Pick your letter

Fri, 08/21/2009 - 11:01am

One of the Economist's leaders this week focuses on the global economy and the nature of the incipient recovery.  They use an alphabet metaphor to explain the possibilities: 

The first step in any recovery is for output to stop shrinking. But the more interesting question is what shape the recovery will take. The debate centres around 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.

Well, first of all, their description of the "U" trajectory sounds an awful lot like an "L" to me. 

Second of all, if that's the case, well, it seems they were paying awfully close attention to an obscure report entitled "Alphabet Soup." 

Third of all, if anything, I'm more convinced of the likelihood of the "W" path coming to fruition.  The nature of the Chinese recovery and the absence of any other global economic locomotive is playing a large role in my calculations here.

Daniel W. Drezner | Permalink | | Comments? Login or register
( filed under: )


Advertisement

 

"Imitation is the sincerest form of flattery?"

by charli on Sun, 08/23/2009 - 8:18am

Did they cite you in any way?

Great Depression was a W....

by Don S on Sun, 08/23/2009 - 5:21pm

If you look at the trajectory that Great Depression took in the US, there was a period of some recovery followed by another drop after 1937. But it varied. I think the most common pattern might have been a U. But possibly a V in the UK and Germany.

The US is clearly not going to be the locomotive pulling the world out of depression this time. If China isn't the locomotive, it's difficult to see another candidate.

The problem with visualizing China (or perhaps India and China) as the growth locomotive(s) is that China simply doesn't have the personal income to consume a great deal in the current scheme of things. Most of chinese savings apparently are held by enterprises, not individuals and families, so where is the great Chinese spending boom going to come from? The other great exporters (Japan, Germany, France) are aging societies. This makes it difficult to sustain a boom in these countries, so their current 'booms' (slight growth the last quarter) are unlikely to be sustained once the stimulus ends.

The US and China clearly need more restructuring before sustainable growth resumes. The US needs to get out from under the pile of mortgage debt and increase it's savings rate - china needs to raise the pay of it's workforce to stimulate demand. Neither is likely to happen immediately, so W is the way to bet.

You're not pretending you

by blue13326 on Sun, 08/23/2009 - 5:59pm

You're not pretending you came up with those terms?

And Roubini's been warning of a double-dip recession for months now.

I am still trying to figure

by Heresiarch on Mon, 08/24/2009 - 1:26pm

I am still trying to figure out how there can be a recovery when none of the conditions that caused the recession in the first place have actually been dealt with.

Banks and financial institutions are still sitting on trillions of dollars of sub-prime loans and associated credit default derivatives that they're still marking up to full pre-crash value to avoid insolvency.

Combine that with the fact that 70% of the US economy is consumer driven and said consumers are now saving for the first time in decades rather than using fixed or revolving lines of credit to spend spend spend and you have a permanent contraction in the US economy that the increase in government spending is masking.

If you remove that increase from the Feds printing cash and selling debt like it's going out of style the actual economy is down something like 6.5% year over year.