7/9/2012 7:50 PM ET|
Is this all the recovery we get?
Because this recession really was different, the recovery will be, too. Here's a plan for investing in what looks to be a slow, tortuous road back for years to come.
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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Default on the $15.7 trillion debt, come out with a new currency AND a Constitutional amendment that doesn't allow anyone in Congress to run for re-election if the budget is not balanced.
We don't need bandaids and Robitussin, we need a tourniquet and shock paddles!
P.S.: Also require that currency has the Bill of Rights amendments printed on one side.
Please everyone mark the spam people so that they will go away!
Small Business does 65% of the hiring and we are not hiring. Until such time as raising taxes talk is ended we are not hiring. Eventually taxes will be lowered again, it always has happened, then we will hire.
Why work hard for less. Wait for the pent up demand and charge more.
So we spend time with our family after we sign paychecks on Thursday, instead of creating jobs 6 days per week and resting only on Sunday.
I can hold out, can you?
Actually one of the better articles I have read in sometime. It has been clear to anyone who has been paying attention for awhile now that the fundamental problem is that a whole lot of money was lent to a whole lot of people who are not going to be able to pay it back. The creditors are going to take it in the neck there is simply no way around it. You can blame who you want and believe that one candidate or the other has a magic wand but you are deluding your self if you believe that. What has to happen will happen no matter who is in the White House or in control of Congress and it is going to be painful. The one certainty is inflation is inevitable because as noted in the article short of default it is the only real way governments can divest themselves of debt and make not mistake GOVERNMENTS WILL DIVEST THEMSELVES OF DEBT. There voters will demand it. Life goes on and it will not be stopped by the mistakes of the past no matter who suffers.
A very good article. It clearly shows that we need a man of great business experience and wisdom to lead us out of the economic doldrums. That man ain't Obama.
Anyway, I think the market is on hold until after the election. Then we'll see what our gooberment will do to for our prosperity. Don't get me wrong. I have never believed that government does much in this regard. Fortunately our capitalistic system is self-correcting and will eventually heal itself.
Go Mitt go. You are our best hope from a world of dopes!
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.
Translation: No politician wants to be the one to tell people that the spending gravy train is out of gas.
But in the end, it won't matter, because the markets, as markets always do, will eventually end up taking care of what the gutless politicians won't. It will just be a lot more painful that way.
"It's normally up to central governments and fiscal policy to make moves that might accelerate progress at this stage of the recovery."
Is there really no chance we individuals can just figure it out on our own? You know, like people did before the big banks and the central government took control of every nook and cranny of the economy? Come on, let's try it. Just once more for old times sake.
I asked this question yesterday and I got zero response: Anyone have any good ideas how to make refrigeration sustainable? What is the service life of a refrigerator or a large commercial food refrigeration warehouse, and how will repairs or replacements be made on down the road after such resources become scarce? Because without refrigeration, other than the constant temperature available several stories below ground, the shelf life of most of our fresh foods will decline in the neighborhood of half to 2/3rds, which will mean that fresh produce, meat, and dairy products will have to be consumed or canned rather quickly after harvest or slaughter. This problem will also make it very difficult if not impossible for any form of transportation to maintain a product temperature too, which will limit distances from sources greatly too.
I did a rough calculation a few weeks ago, and the square size of the hydroponic greenhouse necessary to locally supply just fruits and vegetables on a year-round basis to an urban area of 3 million population is in the neighborhood of 2000 to 2500 square miles, and this figure does not include meat, poultry, grain, dairy products, or paper products either. While we might be able to construct such facilities once, we won't have the resources to replace such facilities after they wear-out either.
And you thought that global warming was going to kill our descendents! What happens to economic growth when raw resources run dry and half or more of our customers must die so that the other half might survive? Imagine what -50% GDP will do to asset values!!!
Congress needs to be updated with younger, smarter officials. The good ol boys club in Congress needs to go. Sen. Byrd was 92 years old when he left congress due to bad health. Who votes a 92 year old into office? It is time to look, learn and read about who is running and if congress will not initiate a term limit then we have to. Our tax dollars go to every country and illegals in the range of tens of billions. We, US LEGAL taxpayers cannot afford this no longer. The US taxpayers cannot take on every countries problems with money. YOUR Vote counts and remember this began as President Bush & Cheney's mess along with the bankers. Time to put the regulations for banks back on, all of them.
Ha ha. So small biz doesn't hire now because of the possibility of higher taxes at some point in the future? That's the stupidest thing ever, and you hear it over and over again. Small biz doesn't hire because there is low demand. Stop wasting internet space with those retarded comments.
The more I think about it, the more I believe we are in a Lost Decade(s) situation like Japan.
Going back to 2000-2001 stuff, Enron, Worldcomm, 9-11, etc, did we every really fully recover? At least the Middle Class didn't. 2000-2012 has been a dark economic abyss.
About the only thing that "looked" like a recovery was the Housing Bubble and THAT popped.
Is that all we got left now? Bubbles? Outsource to India, move factories to China, but we can still create financial bubbles (until they pop).
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