The Double-dip trillion question mark
Interviews with 5 Economists by Jorge Nascimento Rodrigues ©janelanaweb.com, 2010
Today high unemployment rates in the developed world, Europe’s sovereign debt crisis in a large group of countries, a change of the growth model in China and the risk of a bubble bust in this “engine” of the world growth, growing evidence that the US economy – another “engine” as so many exporting countries depend upon this consumer market and outsourcing dynamo – is running out of steam, the American Dow Jones oscillation around the 10.000 points benchmark and the volatility in the financial derivatives markets rose concerns in the class of analysts and opinion makers and spread a fear behavior inside the world financial ecosystem, around the big institutional investors and professional speculators.
Consider also that trust in governments to resolve such problems – either in a Keynesian mood or in an Austrian hard line fiscal adjustment – has been damaged badly. A crisis of confidence has yet to be overcome.
Other key indicators of global economic health (or lack of) “talk” so hard that it would be unwise do ignore: The Baltic Dry Index, a measure of commodity-shipping rates, fell 2.8 percent this Monday (July 5th) for a 27th consecutive retreat, the longest losing streak since August 2005 and it is now down nearly 50%; gold is tentatively attempting to consolidate this week above $1,200/oz (spot gold hit an all-time nominal high of $1,261.90 an ounce on June 18th), investors traditionally see this precious metal as a safe-way in crises times.
On the other hand, some healthy figures, like a forecast from OECD for a real world GDP growth of 4.6 percent this year and a jump of 9.5 percent in the world trade according to World Trade Organization economists, were engulfed by the pessimism. Also, the money “parking” around the world makes no headlines in the breaking news. OECD figures refer that the private sector of its members is forecast to run a surplus this year of $3,000bn [4.8 percent of world estimated nominal GDP for 2010]. Add $300bn in aggregate surplus in emergent economies (the largest slice generated by China), a figure from the Washington-based Institute for International Finance. Only private equity firms, where corporate takeovers and global raids are planned and plotted, sit atop $500bn – some of this financial capital is like “dry powder”. All these trillions are “sensing” deals worth doing. As economist David Caploe, from Singapore, said this week at EconomyWatch.com: the “fat cats” around the world have literally more money than they know what to do with.
With this contradictory background to the current hot topic, we interviewed a diverse group of experts and analysts in different continents about the double-dip buzz. The opinions are clearly divided. Some would say the double-dip is unlikely – we had a single-dip. Others say it’s a true risk with no precise date already scheduled, but unavoidable. Others even would say the Great Recesssion never stopped so it’s only the same music.
Definition of the double dip: When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The National Bureau of Economic Research (NBER) doesn’t define a double dip more than this short sentence: a continuous recession that’s punctuated by a period of growth, then followed by a further decline in the economy. Or in alternative: after a first trough following the recession the economic activity might rise for a period, but not far enough to complete a cycle, then fall again, and finally rise above its original level, only then completing the cycle. Visualy this is a W-shaped movement.
The roots of this W design can be diverse. For some economic historians the fault is to be found in wrong policies. A series of monetary and fiscal blunders drove the countries back into recession. Exit policies from Keynesian stimulus packages at the wrong moment, to early, may stop the recovery. For other analysts and economic historians, Great Depressions are followed by serial default crises and led “naturally” to downturns in the most fragile countries and regions with a risk of world contagion. Only when rent-seeking strategies lost dynamics and the real economy take over the situation, the recovery will consolidate.
Historical case study: The Great Depression was made up of two distinct economic slumps – August 1929 through March 1933 and May 1937 through June 1938. The last period is commonly classified as a “double-dip”. The world GDP downsized softly in 1938 (0.1%) but the world trade contracted dramatically by 12% (more than in 2009). The American stock market S&P composite crashed between October 1937 and May 1938.
INTERVIEWS with Professor CARLOTA PEREZ, Chief Global Economist BILL WITHERELL, researcher MARK J. LUNDEEN, Chief Political Economist DAVID CAPLOE, and consultant and author PETER COHAN.
“If the Chinese manage to avoid the collapse of their housing and commercial real estate bubbles they deserve a medal.”
Carlota Perez, 71, is the renown scholar and expert in technology revolutions, and Professor at Tallinn University of Technology, Tallinn, Estonia, and Visiting Senior Research Fellow at the Centre for Financial Analysis and Policy, University of Cambridge, UK.
Q: World global double-dip is a true risk ahead?
A: Yes, indeed.
Q: Do you forecast a new recession climate for the second half of this year or for next year?
A: Impossible to predict. Too many variables in the game.
Q: The double-dip risk has a higher probability for the developed countries?
A: No. Both developed and emerging. If the Chinese manage to avoid the collapse of their housing and commercial real estate bubbles they deserve a medal.
Q: Can the G20 policies avoid the double-dip?
A: The G20 are no longer recognizing the gravity of the situation. They are back to seeing the crisis as an “accident” to be overcome by monetary policy and some regulation, rather than a structural break that needs the radical re-coupling of the world of finance with the real economy. If you “regulate” a casino, you do not change its nature. We will not be out of the crisis until financial profits come largely from the profits created in the real economy and not from differential asset inflation.
“We think a double dip is unlikely. But except for the highly indebted members of Club Med in the Eurozone, significant near-term fiscal restraint is not desirable with the recovery remaining so weak”
Chief Global Economist of Cumberland Advisors, a global independent, fee-for-service money management firm, based in Florida, since 1973.
Q: Do you forecast an imminent new world recession will all this buzz around a double-dip and the Chinese bubble bust risk?
A: The downside risks for the global economy clearly have increased recently, but we do not see this mid-cycle slowdown deteriorating into a recession either later this year or the next. In other words, we think a double-dip is unlikely. Monetary policy in the US and the eurozone and Japan will remain highly “accomodative”. Probably for the next 12 months with short-term rates staying close to zero. Central banks will seek to counter the effects of the ending of one-off fiscal stimulus measures. Inflation will not pose a problem. Corporate profits should remain strong and business investment is picking up. While the global locomotive economy is slowing from its excessively rapid pace in the first quarter, a healthy development in our view, it will still be the most rapidly growing major economy, with the GDP advancing by 10 to 11 % this year and 9-10% in 2011. The pace of the US economy will clearly be slower than is normal for this stage of a recovery, but should remain positive. Both the job market and the housing market will take a long time to recover. Consumers and investors remain very risk adverse and the equity market appears to be pricing in a more adverse future than we are projecting. This implies attractive buying opportunities for stocks may lie ahead in what are likely to be volatile market conditions.
Q: The slowdown is more probable in the developed countries than in the emergent regions?
A: It is the developed economies that face the greatest growth headwinds. But my answer to your first question indicates I do not expect a double-dip for the US economy. Nor is a recession likely for the Eurozone as a whole. It will likely manage a 1+% growth this year and not much better in 2011. Germany, France, and the Netherlands will do better than this while the weaker members of the zone will remain depressed. Spain, for example, will remain in recession this year and probably longer. This is not a double-dip, but rather an inability to recover from the single-dip.
Q: The recent G20 meeting supporting adjustment fiscal programs against the Keynesian mood can upgrade the risks of a double-dip?
A: The G20 pledge to halve fiscal deficits by 2013 and stabilize or reduce debt-to-GDP ratios by 2016 led some to fear that this will make a double-dip more likely, but this call for starting to take well timed steps to bring fiscal finances under control is less restrictive than it appears at first glance. Governments have already announced steps in this direction and most will be phased in over a number of years with little if any effect during the next 12 months. Also, there will be a significant improvement in fiscal finances as the recovery proceeds and from the ending of the one-off fiscal stimulus measures. Clearly, except for the highly indebted members of Club Med in the Eurozone, significant near-term fiscal restraint is not desirable with the recovery remaining so weak. But we regard the G20 action as positive for the long-term growth of the global economy and hope that sooner, rather than later, our own government will demonstrate that it too is starting to prepare to deal with the grim long-term outlook for the nation’s fiscal situation due to the rising costs of health care, pensions and debt interest.
MARK J. LUNDEEN Statement
“A global double-dip is unavoidable”
A private economic researcher has developed what he called ‘Bear’s Eye View’ (BEV) Chart to track the depth and form of the bear market. He is following the market race between the Great Depression of the 1930s and the present Great Recesssion since 2007 at the Gold Eagle website and at the Le Metropole Café.
“A global double-dip is unavoidable. The problem is that we have massive global debt weighing down the world’s economies; economies that are woefully incapable of servicing the debt burden’s placed on them. Debt by itself is not necessarily bad, if used property it has many benefits. Debt financed the industry and commerce that lifted western civilization out of the dark ages. But debt has a dark side too. What it built, it can destroy.
So what distinguished creative debt, from destructive debt? Simple, all debt finances economic activity of some nature. If in the creation of debt, economic activity is stimulated that pays off the debt, and leaves a profit for the lender and borrower that is good debt. Valuable goods and services are produced, jobs are created, and taxes are paid, all thanks to debt.
But this is not what happened in the past 40 years. Credit standards have been relaxed, resulting in massive debt in government, commerce, and individuals, who were encouraged to take on debt to finance economic activity that could never pay off the debt. So now we find ourselves in our current situation. What is our current situation? On a global basis, we have come to a point where our assets have transformed themselves into liabilities. If you correctly understand our problem, you will understand that it’s not a question of whether or not, we will see a global double-dip, but rather how long, and how much pain the world must endure before we start discussing how best to go about the liquidation of uneconomic debt?
I’m in favor of returning to the marking debt to the market. No more bailouts! If a debtor can’t pay his debts as scheduled, his assets are liquidated for whatever the going price is. I understand that this will result in massive deflation. Banks will fail as housing prices drop by 50% to 90%. Governments will fall too. But all this is going to happen anyway. The current policy of bailing out insolvent debtors will in time result in hyper-inflation. And Hyper-inflation is even worse for political careers, the banking system, and lives of private citizens. We need to admit that there is no good solution to our economic problem. But of the two we are confronted with, the solution that results in truly affordable housing, lower taxes, and steady employment in two to three years seems preferable to me.
So there is nothing the G20 can do to avoid a double-dip. To have, or not have a double dip are not the two choices laid before them. These people have brought the world to the brink, and the only choices they can now choose from is either massive deflation, by liquidating the uneconomic debt that their previous policies have created, or continue their program of bailing out bankrupts, which will result in hyper-inflation, and chaos.”
“I reject the whole double-dip thesis. I think we’ve been in a consistently negative situation”
Chief Political Economist of EconomyWatch.com, Singapore, and founder and president of the Minerva School Program in Critical Thinking.
Q: A W-shaped recession with a double-dip ahead is a true risk for the global economy?
A: I would have to disagree with your assumption of a “double-dip” as a possibility. In my view, the advanced industrialized world — US / EU / Japan — have ALL been in a fundamentally recessionary condition since BEFORE Black September 2008, and certainly since then in a more or less unbroken line … We were openly skeptical about the fourth quarter numbers in the US in particular, and, in general, are generally so about almost ANY numbers produced by a US government agency. When you analyze all the fundamental “real economic” factors — above all, unemployment and, in the US at least, the inventory of unsold houses, both new and “used” – it’s very difficult to believe the US economy has ever come out of the “first” dip, so the fact that all the current numbers are so negative, for both the present and as leading indicators, says to me that the W idea is much less convincing than the long L_________…
Q: Or the double-dip risk has a higher probability for the developed countries?
A: As I said, I don’t think any of the developed countries ever really got OUT of a recessionary situation, so I reject the whole double-dip thesis. I think we’ve been in a consistently negative situation, and, doctored numbers from the Bureau of Labor Statistics in the US AND the stock market aside, the situation has been, is, and will remain grim for the foreseeable future. In that context, let’s remember something a lot of people often forget: The stock market is NOT the real economy. This may — or, at least, should — seem obvious after everything that led up to Black September 2008, but for whatever reasons, people tend to forget that. So just because SOME stock markets “rallied,” that doesn’t mean the real economy has improved in any significant way. This is especially so when one considers the outsize role that finance sector stocks play in a lot of stock market indexes. Without the finance sector — which in the US is now in almost exactly the same structural situation as its “cousins” in Japan have been since 1989, namely, being propped up by the government with a zero interest rate policy that enables them to borrow VERY cheaply, and then invest in a lot of short-term securities in other markets where rates are even slightly higher — the increases we’ve seen in various indexes would be MUCH less than what they’ve been statistically. In this context, we can see the stock market, sometimes at least, reflects the exact OPPOSITE of what is going on in the real economy, especially when, as now, most indexes are so heavily weighted toward finance stocks, whose numbers are radically inflated by government policies that they themselves have had a major hand in crafting.
Q: Can the G20 avoid the double-dip?
A: The G-20 has quickly become the farce that the G-7 became by the time of its second or third meeting back in the mid-70s. It’s just a big show that is now more inclusive than the G-7 / G-8 was, by including China, India, etc, which is all to the good from a symbolic point of view, but it’s already completely devoid of substance, just as the G-7/8 so quickly became as well. So I don’t even think we can meaningfully speak of G-20 policies — let alone place any hopes on them that they are going to do much of anything about world economic problems. For all the talk — and, to a certain extent, the reality — of “globalization”, as the EU debt crisis makes abundantly clear, the nation-state remains the real locus of economic policy-making, and I don’t see that changing any time soon, even though nothing would make me happier than to see greater political — and hence fiscal — integration in the EU. But both the US and Japan are integrated nation-states, and they are in just as big a mess as the EU, so even an enthusiastic supporter of European integration like myself can’t pretend such a development — as unlikely as it seems with each passing day — is going to be able to solve the very deep / real / structural problems that the advanced industrialized world faces. For that, we would need what I see as the sort of intelligent and far-seeing leadership of China — but it remains to be seen how even a cohesive group like that is going to be able to overcome the long-simmering labor militancy that has erupted there, and has already, in our view, made the previous Chinese model obsolete. But they, at least, seem to have a plan — which is something I’m not seeing from the US, EU or Japan.
“I think we will see a slowdown in growth, but it might not be as bad as negative growth.”
Analyst, consultant and author. Peter S. Cohan & Associates, Massachusetts.
Q: Do you expect a double-dip for the second half of this year?
A: I am not sure we ever got out of the first recession so it is wrong to talk about a double-dip. In the U.S., the recession that started in December 2007 persists (at least according to the official dater or recessions, the National Bureau of Economic Research). The NBER dated the beginning of the recession based on job losses and it has not declared the recession over because it is not confident that job losses are over. Having said that, if you define a recession as two consecutive quarters of negative GDP growth, then the first recession ended in the U.S. in the fourth quarter of 2009. I think we will see a slowdown in growth, but it might not be as bad as negative growth.
Q: Can we talk about an asymmetry in the take-off of the world recovery?
A: Part of the reason is that there are some countries like China and India that are still enjoying growth – and in many Latin American countries, the growth is very strong. The growth in China may slow down a bit due to efforts by the government there to let some air out of the bubble. But I would not be at all surprised to see the slowest growth (or possibly economic decline) in Europe due to budget balancing and deficit reduction efforts.
Q: The G20 summits will avoid the double-dip?
A: It might just slow down to very slow growth that will feel like a recession. In general, I find it curious that the political argument for deficit and debt reduction is strong enough to overwhelm the popular benefit of using government spending to keep the economy going forward until the private sector can take over by investing. I suppose the fear of a collapse of the Euro zone is a scary and highly motivating prospect for deficit reduction. But it remains to be seen whether a massive dose of Euro Thatcherism will produce prosperity.