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How the Great Recession and European debt crisis have turned back the growth “clock” of most advanced economies, sometimes more than ten years. Looks like Ken Rogoff was right: this is not Great Recession; it’s Great Contraction.
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Source: Economist Mag.
According to Paul Kasriel at Northerntrust, most likely the EU entered recession this quarter.
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“The Greek tragedy morphed into an Italian comedy. Now, it has become a French farce”. Bank credit is set to slow down or contract.
Of course, the European Central Bank (ECB) could step in to create some of the credit that EU MFIs otherwise would be creating under normal circumstances. But the ECB fears that quantitative easing would somehow sully its Bundesbankian reputation. How ironic that the ECB, a central bank ostensibly sympathetic to an Austrian approach to monetary policy, would not try to maintain a normal amount of credit creation when MFIs were unable to do so. Europeans, get ready to join your Japanese brethren for a lost decade. It did not have to happen for the Japanese and it does not have to happen for the Europeans. But given the intransigence of Japanese and European central bankers (with the exception of British central bankers), it will.
I am leaning toward Rosenberg’s view on this.
A new financial indicator predicts economy is likely to suffer downturn ahead.
This is from Jim Hamilton’s Econbrowser blog. More details about this new indicator.
Most recently, researchers have tried to gauge the degree of financial stress using indicators such as the LIBOR-OIS spread (, ) or deviations of yields from predictions of interest rate models (e.g., the recent paper by Christensen, Lopez, and Rudebusch). There are also a number of composite indexes that various private-sector analysts rely on, such as the Bloomberg financial conditions index.
Two private-sector analysts (Jan Hatzius of Goldman Sachs and Peter Hooper of Deutsche Bank) have recently teamed up with three academics (Rick Mishkin of Columbia, Kermit Schoenholtz of NYU, and Mark Watson of Princeton) to produce a new financial conditions index that attempts to combine the information of 44 separate series including those mentioned above along with a great number of others. One of the differences between their approach and previous work is that HHMSW seek to isolate the separate information of the financial indicators from aggregate business cycle movements by looking at the residuals from a regression of each indicator on lags of inflation and real GDP growth rates.
The more plausible scenario is very slow growth. Bob Shiller also has some interesting comments on confidence and bubbles, how they reinforce each other.
Following the sign of double-dip in housing market, the Leading Economic Indicator (or LEI) shows double-dip scenario is close to reality.
(click to enlarge; graph courtesy of SocGen)