Dr. Doom -don't believe the Optimist (unemployment, arsenal, weapons, dollars)

[SilverOne]

Doctor Doom
Don't Believe The Optimists
Nouriel Roubini, 05.21.09, 12:01 AM ET



Recent data suggest that the rate of economic contraction in the global economy is slowing down, and that we are closer than we were six months ago to the trough of the recent severe global recession.
But while the rate of economic contraction is now lower than the free-fall and near-depression experienced by many economies in the fourth quarter of 2008 and the first of 2009, the recent optimism that "green shoots" of recovery will lead to the recession to bottom out by the middle of this year--and that recovery to potential growth will rapidly occur in 2010--appears grossly misplaced, for three noteworthy reasons.

First, the current deep and protracted U-shaped recession in the U.S. and other advanced economies will continue through all of 2009, rather than reach a trough in the middle of this year as expected by the optimists.

Second, rather than a rapid V-shaped recovery, growth will remain sluggish and sub-par for at least two years into all of 2010 and 2011. A couple of quarters of more rapid growth cannot be ruled out as we get out of this recession toward the end of the year or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But structural weaknesses of the U.S. and the global economy will cause both a below-trend growth and even the risk of a reduction of potential growth itself.

Third, we cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.

Let me explain in detail these three serious risks to the U.S. and global economic outlook.
After the collapse of Lehman Brothers in the fall of 2008, the global financial system went into cardiac arrest. The rate of economic contraction in Q4 of 2008 and Q1 of 2009 was at near-depression rates in most advanced economies, and even in many vulnerable emerging-market economies.

Peering into the abyss of a near-depression, global policymakers--who had been behind the curve for most of 2007-2008, having misunderstood the severity of this financial crisis and its real effects--got religion.
They started to use almost all of the weapons in their policy arsenal to prevent a severe stag-deflation (which I define as a combination of a severe stagnation/recession and deflation). These weapons included significant fiscal policy easing; conventional and unconventional monetary policy easing; backstopping the financial system to the tune of trillions of dollars to reduce the liquidity and credit crunch; a provision of massive support to emerging-market economies via new swap facilities and a tripling of IMF resources; and policies of forbearance toward the banking system to restore credit growth. In the last two months alone, one can count over 150 different policy-easing actions/programs around the world.

Forbes.com - Magazine Article

[cleanhouse]

The problem is the bar has been lowered and it will be lowered for a long time. The definition of a good economy has changed i.e. 4% unemployment is a pipe dream within the next decade as is home prices rising by 2% in the next five years. It is also troubling to see that some Americans are still in denial and believe there is going to be this gigantic economic recovery and all of the wealth is going to be recovered in the next few years. Those Americans are in for an unpleasant surprise.