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Double-dip recession on the horizon?

Written By: - Date published: 8:33 am, January 27th, 2010 - 14 comments
Categories: economy - Tags: ,

Leading US economist and Nobel laureate Paul Krugman sees a 30-40% chance of the US re-rentering recession this year, and the conditions that would cause that would almost certianly be replicated in other countries, including New Zealand, with the same result.

More evidence that a second wave of recession may be on its way came yesterday in the form of US housing data. US housing is where the global recession started and it is vital that this sector get back on an even keel if the US economy, and with it the world, is to enjoy good growth. So, news that housing sales sunk by 16.7% in December, well beyond economists’ expectations and the worse fall in 40 years of records, is worrying. The drop further cements fears that the ‘recovery’ we have seen has been entirely a product of government stimulus and there is no real growth from the private sector coming through to sustain it. Once the stimulus dries up, so might the growth.

Here’s what some analysts had to say:

The numbers “clearly indicate that the rebound in housing demand observed so far has been largely supported by government programs,” Anna Piretti, senior economist at BNP Paribas, wrote in a research note Monday
The report “places a large question mark over whether the recovery can be sustained when the extended tax credit expires,” wrote Paul Dales, U.S. economist with Capital Economics. 

Government stimulus is meant to work like a defribulator, an injection of energy to get the economy going again. But eventually the economy’s heart has to start beating for itself again. A government can’t afford to keep on trying to kick-start it.

14 comments on “Double-dip recession on the horizon? ”

  1. RedLogix 1

    Who needs Krugman when Steven Keen has been making the same case all along?

    At the end of his his latest post Keen points out (and backed by the data):

    Thirdly, now that the debt party is over, the attempt by the private sector to reduce its gearing has taken a huge slice out of aggregate demand. The reduction in aggregate demand to date hasn’t reached the levels we experienced in the Great Depression—a mere 10% reduction, versus the over 20 percent reduction during the dark days of 1931-33. But since debt today is so much larger (relative to GDP) than it was at the start of the Great Depression, the dangers are either that the fall in demand could be steeper, or that the decline could be much more drawn out than in the 1930s.

  2. Homo Domesticus 2

    I believe another recession is inevitable. Lessons have not be learned. Internationally, corporate integrity is still invisible, massive bonuses and over-valued salary packages the norm, stock market, international currency traders continue as before. Eventually, we will have to pay for the massive bailouts, China holds all the cards. Here, stand-up comedian John donKey will continue to do nothing, and one-trick pony Bollard will soon raise interest rates. Exchange rate will rise, for many struggling manufacturers that will be last straw. Increased GST introduced in the next budget by corrupt double Dipton English will push many families to the brink. Food is already too expensive for thousands of hard-working New Zealanders; how will they afford to pay another three percent increase in food prices? Electricity prices will also increase, despite blustering Bozo Brownlee’s electricity reforms. What a joke!

    Homo d.

    • Chess Player 2.1

      You forgot to mention that the sky is falling in.

      If you have some suggestions, let’s hear them – or are you just having a bad morning?

  3. Mr Magoo 3

    To be fair red I think Krugman has been giving % estimates on this since last year.

    The threat of a double dip recession has been there all along and many have commented on it. Some are foolish enough to pretend it is inevitable, but it is definitely a possibility regardless.

    And one we should be wary of. Our current “green shoots” appear to be driven by low interest rates, (media pumped) consumer confidence and the related bump in the property market.
    These are not productive or sustainable things in their own right. Without a productive bump elsewhere this is just a puff of hot air soon to vanish when interest rates rise again.

    Of course who can predict it? No one it seems. “30-40% chance” is about the same as saying “meh, who the hell knows”.

    • Draco T Bastard 3.1

      There were 12 economists that published a prediction of the present recession. Keen was one of them.

      • Mr Magoo 3.1.1

        I am not sure what the conclusion is here?

        If there is one you will say he is “right all along” and if there is not then he was wrong or will there be another excuse of how things changed at the last minute in some unexpected way?

        I mean typically these guys will say “40%” or “likely”. Effectively they are covered both ways. 🙂 I think one of the main features of the current economic environment is the uncertainty.

        Not to say that they are full of crap or unhelpful! What IS interesting is the discussion of the evidence (as pointed out he has) and the various warning signs that are present or will soon be.
        Being science trained myself I do appreciate the nature of such “predictions”.

        • RedLogix

          If there is one you will say he is “right all along’ and if there is not then he was wrong or will there be another excuse of how things changed at the last minute in some unexpected way?

          The point is that Keen and a handful of others formally predicted the crisis in published papers. … while all the neolibs where blithely prattling on about the ‘great moderation’. The vast majority of economists got it wrong; their models have no mechnisms to explain or predict this inherent instability of the capitalist system.

          By contrast Keen, who has been incredibly generous with his time, has developed exact and mathematically rigorous models that do explain what is happening. There is an enormous amount of material on his site now, but my favourite and the most readable entry point is here.

          • Mr Magoo

            I understand that. It is still just a theory.

            Just because it was right one big time, does not make it right all the time.

            To be clear: I am also not saying it is wrong.

            Thanks for the link BTW. 🙂

  4. ben 4

    Just discovered I’ve been banned. Sorry, didn’t realise.

    Later all.

    • That sounded suitably chastised to me. Not that I would presume to tell the Standardistas how to run their blog of course. LOL.

      • lprent 4.1.1

        I really get irritated about people attacking authors and not the opinions and facts in the posts. I particularly get annoyed with the concept of pwning, owning, or winning a debate. It is total crap because there are seldom ‘right’ answers for anything in real life. Probably the nearest you’d get to it is in physics or maths, and even there you’ll find that in almost every case there are a substantial set of ‘depends’ that are the limits for any given solution.

        It is a real pain to write coherent posts at the best of times. It takes time, effort and determination. It is harder when you have people denigrating you personally. It cuts at your motivation to write posts. It is something that I’m not prepared to tolerate happening with my authors. Commentators can year the arguments apart, demonstrate how they are incorrect (in their opinion), discuss and debate – and I really don’t give that much of a shit (apart from the other parts of the policy). But don’t denigrate the authors directly or I’m likely to start on on whomever does it.

        ben actually got off pretty lightly. I was considering devoting some time to tearing everything he wrote apart at a purely personal level to see how he liked it. But I figured a ban was more appropriate.

  5. tsmithfield 5

    What has happened since the recession is that a helluva lot of private debt has been transferred to sovereign debt. This has resulted in a number of countries being on the verge of default with respect to their loan obligations (e.g. in Europe, the PIIGS- Portugal, Italy, Ireland, Greece & Spain).

    The problem is that these nations have been borrowing from other heavily indebted nations. Thus the consequence of default is somewhat like a row of dominoes. So that is one substantial risk. The US housing and commercial real-estate situation is certainly a major risk factor. The US government has changed the accounting rules so banks don’t have to account for losses on these assets until they actually occur.

    This has had the effect of kicking the can further down the road. However, the fundamentals are that there are just too many houses in the US for the people able to afford them. Thus, I agree, there is still another shoe to drop there.

    Finally, another major risk is the effect of banks withdrawing stimulus to avoid inflation. This could have a major slow-down effect on world economies if done too soon. Conversely, if they don’t do it soon enough, we could end up with massive stagflation.

    • Draco T Bastard 5.1

      The problem is that these nations have been borrowing from other heavily indebted nations. Thus the consequence of default is somewhat like a row of dominoes.

      That describes the entire banking house of cards that the private profiteers have given the world.

  6. Quoth the Raven 6

    I think it’s interesting reading this about Japan and their government stimulus – Illusions of the Age of Keynes.

    The world has recent experience with attempts at resuscitating a bubble economy. The Bank of Japan cut interest rates six times between 1986 and early 1987 and all that new money caused the Japanese economy to bubble over. As Bill Bonner and Addison Wiggin write in Financial Reckoning Day Fallout…

    After the bubble popped in Japan, that government pursued a relentless Keynesian course of fiscal pump priming and loose fiscal policy with the result being a Japan that went from having the healthiest fiscal position of any OECD country in 1990 to annual deficits of 6 to 7 percent of GDP and a gross public debt that is now 227 percent of GDP. “The Japanese tried to cure an alcoholic with heroin,” writes Bonner. “Now, they’re addicted to it.”

    Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, “Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession,” with Japan’s nominal GDP growth rate below zero for most of the five years after 1997.

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