Ben Bernanke says the US economy will begin growing by the end of this year. Everyone was encouraged to get that forecast from the Fed Chairman yesterday. But now the critical question is when the recovery does come, what will it be like?
When I ask economists they talk about the recovery in terms of "L," "U," "V," and "W."
"L" is the shape of a recovery after the economy has fallen sharply and then it goes through years of stagnation. This is what happened in Japan in the 1990s. The "Lost Decade" that everyone talks about. Most economists doubt the US will have an "L" because the aggressive moves by the Fed and Treasury have added so much stimulus to the economy.
We could be in for a "U." Dramatic drop, gradual growth, followed by a bounce back.
Most recoveries in the past have been "V"'s: big pain and big gain. It's a speedy recovery. Fat chance that will happen this time.
The consensus view is "W." The economy goes down, then up, only to fall again before it marches higher. Why? In a word: Inflation. Because the Fed has been pumping so much money into the economy to boost growth, inflation makes a comeback. That forces the central bank to raise interest rates, which slow down economic activity.
No one knows for sure if the recovery will be an "L," "U," "V," or "W." But whichever letter it is, it will take a long time -- a couple of years -- before the US economy gets back to normal.
Comments
Ms Susie, you mention the "consensus view" for the outlook in our economic recovery, but what is your instinctive feel for our future? I personally think it will be the "W" twice over. I don't mean large rises and drops, but smaller, less impacting moves. With summer projects in so many area on a distinctive slow move, the employment that normally would increase during these summer months will be weak. We may see some sector rises but come this fall those that had these summer jobs will be returning to the lines of unemployed. The ripple effect of what climb we achieve during the 3rd quarter will be drawn back down. Eventually we will step up out of the ashes but not until after we see some baffling setbacks. Sure there are many other factors that will determine our recovery or setbacks. I was just pointing to an area for illustration. One area of concern for me is in the agricultural markets. With the dollar holding relatively strong, the world markets pricing us out of export sales in grains, and the supply over demand in grains, there may be some issues from these thoughts that put a string attached to help slow our recovery.
Keep up the great professional work that you do.
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recovery will be an "L," "U," "V," or "W." But whichever letter
"
Economic output will not have same curve but here is curve for capitalization.
http://3.bp.blogspot.com/_otfwl2zc6Qc/SjEvqlp1WlI/AAAAAAAAKTA/Oeg0BxjNIYw/s1600-h/Global+Equity+Cap.jpg
Hard to imagine that this is a random walk. Would you guess that random walk would be merely bunch of dots on the wall? By contrast the continuity of this curve does offer some limitation to fluctuation, a limitation which prevents sheer randomness of march, randomness of walk.
flipping this curve over or looking at it from handstand you then see good approximation of dollar strength. Can you see the deflation, the peak buying power of your dollar on 9 March 009? If we have some momentum towards inflation by virtue of curve continuity thus economy should overheat.
Global Overheating
!
Arrrrgh
They are talking about recovery for the last 2 years but with the situation we have right now I am not sure about that. I think this isn't just over yet.