Monday, 2 March 2009
The Economic Crisis: Getting A Sense of Scale
The economic commentators are always full of doom and gloom. The very strength of the adjectives they use make it difficult for non-economists to get a real sense of the sheer scale of current crisis. Because, without a doubt, part of the commentariat's shock at what is happening is simply the breaking of a spell: the illusion that 'boom and bust' was over, and the 'Great Moderation' had tamed the business cycle, had been very widespread. So some of this rhetoric may be simply a reaction to the previously prevailing orthodoxy, not a reliable guide to the severity of the problem.
Richard Parker in the NYRB, however, gives be a comparison I can understand:
"By mid-February, the Federal Reserve's once-gargantuan $29 billion rescue of Bear Stearns had been dwarfed not just by the government's hotly debated $700 billion "bailout bill" last fall, or even President Obama's nearly $800 billion stimulus package, but far more stunningly by the $7.6 trillion the Fed and Treasury had by the beginning of 2009 already pledged to contain the ever-widening collapse of the economy, and the additional sum of up to $2 trillion that the new administration said it would raise from public and private sources to rescue banks. Governments from London to Beijing have meanwhile rushed to provide vast sums to their own capital markets. These figures are mind-numbing to voters—and to sophisticated investors and economists as well, and for good reason: fifty years ago the United States spent what in today's dollars would amount to only $115 billion on the Marshall Plan to reconstruct all of Western Europe; the 1980s savings and loans bailout—at the time the largest financial rescue operation since the Great Depression—cost taxpayers a mere $130 billion." (my emphases)
The other issue is how long is this likely to go on for. Will this recession be 'V' shaped (painful decline, but followed by a very swift recovery)? Will it be 'U' shaped ( painful decline, followed by a period of flatlining before the recovery) ? Or will it be 'L' shaped, like in Japan ( drop off cliff and stay at the bottom of the economic canyon for ages...) ? John Ross points out 27th Febrauary was the 352th day since the Dow Jones hit it's peak, and that overall stock prices have so far declined by 50%. He goes on:
"The only fundamental difference between the current decline and that of 1929, so far, is the duration of the fall. After 1929 it took the Dow Jones 713 trading days to reach its bottom – the trough being on 8 July 1932 by which time the Dow it had lost 89.2% of its value. It remains to be seen for how long the current decline will continue. However although the duration of the drop is at least as yet not as great as after 1929 is as rapid."
OK: so we don't know what shape this recession will be because we're still falling off the cliff, despite throwing money at the problem on a scale which dwarfs the post-war recovery package for an entire continent.