And there's perhaps no better example of that than the current debate over the strength of the U.S. economy. Professionals in the Concrete Canyon have been amassing on either side of two camps for months: "The U.S. economy is headed toward recession" or "The U.S. economy will continue to grow."
Still, as history demonstrates, and contrary to the current 'chorus' on Wall Street, sometimes there are more than two options. For example, what if the U.S. economy is headed toward a growth recession? I.E. a protracted period of sub-trend GDP growth.
Most analysts argue that the U.S.'s trend rate of growth is 3%, with a growth rate below that being a growth recession. The consensus calls for a GDP growth rate of about 2% for 2007 and next year
Moreover, Financial Times columnist Martin Wolf points out that a lengthy growth recession is likely to be far more disturbing than a sharp recession, assuming a sharp recession ends quickly.
Of course, final GDP statistics for 2007 won't be released for another two months or so, and the 2% GDP growth estimates for both 2007 and 2008 could prove to be low. Still, if both come to fruition Wolf says U.S. personal spending/private investment will become sluggish, and be offset only partially by fiscal spending increases and an improvement in net exports - - a scenario he calls "the great unwinding."
The great unwinding's implications
Wolf argues that once the great unwinding starts and U.S. personal spending / private investment becomes sluggish the rest of the world will either have to increase demand (by buying goods and services) relative to the potential supply, or reduce the supply relative to the demand. Further, the rest of the world's build-up of savings and currency reserves is proof that the money exists for those outside the U.S. to consume and invest more.
Wolf listed China as a prime example of a country with ample savings to increase consumer spending and investment. He should have listed Middle East nations flush with petrodollars, Russia, and to a lesser extent the European Union as three other candidates capable of consuming and investment more.
Finally, Wolf calls the great unwinding "a turning point for the world economy," a period where the rest of the word, and in particular emerging markets, must now become demand engines of the global economy. But will they? Wolf says this big economic question will be determined over the next few years.
Economic Analysis: Wolf offers several data points that argue that the United States is in a growth recession. However, whether U.S. private demand (personal spending, investment) remains sluggish in 2008, requiring the rest of the world to serve as engines of growth for the global economy depends on several undetermined factors. These include: U.S. Federal Reserve monetary policy, U.S. Government fiscal policy, the price of oil, and the size of a potential subprime mortgage bailout / mortgage market insurance program.
Why do we have a weak dollar?
Holiday hiring slow for retailers
Closing Bell: What sell-off? (AIG, ABK, EPR, MBI, JAVA, ORCL, ERTS)
Reader Comments (Page 1 of 1)
11-21-2007 @ 7:39PM
william lindblad said...
Mr Wolf sound like a student of John Gresham and I have never been able to follow Gresham either. On the other hand, good old (and dead) John did give us the concept of value, although, dense, at least to me. I prefer his simplied approach, which he called "intrinisic".
Plain and simple this can equated to what the other guy is willing to pay. The aruments over "money" as we know it go back to Andrew Jackson who did not like paper currency in favor of gold and the McKinley era that favored silver. Paper won. Paper is based on faith. In this case it is the word "faith" that has to be considered. If the dollar is to remain the worlds "reserve" currency it must retain faith in value. Our present position of cutting rates to save our own economy could well be our own un-doing as foreign investment is currently becoming cautions. Without this investment we have a serious problem.
A recession is when your neighbor is out of work. A depression is when you are out of work.
3-27-2008 @ 3:49AM
Surfer said...
Nice job at spinning our very deliberate economic collapse. http://theusrepublic.wordpress.com
11-22-2007 @ 1:52AM
cerner1 said...
home builders will be jumping outa windows soon it will take 4 years to reecover
11-22-2007 @ 1:55AM
cerner1 said...
the home builders will take 4 years to rebound if not longer
11-22-2007 @ 1:55AM
cerner1 said...
us is in a growth depression soon
11-22-2007 @ 5:36AM
MITCH said...
bernacke keep cutting the fed rate and watch oil go to 150-200 per barrel.stop trying to save the losers and prevent pulling the rest of us americans into the same situation.
11-22-2007 @ 9:11AM
JOhn said...
A barrel of oil will go to 150-200 irregardless of where US interest rates are. In 2003, interest rates were lower then now and oil was 40 / brl. Oil is increasing in price as demand increases and supplies/reserves/new finds decrease. An economic matrix of inflation targets oil for 102 / brl in 2008. As to gold....it was over 800 / troy ounce almost 30 years ago. Adjust those metrics for inflation.
As to the Fed / Bernanke (Greenspan) they are pawns to the market forces they try to control. The economic theory of controlling interest rates for a society has always been retroactive as opposed to proactive...and that was based on only one society/economy. We are now in a global economy where money moves across borders with the press of a button or the striking of a pen on paper. Until govts stop increasing the money supply, the world will be continually be in an inflationary spiral. As natural resources deminish in supply due to depletion, their cost will rise. After the collapse of the US stock market following the dot.com, the US was headed into a deflationary mode ala Japan since 1987. The Fed lowered interest rates, same as Japan did, hoping to ignite the economy again and force savings as did the Japanese, much to Japan's eventual misfortune as they are still in a morass after 20 years (see yen carry trade). Americans, however, did not save, they spent the cash influx on toys and goods......ATV's, boats, designer clothes, etc. ALL DEPRECIATING "assets". The Americans found the surplus funds by remortgaging their homes and pulling out equity, using that equity to buy JUNK and now they must pay on their mortgage while their junk is now useless. THIS WAS THE INTENT OF THE GOVT....to create business for a slowing economy. It backfired.
11-22-2007 @ 6:33AM
mykisa said...
Fair Tax would fire up America`s manufacturing base
11-22-2007 @ 10:32AM
Mort said...
Looks to me like we are facing some serious problems in 2008 as Secretary Paulson said this week. Look at the economic FACTS:
The dollar is the WEAKEST in decades with nations indicating they will invest in other currencies, significant credit problems are BOMBING major banks, oil is nearly $100 predicting continuing major gasoline price increases soon, home foreclosure numbers are bad and growing, housing is literally frozen and falling, there's a 4-year oversupply of condos in some major cities Miami, Las Vegas etc.), grocery and energy prices are soaring with electricity and heating oil/natural gas expected to go up 15-20% this winter, health care costs are almost out of sight, manufacturing jobs continue to go overseas and the huge illegal alien problem remains...
...and we have a $12 BILLION A MONTH war full of corruption that we can't seem to win.
Whoever thought a Republican administration would put America in such poor financial shape???
11-22-2007 @ 3:14PM
nikki said...
I have to laugh at those that are still questioning if USA is in a recession?
11-23-2007 @ 9:56AM
John Lysek said...
By increasing the national debt 50% in 7 years, bush has shown the world that America has no intention of ever getting its books in balance: that the dollar is the worst currency to bank. http://www.nowandfutures.com/forcast.html has excellent charts showing just what our government has been lying about (everything) and where things are headed.
11-23-2007 @ 12:30AM
Jill Schottenstein said...
THANK YOU GOV. SPITZER,
Please ask Congress for a GAO audit of all banks, hedge funds, accounting firms, brokers, institutional holders, transfer agents... to clean up the mess you must have a true audit! Suggest taking the politics out of the courtroom and replace the "best interests of the children" (look into those pay raises of George Bundy Smith & others..)
November 21, 2007
"GOVERNOR SPITZER ANNOUNCES $5 MILLION IN FUNDING FOR EMERGENCY FOOD NETWORK
Unprecedented Decline in Available Food, State Doubles Previous Amount of Funding for Hunger Prevention Program"
"Governor Eliot Spitzer visited the Bowery Mission in New York City today to announce an additional $5 million will be available to help food pantries and soup kitchens, who are facing a decrease in federal funding and private donations, restock their shelves during this holiday season. "
“We absolutely must continue to support the critical work of New York’s emergency food network, and I am pleased we can be of some assistance during this particularly tough holiday season,” said Governor Spitzer. “These volunteers help ensure that our state’s most vulnerable residents - the indigent, children and seniors - receive the food they need to remain healthy and productive.”