Don't worry (too much)

I doubt the US economy will plunge into a recession any time soon


Don't worry (too much)
by varjavand

Dear Agha Mehrdad: I enjoyed reading your article, entitled "Boom and Bust". Your analyses are valid and possess professional quality. I totally agree with your not-so-promising prognosis concerning the US economic outlook. However, I would like to add a few points of my own in support of your arguments and/or in an attempt to offer alternative views.

As far as I am concerned, the so called stimulus package, proposed by the Bush administration, is nothing more than a too-little-too-late remedy. It may not have the intended effects envisioned by the administration. As you know, the disposable income is not the only determinant of consumer spending, albeit a key factor. For consumers to spend more money, especially on the big-ticket items, their expectations must also be favorable. Without optimistic expectations, the full increase in consumer spending, following the tax rebate, is only a wishful thinking.

Although, the index of consumer confidence showed a slight increase, from 87.8 to 88.6, a less than 1% increases for the month of December. I believe it does not mean much based on its sheer magnitude. The increase was perhaps due to the upbeat consumer sentiment during holiday shopping season and the massive discount offered to them by retailers. I would expect the value of this index to drop noticeably for the month of January due the barrage of bad economic news that keeps coming.

In addition, the Purchasing Managers Index, PMI, which is a broad-based measure of producers' expectations and is based on a survey of thousands of supply professionals, showed a considerable decline for the same period of time, month of December. It dipped to 47.7%, from 50.8% the month before, a decline of 6.15%. Two of its five components; employment and the new orders declined for the month of December, the employment components was almost flat.

The value of PMI index below fifty, as you know, indicates that manufacturing sector is shrinking. And the prospect for new business investment is gloomy. In addition, when the PMI shows an unexpected decline, it triggers a strong negative reaction by stock market. The unprecedented drop in PMI was perhaps one of the contributing factors to the massive decline of the Dow Jones index since the start of the new year, about1000 points, or 7.5%.

Tax rebate in 2001 did not produce the desired effects either. According to a survey conducted by the Wall Street Journal right after the announcement of tax refund in 2001, 36% of the respondents indicated that they planed to save their tax refund instead of spending it. The attitudes may not be any rosier this time because of the lingering uncertainties coupled with the lackluster housing market and a severe crisis in mortgage industry. In my judgment, unless there is a drastic change, such as election of a democrat to the white house, there will not be a robust adjustment in consumer spending to the up side, we need a big push

2. Even though the United States is a supporter of the floating exchange rate regime, I believe it has been the hidden agenda of the current administration since President Bush took office to keep the value of dollar artificially low to boost the US exports. This policy has been to some extent successful thus far in keeping the US economy from falling into a severe recession.

3. It seems the ability of the Federal Reserve System to regulate the reserves of commercial banks through its monetary policy has been faded in recent years. Its last two attempts to pump additional liquidity into the financial system deemed only symbolic with no tangible effects. The Fed's capacity has been especially hampered by the ability of commercial banks to practice what is known as securitization.

An attempt to convert the otherwise illiquid assets, such as loans, into income producing liquid assets. I January 17, the Chairman of the Fed said "securitization of mortgages although 'basically positive', has "played a role in the still-unfolding mortgage and credit crisis" because it "makes the mortgage market 'less dependent' on bank deposits as a source of funds with which to make loans"

Such practice, in the meantime, has enabled the commercial banks to take these securitized loans off their balance sheetmaking it less illustrative of their financial strengths or weaknesses. As you know, the Federal Funds market is the main, and most readily-available, source of liquidity for the commercial banks and the main channel through which the Fed can regulate the reserves of commercial banks.

Under the condition of uncertainty created by securitization and off-balance-sheet practices, commercial banks no longer trust one another and have less desire inject their excess reserves into Federal Funds market, making it more difficult for commercial banks to acquire reserves if a need arises.

Therefore, the best source of liquidity for commercial banks has been cut off by reluctance of commercial banks to make their excess reserve available to other commercial banks. In addition, pressure from regulators has forced them to lift their lending standards creating credit crunch.

Through securitization, the commercial banks, especially the giant ones, have created this illusionary money creating, highly comlicated, scheme, engaging in non traditional high risk activities. As the bottom is falling and the so called bubble is bursting, they are all feeling chocked off.

4. Technically speaking I doubt that the US economy will plunge into a recession any time soon. Negative growth rate for the US economy is a remote possibility. However, the prolong slowdown may have the same, or even worse effects, than another soft short-lived recession. According to the WSJ published last week, most economic forecasters believe that the US economy will grow at meager rate of 2.2%, in 2008 with worsening unemployment, and inflation rates.

5. The US national debt currently stands at $9.2 Trillion, more than the entire GDP of most countries in the world. However, compared to the size of US economy, it is almost 66% of US Gross Domestic Product, GDP. When it comes to the ratio of national debt to GDP, the US is not at the top of the list.

There are many other countries with higher ratio of national debt to GDP. The US economy, as you mentioned, is debt-driven which means it is spending driven. Consumers borrow money to spend especially on big-ticket items, so called luxury items. US government, similarly, has been operating on deficit for many decades with the exception of 1998-2000 with a slight budget surplus.

6. The last banking crisis in the United States happened in late 70s and early 80s, many years in the making. The main reasons; first the savings and loan banks were cut off guard by the sudden surge in the interest rate, to double digit at some point. With their assets mostly tied to fixed interest long term loans, they started to lose money. Consequently, many of them went bankrupt after years of struggling. Second, the so called regulatory forbearance and the swing-under-the-rug attitudes of the regulators which allowed the ailing banks to continue their business for years until their problems grow deeper and deeper.

I don't believe something like that will happen this time namely for two reasons: the increasing public awareness of bank operation and the increased ability of the investors to understand and to tolerate risk, and the lessons bank regulators have learned from that bitter costly experience. In addition, combining their ingenuity with progressive information technology, financial institutions in general and commercial banks in particular, have been very successful in creating innovative risk-sharing products and digging into regulatory grounds to find loopholes.

Finally, from the style of your writing and your in depth understanding of economic concepts, I can surmise that you are a trained economist. If so, good for me, it makes me proud. If not, shame on me to see a non-economist knows my profession better than me. Please keep writing.


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REPLY : I DOUBT IF..........

by Faribors Maleknasri M.D. (not verified) on

I think you can be quiote right. because first must the europians pay. It means no recession for the United States in the next days. In europe it has allready begann. Please acknowledge the followig: Thu, 24 Jan 2008 14:58:10
Societe Generale reveals trader fraud
France's Societe Generale SA reports a 4.9 billion-euro trading loss, the largest in European history, accusing a trader of fraud.

The bank, which is already exposed to the subprime mortgage crisis, said the incident would have a 7.16 billion US dollar negative impact on the group.

It also announced further write-downs of 2.05 billion euros related to the global credit crunch and said it would raise 5.5 billion euros through a capital increase to strengthen its balance sheet.

SocGen shares closed down 4.15 percent at 79.08 euros on Wednesday. The stock has fallen around 20 percent since the start of 2008.

The bank said it detected the fraud at its French markets division the weekend of January 19-20.

In a statement announcing the discovery, it called the fraud 'exceptional in its size and nature.'

It said it was in the process of dismissing the Paris-based trader who had misled investors in 2007 and 2008 through a 'scheme of elaborate fictitious transactions', adding that the trader's managers would leave the company.

The trader, who was not named, used his knowledge of the group's security systems to conceal his fraudulent positions, a SocGen statement said.

The fraud appears to be the largest ever by a single trader.
For some poeple has the recession nothing to do with "Sanctions" against the ISLAMIC REPUBLIC of Iran, but for me. Greeting



by 50cents (not verified) on

Many believe this is a sector-specific recession? It arguably looks much milder than NASDAQ crash in 2000. The amazing thing is experts are never good at seeing what is coming but are very keen at looking back and analyze what happened? Why is that?
Around 2001, I had read several papers from very leading economists arguing a property boom-bust always follows a share-market boom-bust with 3-5 years lag. It appears those papers were correct?!



by 50cents (not verified) on

Many believe this is a sector-specific recession? It arguably looks much milder than NASDAQ crash in 2000. The amazing thing is experts are never good at seeing what is coming but are very keen at looking back and analyze what happened? Why is that?
Around 2001, I had read several papers from very leading economists arguing a property boom-bust always follows a share-market boom-bust with 3-5 years lag. It appears those papers were correct?!


And everyone's in this mess together.

by What a heck do I know (not verified) on

Money flows 'round the globe; where it stops, no one knows Wed Jan 23, 12:22 AM ET


Investors are finding out what factory workers learned long ago: Globalization isn't always their friend.

That's evident when people pay so much attention to plunging stock markets in places such as Frankfurt and Shanghai, and when the Dow Jones Industrial Average drops "only" 128 points, as it did Tuesday, after being down 465 early in the day after the foreign sell-off.

In the long run, free trade and international investment can promote wealth, create middle classes and foster democracy. Nonetheless, it's hard to look at today's international economy and markets and not wonder whether something's seriously amiss.

Investors send vast amounts of money around the world, placing bets on things they might not fully understand — the turbocharged U.S. housing credit market, complex derivatives and frothy emerging markets, to name a few. This unfettered flow of capital has outstripped governments' ability to discourage foolhardy speculation, or even to provide a decent amount of transparency on what is being invested where.

In recent months, the Federal Reserve has taken a more interventionist approach, enacting emergency interest rate cuts, such as Tuesday's three-quarters of a point reduction, and adopting new rules on lending.

That's a good start. But in a world in which banks can have billions of dollars of potential losses hidden in "structured investment vehicles" and other esoteric securities, these actions seem minimal. In many developing-world markets, it's even harder for investors to know what they are getting into.

Millions of U.S. investors have been learning a lesson about these risks. They've been pouring money — 401(k) and otherwise — into international stocks and mutual funds in search of higher returns and greater diversification. But the relentless downdraft in markets virtually everywhere demonstrates just how undiversified the world has become.

The U.S. housing slump is dragging down European banks that invested in dubious mortgage-backed securities peddled by Wall Street. Asian economies, which had supposedly been maturing and becoming less dependent on the United States, have been sent into a panic over the thought that a recession might be imminent here. And markets everywhere rebounded when the Fed announced the latest rate cut.

For all the talk about growth in the developing world being "decoupled" from the United States, it's the global economy, stupid. And everyone's in this mess together.


Worse yet!

by farokh2000 on

As a matter of fact the Economy in this Country is so screwed up that it is now in the state of "Stagflation=Recession + Inflation at the same time". The morons in charge since 2000 took a Surplus and messed it up so bad that this is going to get much worse before it gets any better.

And they are not even counting the cost of the genocide in Iraq and Afghanestan anywhere. This is their creative Accounting, of course, or Wodoo Economics. It will be decades before this is fixed.



Great articles (by you and

by not an economist (not verified) on

Great articles (by you and the other article about this topic earlier by another contributor), thanks, they are educating. The recent increase of the influence of the lobbies' desires on the government's decision making and policies (including economic) seems to be a major danger for the health and financial security of the country in the long run. I think it is much more of a danger than is discussed and acknowledged in government and in mainstream media. Actually there isn't any serious attention paid to it, afterall the silent elected public officials in high positions were supported by the very same (more powerful) lobbies. Also mainstream media is owned by, or relies heavily upon the advertising money that they receive from those related to the lobbies. The very high deficit at about 9 trillion dollars doesn't help either, another matter that is not receiving the proper attention that it deserves. Yes there are economic cycles, but these seem to be above and beyond the periodic economic cycles. Just some thoughts.


You again!

by Bored Iranian dude (not verified) on

Ah we meet again Varjavand!! You and your silly persian nose! Here is another Ad Homineeuuum attack; your article sucks!! HAH! Take that Varjavand!! (shake my mighty fist in the air)


They may have swallowed too deep

by Alborzi (not verified) on

There is $2 trillion, genocide bill and SS on top of it.
The ducks might be flying home to roost.


We are already in a recession!

by Farhad Radmehrian (not verified) on

I don't know what your expertise are but according to many economists we are already in the beginning of a "recession"! But recessions are always followed by a profitable "recovery"!
What we should worry about is the long term health of the economy and our children's future! Deficit spending and borrowing from the future has to have a limit! This ponzy scheme, this house of cards, will fall some day!