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Retrenchment, Not Recovery
Cross Posted From The End of the American Century
Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. But what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.
A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.
Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.
"And there's another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.
These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is right on target. There will not be a recovery like ones of the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.
Take a look at Roberts' essay, and offer your thoughts.
Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. But what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.
A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.
Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.
"And there's another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.
These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is right on target. There will not be a recovery like ones of the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.
Take a look at Roberts' essay, and offer your thoughts.
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Two things:
A. Thanks for your post! (your link to the article leads to your article on your blog - you might want to fix that - or I suggest other readers just look at the link in your blog, which does work)
B. I am in agreement that we are in for a downturn and a retrenchment of our economy the likes of which may not be clear to most people. I think that when people had too much money to burn and doo-dads were so cheap, people got in the habit of buying lots of stuff they didn't need. Now, with less money to spend, they look around and notice they pretty much have more than enough to last for many, many years - except for food and fuel and so forth. All that previous consumption has built up a powerful reservoir to be rationed out over the next coming years... thus leaving the economy without consumers.
January 28, 2009 1:04 PM | Reply | Permalink
Thanks for both A and B, Thera. As to A, can you tell me how to edit posts I have already made? I am relatively new to TPM, and I haven't been able to figure out how to edit things I have already posted.
On B, I think you are right on. But it going to be a huge problem for the economy as a whole if it is "without consumers." No consumers=no production=no jobs. I see this as part of a seismic shift in the U.S., and in the global economy. But I am not at all sure what it means coming out the other end!
January 28, 2009 7:24 PM | Reply | Permalink