Friday, November 11, 2011

Double-Dip Optimism?

Not sure why.

From Yahoo! News about Wall Street Journal Poll:
Economists are getting increasingly optimistic about our chances of avoiding a double-dip recession.

A Wall Street Journal survey of 52 economists put the chances of falling back into a recession in the next year at one in four. That's down from a one in three chance, when the Journal put the question to the same group in September.

The Great Recession officially ended in June 2009, but since then growth has been frustratingly slow. Over the summer, anemic job growth, Europe's debt crisis and the wrangling in Washington over raising the U.S. debt ceiling sparked new fears that the economy could begin contracting again. But since then, signs have pointed to steady, though still far from strong, growth. On Thursday, the Labor Department said the number of people filing first-time claims for jobless benefits dropped to 390,000--the lowest level in seven months.

Still, economists in the survey said they expected the jobless rate to stay above 7 percent by 2014.

They also said there's a two in three chance that the Eurozone will fall into a recession, dragged down by possible Greek or Italian defaults. If that happens, the U.S. economy would likely also be affected.
I am not so optimistic. An imminent EU collapse would have widespread ramifications for the U.S. and the world as a whole. Deficit cutting will also lower aggregate effective demand and therefore growth. Private spending is unlikely to make up the difference because of the large amounts of debt still on their balance sheets.

This could be avoided if the EU creates a fiscal institution to carry out the spending necessary to prevent a collapse in demand and if the U.S. increases deficit spending and writes down large amounts of private debt, but all of these remedies seem extremely unlikely. Thus, I am rather pessimistic that we will avoid a double-dip recession.

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