Saturday, July 25, 2009

Happy Days Are Here Again, Aren't They?

Mark Carney would have us believe the recession is over even if recovery will be somewhat slow. However, look at what Mr. Carney said one year ago, two months before the global economy crashed:

The Canadian economy is judged to have moved into slight excess supply in the second quarter of 2008, and this excess supply is expected to increase through the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential economic growth starting early next year. This will bring the economy back to full capacity around mid-2010.

On the other hand, here is a transcript of an interview with Nouriel Roubini, who foresaw the crash coming, on PBS's Nightly Business Report about what we might expect now:

PRATT: So what is your forecast for the recovery right now? I've been hearing sub par growth. What exactly does that mean?

ROUBINI: First of all, in my view the recession is going to continue through the end of the year. It's not over yet, and while potential growth rate for the U.S. economy is 3 percent, I expect that the growth rate of the economy is going to be very anemic, below trend, then on 1 percent for the next two years. Why? You have U.S. consumers are shopped out, saving less debt burden. They're not going to consume very much. Your financial system is severely damaged, and credit growth is going to be limited, and now we have also this massive re-leveraging of the public sector with a large budget deficit and increases in public debt are going to eventually crowd out the economic recovery of the private sector. So I don't see a lot of economic growth ahead of us.

PRATT: Are you worried at all about a double-dip recession?

ROUBINI: Yeah, the risk is that by the end of the next year, if budget deficit remains very large, around $1.5 trillion, and if the Fed keep on monetizing them, essentially printing money to try to prevent increases in interest rates, expect that the inflation is going to go up, and if expecting inflation were to go up, long-term government bond yields would go up, and mortgage rates will go up. Borrowing costs for consumers (INAUDIBLE) will go up, and that's going to crowd out the recovery, so there's even a risk of a double-dip recession.

This looks very much like the early nineties but perhaps worse. The political toll then included the defeat of the Bush I administration in the U.S. despite the political highs it achieved following victory in the 1991 Gulf War and the reduction of the Mulroney-Campbell PCs to 2 seats in 1993. The political toll substantially lagged the economic one but it was just as devastating when it appeared.

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