Monday, 21 September 2009

Armageddon postponed

Here is the latest from Paul Krugman on the state of the global economy and the possibility that Armageddon may have been averted.

Sept. 21 (Bloomberg) -- The global economic downturn has probably hit bottom and the U.S. may have emerged from recession at the end of July or in August, said Paul Krugman, the Nobel Prize winning economist.

“The end of the world appears to have been postponed,” Krugman, a professor at Princeton University, said at a seminar in Helsinki today. “We’ve had an extraordinarily terrible crisis” though “we’ve probably hit bottom” as “world output has turned positive.”

He warned the world economy “does not appear to be falling into an abyss but is still” in trouble and the recovery will be “slow and painful.” The outlook is “very fuzzy’ and a W- shaped recession may become U-shaped. While budget deficits “saved the world” in the short term, “for most people things are going to get worse,” he said. He forecast U.S. unemployment may rise until early 2011.

The U.S. economy shrank 1 percent in the second quarter compared with the prior three months. The drop in GDP was the fourth in a row, the longest contraction since quarterly records began in 1947. Krugman, who won the Nobel Prize in economics last year for his theories on world trade, said the U.S. has $1.1 trillion in annual capacity “staying idle.”

He said “the truly extraordinary thing” has been “the collapse of world trade” and cast doubt on the potential for exports to lead the global recovery.

“The problem is that this is a global financial crisis,” he said. “How can we have an export-led recovery? Unless we find another planet to export to.”

History is no guide, he said.

“The trouble is, we really have no road maps. The only model is the Great Depression itself.” That “was ended by a very large spending program known as World War II and we don’t really want to repeat that.”

The Nobel Laureate said the world has become “highly subject” to financial bubbles and its willingness to fail to recognize the bubbles was “remarkable.”

One can only echo his sentiments on two scores.

1. The capacity of global capitalism to blow bubbles and then not recognizing them as such.
2. The need to avoid the same "solution" this time around to how the world managed to emerge from the Great Depression.

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