July 2, 2008

Economic Downturn: Deeper and Longer

The central bank of central banks has spoken. The Bank for International Settlements (BIS) had the following to say in its annual report:

While difficult to predict, their interaction [credit crisis and inflation] does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect. [1]

The BIS is not alone. One of President Nixon's chief political advisers has laid out the reasoning in a book. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. Phillips is saying the US is facing a crisis of historic proportions. He identifies seven contributing factors on which I've written in the recent past. When introducing these factors during interviews, Phillips says:

Normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time... there are like six or seven [factors], and you don’t usually see anything like that number.

There is an eighth contributing factor to consider: stagflation. The primary control mechanism of the US Federal Reserve (Fed) is setting interest rates. The inconvenient truth is that we are facing dangerous inflation (controlled by increasing interest rates), while at the same time facing a stalling economy (controlled by cutting interest rates). First we saw evidence that the private sector lost control, as the Fed had to step in with tax-payer backing to support a buy-out of Bear Stearns. Now we see that the Fed itself doesn't really have control.

Update: The BIS perspective on the consensus view is corroborated by the June National Employment Report:

The number of private sector jobs fell by 79,000 in June, according to a payroll report released Wednesday, with the decline exceeding economists' forecasts. Economists polled by Briefing.com had expected jobs to decline by 20,000 in June.[2]


1. Associated Press, BIS: Global economy could face deeper downturn, George Frey, June 30, 2008.

2. CNNMoney.com, Payroll report: 79,000 private sector jobs lost in June, July 2, 2008.



libhom said...

The irony is that we may not even be in a recession yet. But, income redistribution from the middle class and poor to the rich is making it feel like most of us are in a deep recession.

GDAEman said...

Yea. The Wall Street part of the economy might not be in a technial recession, but the Main Street part of the economy has been receding for decades, and more sharply with the recent economic crisis.