist, and in time of economic crisis the business tends to spend more money for advertising. Therefore, the good results of Google sells are just confirmation of the existing economic troubles. | link |
CHINA./RECESSION./RECOVERY: For the first time Asian economies, led by China, are helping the West to recover from economic recession. Some economists wonder whether China is laying the groundwork for sustainable growth or just increasing its export despite the recession, writes The New York Times. "If the consumer in the United States and Europe doesn't come back, I'm not sure Asia has a Plan B," said for the newspaper Kenneth S. Rogoff, a professor of economics at Harvard. In other hand if China does slow, as some experts fear it could in the second half of 2009, the United States' effort to climb out of recession could be that much harder, writes The New York Times. Whatever is the future one is clear - the world is experiencing a geopolitical shift, the center of gravity is moving towards Asia. (read in depth)
U.S./ECONOMY./DEFICIT: Don't be scared by large deficits in times of recession, says Paul Krugman in opinion for the New York Times. The Great Depression was caused by the government's efforts to keep the balance sheet green. Actually anti-deficit policy in the 30s transformed the recession into depression. It was wrong policy, argues Krugman. The big deficits are among the small range of tools that can fix the capitalist economy in crisis .
There are examples with countries such as Belgium and Italy who survived after their net debts had grown more than 100 percent from GDP. Krugman thinks that the dangers for America are not economic, but political. "So don't fret about this year's deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery - says Krugman in the end of his opinion article - the extra debt should be manageable. If we face a potential problem, it's not because the economy can't handle the extra debt. Instead, it's the politics, stupid." (read in depth)
ECONOMY./RECOVERY: The world economy shows signs of recovery - China, Japan, Germany and France marked growth between April and June 2009. Housing market in America also is improving, consumers and businesses are more optimistic, Dow Jones index is up. Now is time for a new debate: what will the recovery look like? The Economist magazine writes about three scenarios: "V", "U" and "W". A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more. (read in depth)
In recent weeks, a small but vocal minority of experts, the so-called "double-dip" forecasters, have predicted a "W-shaped" recovery, writes the New York Times, among the double-dippers are Martin Feldstein, Edward Harrison, Paul Krugman, and Nouriel Roubini. These economists see some analogy between the present economic situation and the crises in the early 80s and during the Great Depression in the 30s. In both cases there were twin recessions (1980 and 1981-1982; 1929-1933 and 1937-1938) before the real recovery happens.
According a recent survey of the National Bureau of Economic Research most economists - about 65 percent - are predicting a long, slow U-shaped recovery.
ECONOMY./RECESSION./RECOVERY: Global recovery can happen only if there are markets and consumers, but the world can no longer rely for growth on spending Americans. The economist Robert Samuelson thinks that developing countries - China, India, and Brazil - would seem to be the obvious replacement for American spending as the world's economic motor. All these societies have huge needs for housing, consumer goods, health care and more, but they still don't have a culture of consumerism. Samuelson gives as example China's saving rate that in 2008 was 54 percent of GDP while the U.S. saving rate, including both households and businesses, was 12 percent of GDP. The pessimists say that China is not capable to change its export based economy and will continue its aggressive trade policy that will put in danger the "emerging market" countries such as Brazil and Egypt. Nicholas Lardy of the Peterson Institute is more optimistic. China's leaders, he says, are trying to boost domestic spending by decreasing household saving. Without the prop of American spending, the world needs a new basis for mutually beneficial growth, says Robert Samuelson and warns "without it, we may face protectionism, nationalism and economic strife." MORE
US ECONOMY./RECESSION./THEORIES: The U.S. history shows that Big Government does not help recovery neither shortens the recession, says Alan Reynolds from Cato Institute. In an article for The Wall Street Journal he refutes Paul Krugman's theory that in this recession the Big Government saved America. Recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed, says Reynolds. On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy, he adds. [READ MORE "IN FOCUS": FREE MARKET OR REGULATION?]