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the recession--is it a U, V or W?(5 posts)

the recession--is it a U, V or W?gtx
Feb 3, 2002 11:14 AM
thought this was a good article
In my unofficial role of curmudgeon (long)McAndrus
Feb 3, 2002 2:33 PM
I thought this sentence was the most interesting.

"Some say there has been no recession at all since American GDP declined only in one quarter, July-September, and then grew by a marginal 0.3 per cent the next quarter."

Now I have not been following the recession statistically. If this statement is true then I have an obligation to remind people that words mean things.

If the definition of a recession is two consecutive quarters of decline (and that is the definition) and we have not had two quarters of consecutive decline then we are not in recession.

(If you have the patience, there's a long piece following on how recessions happen. I'm doing this because the average American's understanding of simple economics is absolutely putrid. If you find me a crashing bore then you'd better stop now.)

As to your question, U, V, or W? I believe the answer is U for these reasons.

Recesssions are economic phenomena caused by contractions in a nation's money supply. How does this work?

Any economy has a natural growth rate. It can sustain certain levels of growth (or contraction) without igniting periods of monetary inflation. A role of the Federal Reserve in the US is to guestimate the rate of growth of the economy and supply the right amount of money to support that growth rate. If the Fed provides too much money, we have inflation. If the Fed provides too little money we have either a) recession or b) deflation or c) both.

My research over the years has shown me that since WWII, economists have become orders of magnitude better at their jobs then they used to be. Each and every business cycle since WWII has been handled better and better by each Federal Reserve - assuming it has the political will to do so - and they have so far.

In a perfect world, the Fed is always printing just the right amount of money to provide the economy at its natural growth rate. That's its job as chartered by the Congress.

Where do recessions come from, then? Well, either the Fed guestimates incorrectly (the volume of statistics the Fed collects is staggering) or something happens that mimics a monetary contraction.

What can mimic a monetary contraction? Let me give two examples. The 1973 Yom Kippur War sparked what we call the Arab Oil Embargo. When this happened the price of oil shot up. That caused what economists call a "supply shock" to our economy. It sucked so much money out of the non-oil parts of the economy that the non-oil economy went into recession.

Anyone on this board old enough to remember the 73-74 recession? I am and it was a doozy. Much worse than the 89-91 and current versions.

The second example is the collapse of the Savings and Loans in the late 80s. Since banks are the conduits of cash in America, when so many S&Ls went under it had the effect of reducing the amount of cash in the system. Then we had the 89-91 recession.

What the Fed has done in the Greenspan era has been nothing less than remarkable and politically the man is untouchable. Each year they are more and more adept at reading the growth rate of the economy and putting the right amount of money into the economy.

The cause of the current recession goes back to the Mexican banking troubles in the mid 90s. When the Mexican financial system got into trouble, our Federal Reserve started pumping cash in anticipation of a Mexican collapse much like our own S&L collapse.

Mexico was hurt but didn't collapse and now we had tons of cash flowing into the economy. Anyone want to guess what the coincident event was in our economy? The dot-com bubble. That's where the cash went.

The Fed saw this and starting removing cash from the system because it feared triggering inflation. You saw this in the bursting of the dot-com bubble which preceded the current recession.

As late as the third quarter of last year the Fed had hit the gas again in the money supply. A few days ago they announced there'd be no more reductions in interest rates. In other words, they think the money supply targets now are just about right and they've eased off on the gas pedal.

Is there a point to all this, fella? Yes. gtx asked for opinions on U, V, or W. A U recession is normal. A V or W recession happens when the Fed reacts too harshly to economic movements.

I don't believe I've seen a V recession myself. But in another test for the oldsters, the 79-81 recession was actually two V recessions close together, in effect a W. And that was caused by the Fed under Arthur Burns overreacting.

You'll only see a W recession this time if there is something else looming to artificially contract the money supply and I don't see any such thing. Therefore I predict a U recession.

(Whew! Can this guy blabber on or what?)
I'll tell you when it's over...nmmr_spin
Feb 4, 2002 9:21 AM
Some ThoughtsJon Billheimer
Feb 4, 2002 9:43 AM
Although the monetarist model of recessions and depressions has some value, ultimately economic activity is fueled by human beings, not just the management of money supply. So there is a strong psychological element here, which classical eco nomic theory has always recognized.

Secondly, there are structural reasons, and I think the observation in the IT article about the structural shift from a goods-based economy to an information based economy is trenchant. Alvin Toffler observed this trend many years ago.

That having b een said, I read an interesting article a week or so ago in the Edmonton Journal. Some economist--I don't remember who--observed that the advent of the PC and the wiring of America and the world produced a huge structural boost to economic activity which aided and abetted the very long bull market in the last decade. U.S. economic growth averaged around 3.5 - 3.8% during this time, as opposed to its more traditional growth rate of 2 to 2.5%. Therefore, according to this theory, we will/are coming out of the recession, but future growth rates will tend to fall back toward long term averages, since the synergies from the PC/Internet revolution have for the most part been realized. Interesting point of view, huh?
Some ThoughtsMcAndrus
Feb 4, 2002 11:43 AM
Yes, I think your observations are on the point. In my boring post about monetary policy I tried to point out that its the Fed's job to anticipate the natural growth rate and match the money supply to that growth rate.

In the monetarist point of view, all wealth creation is the result of human activity. I think the more honest economist will say that given time, economics will be able to predict human behavior pretty accurately. (In my lifetime? Hmmm...)

As an extension of the idea, which nation is wealthier per capita, Taiwan or China? Taiwan. Which nation has more natural resources? China. What's the difference? An economic system that allows the Taiwanese to act more productively.

Your remark about the accelerated growth rate due to computerization is an echo of one Greenspan made a couple of years ago. I believe he said he saw this as an explanation for productivity growth in the late 90s that was otherwise unexplainable.

I agree that this boost of productivity will eventually level out to a more normal growth rate as well.