Historically, countries have pulled themselves out of most recessions through exports. The way this works is, as the value of currency falls, goods and services become cheaper, while the rest of the world left unscathed by the crisis sweeps the cheaper stuff and pushes the weaker economy’s exports up. As more stuff is sold and bought, more people find jobs and the recovery starts. Sadly, this recession does not fit into this model.
The recession that hit after the crash of 2008 was not centered on any single country. The recession of 2009 was the first one since the Great Depression, when GDPs worldwide have declined. In addition, countries that are currently growing, like China, for example, are not in the mood to share the pain and boost their own imports so that other countries’ exports could grow. To make matters worse, China is keeping its currency artificially depressed, despite the insistence of the rest of the world to let it float freely. China simply has one goal in mind, considered by many to be rather selfish one, which is to keep or grab a better share of the weak global demand.
But the “currency war,” as Brazilian Finance Minister Guido Mantega has called it, is only a manifestation of the real problem. Simply, it is a mathematical improbability for the entire world’s exports to grow and imports to decline at the same time. I mean, who is going to import everyone else’s exports? Martians?
So, the $14.5-trillion question is: how is the U.S., as the world’s biggest economy, going to revitalize its economic output if it is not going to be through exports? Well, there is not much buzz out there in the form of optimistic, yet plausible answers. There is, however, plenty of very realistic pessimism, estimating that the U.S. economy could remain stuck in an L-shape “recovery” for years, or worse, revert into recession.
To make matters worse, the hole into which the U.S. has dug itself in is really a monster of a hole. The unemployment rate is still dismally high, remaining 5.6% lower in September compared to its December 2007 peak. To put things into perspective, since 1970, after four out of five recessions, the unemployment had hit new highs relatively quickly, and certainly much sooner than at the stage that we are at now. The only exception was the recession that hit after the tech bubble burst in 2001, when the unemployment remained below its pre-recession peak, albeit by a much narrower margin of 1.8%.
What is really keeping economists awake at night? This gnawing feeling that the U.S. economy could be stuck in neutral for a while. People are not back at work because the companies are not hiring. Companies are not hiring because the demand is very weak. The demand is weak because everyone is conserving cash and not spending. This is what the aftermath of a financial crisis looks like: it is as ugly as heck and it just doesn’t know when it has outstayed its welcome.
When wallowing in grim thoughts, Japan’s lost decade is often invoked. But, compared to the U.S., Japan was actually better off than the U.S. is now. What we are going through today is much worse: there is more unemployment, the demand is weaker, and the policy response appears to have done more damage in the long term when weighted against the short-term benefits.
But I’m describing the water to the drowning man. By now you may have gathered that I am not a fan of Alan Greenspan, but he may be onto something. At the recent Bloomberg FX10 Conference, he said, “It’s useless to try to stimulate business executives’ animal spirits as long as they’re still fearful of another financial calamity. What’s required is an extended period of calm — long enough for executives to regain their confidence and start thinking about new opportunities again.”