Economic Retrenchment, Not Recovery
January 27 2009 / by DSMason / In association with Future Blogger.net
Category: Economics Year: 2009 Rating: 1
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.
