Image: Jim Jubak

Jim Jubak

Last week -- on July 5 -- three of the world's central banks moved virtually simultaneously to stimulate the global economy. And financial markets shrugged.

I think that shrug marks an important new stage in the agonizingly slow recovery from the global financial crisis and the Great Recession. It indicates that financial markets agree that central banks are now relatively powerless.

Yes, central bank intervention, especially by the U.S. Federal Reserve, stabilized the global financial system. But the next stages of the recovery are about deleveraging to reduce the huge debt load distributed throughout the global economy, and then about demand creation. (See my related blog post on the markets' collective shrug here.)

Central banks are not well suited to either of those tasks. It's normally up to central governments and fiscal policy to make moves that might accelerate progress at this stage of the recovery. But few governments are in a position to take forceful fiscal action. And in even fewer countries is there political consensus that such action is necessary.

If I'm right, we're headed for more years of a recovery that at times is going to be so painfully slow that it won't feel much different from a recession.

In this column, I'm going to lay out, briefly, my view of where we are, where we're going and what kind of investment strategies might work best in what is likely to be a very tough investing environment for years.

More than a standard recession

As Kenneth Rogoff and Carmen Reinhart so convincingly argued in their 2009 book "This Time Is Different," this isn't your standard business-cycle recession. Business-cycle recessions come in lots of shapes -- U and V, for example -- and can last for just a few quarters or more than a year. The shortest postwar recession lasted for six months, the longest for 16 months. (For more on the length and shape of recessions, see this page from the Minneapolis Federal Reserve.)

A recession is typically the result of a supply or demand shock (such as a huge surge in oil prices), a drop in confidence that produces a big drop in demand, or overproduction at the peak of the business cycle that produces a temporary excess of supply. And the fixes for the run-of-the-mill recession are, according to the consensus among economists, some combination of fiscal and monetary actions to revive demand and restore confidence. Those actions can include tax breaks, government spending and interest-rate cuts.

Those are exactly what the United States has tried in the aftermath of the global financial crisis (which isn't to say that what we've tried was well-designed or executed).

But, as Rogoff and Reinhart argue, recessions that are the result of financial crises are significantly different from run-of-the-mill business-cycle recessions. For one thing, they last longer. In a typical recession, it takes about a year for the economy to make up lost ground and to return to its long-term growth trend. In a financial-crisis recession, Rogoff and Reinhart's data show, it typically takes more than four years for an economy to regain its pre-crisis per capita income level. And it takes even longer for an economy to resume its long-term pre-crisis growth trend.

Our lagging recovery

Where is the U.S. economy on that timeline? The U.S. gross domestic product peaked at $14.42 trillion in nominal dollars in the second quarter of 2008 and in inflation-adjusted dollars (constant 2005 dollars) at $13.33 trillion in the fourth quarter of 2007. In nominal dollars, which don't correct for inflation, the U.S. economy had regained its second-quarter 2008 peak as of the second quarter of 2010. In inflation-adjusted dollars the economy had recovered the ground lost to the crisis and recession as of the third quarter of 2011.

But because the U.S. population grew during that period, the per capita figures aren't as good. At the end of 2007, constant-dollar per capita GDP stood at $44,125. At the end of the third quarter of 2011, it was only $42,731. Adjusting for inflation and for population growth, the United States hadn't recovered the ground it had lost since the end of 2007.

And with the economy growing at an annual rate of just 1.9% in the first quarter of 2012 and projected to slow from that rate in the second quarter -- results aren't in yet -- the U.S. economy still hasn't rebounded to its pre-crisis rate of growth, either.

As discouraging as those numbers are, the U.S. economy has still managed to rebound more quickly than many other economies in the developed world. The United Kingdom, for example, is officially back in recession, with GDP contracting by 0.4% in the fourth quarter of 2011 and 0.3% in the first quarter of 2012. The optimists among economists are projecting growth for all of 2012 of just 0.4%. The Organisation for Economic Co-operation and Development, on the other hand, expects the economy in the United Kingdom to shrink by 0.1% for all of 2012.

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