Thursday, September 1, 2011

The question is not "can" the economy be saved, but "will" it.

Martin Wolf:
Struggling With a Great Contraction - (FT)
"Many ask whether high-income countries are at risk of a "double dip" recession. My answer is: no, because the first one has not ended. The question is, rather, how much deeper and longer this recession... might become. By the second quarter of 2011, none of the six largest economies had surpassed... their 2008 [output levels]... In the US, unemployment is still double its pre-crisis rates. 
In neither the US nor the eurozone, does the politician in charge... appear to be much more than a bystander of unfolding events... Obama wishes to be president of a country that does not exist. In his fantasy, US politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer the country to fail, rather than the president succeed... 
In the long journey to become ever more like Japan, the yields on 10-year US and German bonds are now down to where Japan's had fallen in October 1997... does deflation lie ahead...? That seems... to be a more plausible danger than the hyperinflation those fixed on fiscal deficits find so terrifying. [The] huge fight over US fiscal policy... has caused a run into, not out of, US government bonds. Meanwhile, stock markets have taken a battering... Nouriel Roubini, also known as "Dr Doom", predicts a downturn... yet he is surely right that the buffers have mostly gone: interest rates are low, fiscal deficits are huge and the eurozone is stressed. The risks of a vicious spiral from bad fundamentals to policy mistakes... are large. 
Yet all is not lost. In particular, the US and German governments retain substantial fiscal room for maneuver--and should use it. But, alas, governments that can spend more will not and those who want to spend more now cannot. Again, the central banks have not used up their ammunition. They too should dare to use it... the key, surely, is not to approeach a situation as dangerous as this one within the boundaries of conventional thinking."

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