Daily Investment Interpretations
January 10, 2009
Update: Paul Krugman has just
published two new articles dealing with the prospects for a second Great
Depression. In the first of these: Permanent Link to Risks of deflation (wonkish but important),
he extimates that, without intervention, the current crisis could lead to
an annual deflation rate of the order of -3.5% a year. He concludes:
"So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldn’t remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third."
In the second article: Permanent Link to Romer and Bernstein on stimulus, he concludes that the Obama team's estimates of the effects of their stimulus package appear to be within reasonable agreement with his own.
Of course, the Obama Administration can generate additional stimulus packages that would make up this shortfall, but you have to wonder about their loss of face and of credibility if they show up on Congress' doorstep in a couple of months asking for another $1.4 trillion.
Two additional points:
(1) Huge as the existing and prospective federal deficits are, a decade of rising Gross Domestic Product would halve their total value. For example, 10 years with a GDP rise of 7.2% a year (including inflation) would halve the then-existing federal deficit, and well before that, it should offset the $2 trillion-$3 trillion invested in restoring the economy to a rising GDP. Conversely, if the GDP continues to fall, the federal deficit as a percentage of GDP will rise even with a balanced budget. (And this doesn't touch the trillions in home and stock market evaluations that have disappeared during this downturn.)
In other words, it will cost us a lot less to recapitalize the economy (if we can make it work) than it would to let this slump deepen.
The government is trying a long ("Hail Mary") pass into the end zone that will decide the ball game.
(2) The fact that the world's leading economists are unsure whether or not we're going to sink into a second Great Depression tells me how much credence to place in stock market experts who are urging us to buy stocks in anticipation of the recovery that's going to occur later this year. (Could China be a special case? China is cash-rich rather than debt-poor. Would low commodity prices help China serve its 1.2 billion-person internal market?)