Double dip in the USA?

Escrito el 17 diciembre 2009 por Gayle Allard en Economía de EEUU

The latest economic data from the United States is encouraging. Consumption has begun to grow, housing sales are expanding, new orders are up. Even unemployment has already begun to decline, to 10%, well before any analysts had forecast.

But a look at history shows that this may be a place that we have been before. In the mid-1930s, the US economy showed signs of recovery from the deep recession that followed the financial crash. Unemployment began to improve, businesses were recovering and the country moved out of deflation territory.

It was at that moment that fears of bottled-up inflationary pressures and high government deficits, along with widespread speculation in commodities markets, began to dominate the public debate. Monetary and fiscal authorities began to tighten policy: the Fed raised reserve requirements by 50%, and Congress cut public spending. The result was a plunge back into recession, with unemployment reaching 20%. Recovery to normal growth, employment levels and even asset prices was postponed until after World War II.

What lessons does this situation have for us? The conditions are similar: incipient recovery, commodity speculation, fears of deficits and inflation in the future. Many of these fears are justified. Clearly, we can´t afford to ignore the budget deficits that in many countries have topped 10% of GDP. Debt levels look precariously high in the coming years, and more massive stimulus is clearly not an option from the fiscal side.

It is on the monetary side where authorities might do well to apply the lessons of the 1930s. While the credit crunch continues and GDP growth looks to be below potential in the future, central banks would probably be well advised to keep money conditions easy as long as they can. The US economy is still not out of the woods, and the double-dip or “W” recession for the US economy cannot be ruled out as a possible scenario.


Jorge J. 17 diciembre 2009 - 21:09

At least they are seeing somekind of recovery… here in spain we cant fall again because we havent risen yet…

Ram Parasuraman 19 diciembre 2009 - 15:45

Dear Professor,

Are you satisfied by the outcome of the Copenhagen summit? What we obtained is an non-legally binding agreement, more of a word of mouth gesture from 4 major economies, i.e. US, China, India and South Africa that they would work on a plan and ensure transparency about their emissions data. Is this sufficient? Does it provide anything besides a basic acknowledgment?


JOSE LUIS REVILLA ESCUDERO 25 diciembre 2009 - 14:10

WALL STREET, 20 years later

Year 1987
Reagan was the US president at that moment. OCTOBER´s BLACK MONDAY makes WALL St fall 508 points in one single session.

20% drop in one day. What happened ?? … Alan GREENSPAN is the FED responsible, and therefore, the key person in the country due to give some kind of explanations to the world.

Greenspan doesn´t know what to say. The main aim of his speech must be CALM, restore CONFIDENCE, and obviously PLANS, IDEAS, …

The reason of this situation was not other than the decision of increase interest rates, without taking much notice of the effects from this decision in the, at that time, bubbled finacial markets. But there is never one single cause,… the main bonds collector in the country gets into bankruptcy, mainly due to this increase in interest rates that made current bonds lose value.

So, GREENSPAN was guilty ??
Obviously, he ´d just arrived into his FED position. But also obvious is that he was supposed to bring some kind of “outdoor” experience in markets, stock exchange, brokers and bankers.
So, yes, GREENSPAN did a bad calculation of risks when deciding to raise rates and ignored factors that derived into a complete hell.

The RESTRICTED handbook for complex situations had to be released from the shelves of the FED library. And acting as a cook recipe book, only 3 dramatic options were recommended:

1- To close the markets. To interrupt the daily shares transactions.
2- To deliver all the FED credit lines and cash into the banks and brokers to restore credit flows and restore confidence.

3- To artificially enter into the markets buying shares to sustain the indexes.

All these 3 measures were considered as an interferation of the state into the free markets. All an interest declaration in the middle of the capitalism paradigm country, the United States of America.

Some time later, nobody explained yet how… but suddenly, the next day, and in only half an hour, major banks began buying futures to restore shares quotations. Many experts said it was some kind of a together action between the government and the private banks. Others say that banks decided to do so because they had the TOP SECRET support of the government, just in case, all went wrong again.

Year 2008
President W.BUSH is in charge. Lehman brothers fall down. The financial system breaks up completely.

Ben BERNANKE had substituted GREENSPAN not that long ago. A long period of 0% interest rates is inherited by BEN, and obviously a new bubbled Wall St is also present. But a new bubble is also there, the REAL ESTATE market.

The securitisation of SUBPRIME bonds attached to this REAL ESTATE bubble makes everything explode.

The difference with year 87 crisis is maybe, that BERNANKE did not decide to raise the rates before everything collapsed. But only for that, since all other is very similar:

1- Instead of a bonds company collapse, we have LEHMAN BROTHERS fall because of the subprime loans.
2- In both cases we have a new FED responsible in charge.
3- The system collapsed and the “between banks” loans stopped in a sudden way, collapsing the credit flow.

4- Markets also dropped heavily, creating a complete negative sentiment.

But in this case, it was not the next day, and with all major banks buying futures, the ones that healed the situation.
It has been a FED strategy, right from the heart of Wall Street, buying shares, nationalising banks, and supporting artificially the Stock Exchanges during the last 10 months. This strategy has not spent half an hour, it has spent more than 12 months and it still continues…

1- 0% interest rates policy.
2- Banks nationalised through the entrance of the government in their shareholding composition.
3- Interbank credit flows restored through vast amounts of public money.
4- Shares quotations support directly from the FED treasury departments and operators.

And we still continue, some say that maybe till june 2010, others fear about the consequences of the end of this aid.

Some say that our current crisis is similar to that in year 1929, the great depression, but its similarities with the chaos of year 1987 are also remarkable, mainly in terms of the banking collapse.

This crisis has left the Wall Street operators screens and has jumped into the real world, that after such a long period of wealth financed by GREENSPAN low interest rates policies, crashed into a REAL ESTATE and CONSUMER bubble that made credit institutions collapse.

And all this came without previous forecast ???… Where is regulation, where is the banking system control ???

So, did GREENSPAN get wrong again ??? …

Meanwhile, investors all around the globe look voiceless how bad macro data ( huge unemployment, public deficit, real estate dramatic statistics … ) mix with a rally in Wall Street.

Every single day a bad figure is released, markets respond with gains. Creating once again a Stock bubble with only 3 – 4 key companies rising the indexes, while the remaining companies struggle to survive.

Markets cannot fall. Markets must be the indicator of positiveness, confidence, that ” we are in the right road to recovery”, but macro data do not say that yet.

Is the FED once again manipulating the markets ??? … Till when ??? … And when this manipulation finishes, what is going to happen ??? ….

We have to wait till june 2010 to see the effects, or maybe more ???

What kind of investors took profit of this unusual rally ?? … Obviously, not the experienced ones, obviously not the old ones, … But those that one day got up, and while having breakfast before taking the car to get into his public office or “anti crisis business” saw that CITIGROUP shares were at 0,5 dollars per share, and told his wife, … Honey !!!, tell the bank branch clerk today to put our savings into CITIGROUP shares that are extremely cheap !!!!

Jose Luis Revilla Escudero
Chairman & CEO
WWShares, Inc
– Global Wealth Management-

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John Anthony 13 enero 2010 - 12:54

John Anthony…

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Karry 11 noviembre 2012 - 09:50

Highly energetic post, I liked that bit. Will
there be a part 2?

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