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August 24, 2009

Prof: Risk of Double-Dip Recession Rising

At the moment he thinks it's more likely we'll have a "U" shaped recession (a "recovery" with very slow and soft growth that is almost but not quite recessionary itself).

But he sees risks of the dreaded "W" too.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they donít. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

That whole thing about oil... It's bizarre that Obama and the Democratic Party have apparently decided to just hope for the best with regard to oil. To just pray that we don't have yet another big run-up in the cost of oil that tips us back into recession (or deeper into recession if we're not out yet).

That's not a workable economic strategy, and it's an awful political one. Whenever oil prices spike, the public gets frothy about oil exploration. True, when the jam-up eases, they forget all about it. (Alas.)

Obama and the Democrats have ignored entirely the last oil crunch, the one that plunged this country, and the world, into a deep recession. They have not expanded supply in the least.

What the hell do they think is going to happen when this all happens again, which it always does? The public will remember that many Republicans (including of course Sarah Palin) were pushing hard for expanded domestic energy production and were entirely ignored. The public isn't thinking about this much now, but when it happens again, it will be practically all they think about, and Obama's solar power and unicorn farts plan for green energy is not going to mollify them.


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posted by Ace at 01:23 PM

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