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Monday, August 24, 2009

Roubini Concerned about Double Dip Recession

by Calculated Risk on 8/24/2009 08:52:00 AM

From Bloomberg: Roubini Sees Increasing Risk of Double-Dip Recession

Nouriel Roubini ... said the chance of a double-dip recession is increasing ... The global economy will bottom out in the second half of 2009, Roubini wrote ...

“There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote. “Policy makers are damned if they do and damned if they don’t.”

Government and central bank officials may undermine the recovery and tip their economies back into “stagdeflation” if they raise taxes, cut spending and mop up excess liquidity in their systems to reduce fiscal deficits, Roubini says. He defines “stagdeflation” as recession and deflation.
Roubini currently expects a U-shaped recovery, where growth will be “anemic and below trend for at least a couple of years,” he said.
There are still many problems in the economy, including the housing market, commercial real estate, household balance sheets (still too much debt), consumer spending, and more. As Roubini notes, there are significant risks "associated with exit strategies from the massive monetary and fiscal easing".

From the WSJ: Policy Makers Seek to Learn From 1937's Stalled Comeback
The Great Depression was W-shaped. The stock-market collapse led to a steep economic decline. But by 1933, the economy had rebounded. Then a series of monetary and fiscal blunders drove the country back into a deep recession at the end of 1937.

That episode is at the heart of the debate over how quickly the government and the U.S. Federal Reserve should unwind the emergency measures they have taken to fend off a Depression-like contraction.

For the administration, the answer is clear: Err on the side of continued expansionary policies. "What you learned from that episode in 1937 is that it's not enough to be recovering," says Christina Romer, chairman of the president's Council of Economic Advisers and an expert on the Great Depression. "You don't want to do anything when you start recovering that nips it off too soon."