Friday, 20 November 2009

Recovery Doubts

(The Green-Shoot Worm And The Abracadabra Herd)

It is almost as interesting to follow the way the commentators of the global economy keep moving in odd herds, as it is to watch this wannabe recovery itself. A few days before the meltdown most of the people -- now famously -- thought things would be just fine. Then suddenly the lightning struck and the entire herd changed direction. But it turned out that in policy we believed. The herd changed direction again. Then a lull. Then lightning again. Etc etc etc. My favourite bit in this is the lull. You feel that another rampage is going to happen, you already can smell the change in the air.  But, usually you have no idea which way the herd is going to go.

From the end of spring, we have been wondering whether the recovery was really there. We, The Herd, convinced ourselves that this is going to be a short trough. Perhaps a deep, but definitely short one we were telling ourselves.

Occasionally the herd turned south again and again, mostly rather not on news, but on the observation that if the picture we saw was in the frames of our macroeconomic models, then we would have to worry a lot. Fortunately, we could always remind ourselves that the crisis proved that none of our models had anything to do with reality, and hence unconstrained optimism always won the day.

Now consider the comparison between the current “post a crisis” rally, and other similar one in 27 years ago. Although, it is only concerning the US markets, the table is a vivid illustration of how we are in a very different trouble. The past behaviour of any national economy during recovery from their respective crises is not going to tell us much.

It may be added, that this crisis was the first known truly global crisis. Although there were some economies less impacted than others (Poland, Brazil, Indonesia seem to have benefited nicely), all countries were affected in a significant way. As this blog has pointed it out before, we do not exactly have a model of the global economy anywhere near the quality of macroeconomic models. (And -- khm -- the public's trust in the latter is somewhat ... whatstheword, whatstheword, er, er... ah! disappeared without traces.)

And thus the only hope left is hope itself. (Oh, poetry!) If everybody gets excited about how amazing the future is going to be, by definition the future is going to be great. Square that, you rational expectations theory... (Imagine, along these lines, we could want an Anything!)

Which takes us to these wonderful green shoots that have been popping up Absolutely Everywhere. Consider the following graph (from the St Louis Fed's research page) :

That little wormy thing on the bottom right is the green shoot...

Or look at the retail spending dynamics in Europe (figure 2 in the Eurostat's Recession in the EU: its impact on retail trade). While the overall picture of the European economy is turning much less negative than the abyss looked, hunger for consumption is not exactly here.

It seems that the economic abracadabra herd is just about to go on a rampage on how long the to real recovery will take. This will get really boring after a while...


  1. "If everybody gets excited about how amazing the future is going to be, by definition the future is going to be great."

    - well that is the big question, isn't it? For many people do believe there is simple maths in the way of the future being great (overleveraging 'n' stuff)...


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