Archive for June, 2008
A deadly cocktail mix: the 1973 & 1979 “Stagflation” meets the 1990 and 2001 “Asset/Credit Bust” with the result being an ugly U.S. recession and sharp global slowdown
It now appears that the U.S. and global economy is facing the worst of the shocks that led to the U.S./Global recessions of 1974-75 and 1980-82 (stagflationary shocks from oil prices) together with the shocks (asset/credit bubbles gone bust) that led to the recessions of 1990-91 and 2001. The combined mix of the worst shocks that led to the last four U.S. and global recessions (1974-75, 1980-82, 1990-91, 2001) is thus quite deadly and therefore one of the reasons why this will not be a short and shallow recession (V-shaped and lasting only 6 months) in the U.S. but rather a longer, uglier and deeper one (U-shaped and lasting 12 to 18 months).
Let us detail how the current U.S. and global economic outlook shares the worst of the shocks of the last four U.S. and global recessions…
The delusional complacency that the “worst is behind us” is rapidly melting away…and the risk of another run against systemically important broker dealers
After the collapse in mid-March of Bear Stearns and the ensuing bailout of Bear’s creditors and the extension of the Fed’s lender of last resort support to systemically important members of the “shadow banking system” (the non-bank broker dealers that are primary dealers) a sense of delusional complacency emerged in financial markets based on fairy tales such as “the worst is behind us”, the “recession will be short and shallow”, that “housing is bottoming out” or even that “we will avoid the recession”. This chorus of cheerleaders included policy makers that had missed the incoming financial tsunami for most of 2007, CEOs and senior financial sector folks who had lost hundreds of billions of dollars with their reckless lending, and investments and a bunch of self serving spin-masters talking non-stop their long books on CNBC and other financial media. This circus of “the worst is behind us” became a pathetic and louder chorus in the two months from mid-March till the end of May. This delusion was for a short couple of months supported by rising stock prices, reduction in credit spreads and interbank spread that, however, remained very high and indicated a persistent liquidity and credit crunch.
But this delusional complacency is now rapidly collapsing as financial markets are back to panic mode. Let’s detail how…
Which countries around the world are at risk of a hard landing, i.e. a sharp growth slowdown and an outright recession? Following the U.S. the list is now growing. Countries now at risk of a hard landing now include: the U.S., the U.K., Spain, Ireland, Italy, Portugal, Japan, Canada, New Zealand, Latvia, Estonia and a few other central-south European countries.
Let us start the countdown and see the details of the recession risks in each one of these countries…
Project Syndicate has published my latest column for this forum “The Specter of Global Stagflation”. This is a shorter version of a much longer piece “Global Stagflation Ahead? The Interplay of Aggregate Demand and Aggregate Supply Shocks” that I recently posted on my Global EconoMonitor. Here is the text of the Project Syndicate column: “The […]
Is there a significant chance that Israel will attack by year end Iran’s nuclear facilities? The German magazine Spiegel argues so in a two-part article “Mission Doable“ and “‘We Will See a Middle East in Flames’“ (hat tip to Fabius Maximus): While the Europeans continue to pin their hopes on diplomacy and are convinced that […]
RGE Content Weekly Roundup and the launch of the new U.S. EconoMonitor and the Emerging Markets Monitor group blogs
After the success and popularity of the Latin America EconoMonitor, the Europe EconoMonitor, the Global Macro EconoMonitor, the Finance & Markets Monitor, and the Asia EconoMonitor RGE Monitor is proud to launch the U.S. EconoMonitor and the Emerging Markets Monitor. Starting this week a broad group of academic economists, experts, former and current policymakers and […]
Following the great success and popularity of the Latin America EconoMonitor, the Europe EconoMonitor , the Global Macro EconoMonitor, the Finance & Markets Monitor and the Asia EconoMonitor, RGE Monitor has just launched two new group blogs: the U.S. EconoMonitor and the Emerging Markets Monitor. Starting today June 15th a broad group of academic economists, […]
Yours truly was interviewed yesterday by Bloomberg TV on the state of the economy. The link to the video is here. The retail sales figures for May – better than expected – were driven by a temporary factor, the tax rebates, whose influence will fade out by early fall. Instead, more persistent factors will bear […]
The recent rapid rise in commodity prices – oil, energy, metals and agricultural commodities – is leading to the concern that the ensuing rise in global inflation may be associated with a slowdown of global economic growth if not an outright global recession; i.e. there are rising worries about stagflation, a deadly combination of rising inflation and economic recession.
Indeed, not only inflation is rising in many advanced economies and emerging market economies but there are signs of a likely economic contraction in many advanced economies (the US, UK, Spain, Ireland, Italy, Portugal, Japan). In emerging market economies the rise in inflation has been associated so far with rapid economic growth and economic overheating; but there are worries that the economic contraction in the US and other advanced economies may lead to a growth recoupling – rather than decoupling – in emerging markets at the time when rising inflation is forcing monetary authorities to tighten monetary and credit policies to control rising inflation; so “stagflation lite”, i.e. rising inflation cum sharply slowing growth may soon become a problem also for emerging market economies. So should we worry about stagflation or “stagflation lite”?
Let us analyze this issue in more detail…
The US May employment report dashed the delusional hopes that the economic contraction would be mild or avoided altogether: apart from the headline figure – a drop of 49k jobs in May and five consecutive months of falling employment – the details were even uglier: unemployment rate up from 5% to 5.5%; falling employment also based on the household survey; falling temporary employment (a coincident rather lagging indicator of the job market; flat hours worked; falling employment in a broad range of industries; and a birth/death BLS estimate that overstates net job creation by new firms as it is still adding 217k in May alone that are likely to be drastically revised downward once the long delayed benchmark occur. So, an outright ugly job report.
Add to that oil prices going up $10 on Friday alone and $16 dollar in the last two trading days (+13%) and you get a double whammy: contracting economy via jobs and a stagflationary shock via oil prices.
Let us consider the consider the consequences of this double whammy…