“There are two types of recession,” Summers said. “One happens when the central bank steps on the monetary brakes during an inflationary phase, and that ends quickly. The other type needs a lot longer to recover. It’s caused by financial bubbles and deleveraging. It takes longer and that’s the one we’re in now.”
Larry Summers, Chairman of the National Economic Council
(as quoted by Reuters in Germany suggesting that Europe will recover later than Asia and U.S)
The irony of the above quoted comment of Larry Summers is that the first type of recession caused the second. The Federal Reserve had raised rates to control the rising inflation and then the prolonged slow down had followed.
Now, the global economy is recovering, and that includes primarily Asia, the United States and Europe. The world is interconnected. It is interconnected more so than before, particularly since the rapid financial and technological globalization of the ‘90s. And in part due to the Clinton administration’s, albeit their misguided myopia vis-à-vis the long run, short run economic policies.
The long economic winter, the famous Harvard professor who is quoted as telling the Germans who had little to do with causing the bubble and its subsequent deleveraging, was because of the Clinton long run. When the markets cleared in the classical long run looking out a decade from 1997, winter had set in to correct them through deleveraging. It is a separate issue, however, if the markets had to deleverage to correct their excesses, even if that is the accepted wisdom.
Asking the markets to deleverage is akin to asking households to lower their standard of living without rolling over their debt. And unconditional recapitalizing is the equivalent of giving them cash with no strings attached to their leverage at the time of recapitalization. The markets had to both deleverage and be recapitalized because monetary policy was not sufficiently interventionist in the crisis, but behaved as during normal times, expecting an “L” shaped recovery as if the “L” was a self-fulfilling prophecy from the columns in The New York Times by Paul Krugman to the Fed and to the White House. It was not economics but pure politics to advance a prefabricated social agenda of the incoming Democratic administration to expand government.
If President Bush had thought he had tied the hands of the Democrats on spending to force government reform, the Obama Democrats responded by sinking the world along with the United States deeper into debt to respond to the crisis, taking advantage of the anti-Bush and anti-right sentiments around the world after the Iraq war. We may all be in the same boat, but not to sink together, capsized by a hole in the hull. What we need is a rising tide to lift them all.
The silver lining of the passing dark economic cloud is that the interconnected world is becoming loosely coupled from the U.S economy. The business cycles are becoming staggered in time, perhaps cushioning the depth of each other’s slowdowns as the emerging markets integrate. It has ceased to be the economic fist fight of the ‘90s that projected unchecked U.S economic power through the International Monetary Fund (IMF). It is now the nascent world of the G20 transitioning out of the G7.
The purpose of the dollar is to lubricate the possibly prolonged transition from the G7 to the G20 over at least the next two decades, through 2030, as new freely floating currencies join the world’s currency markets in an enlarged global economic pie.