That we are suffering the worst economic recession in the post war era is not up for question, and it would take a confident commentator to be overtly positive regarding the future of the global economy. Like Roubini, it seems easier to stick to your bearish guns, and, like a stopped clock, at least you will tell the right time twice a day.
But wondering whether the worst is over will do nothing to quell the nerves of the herd. Entering the market too soon, or worse, too late, has kept the mood on trading floors set permanently at “squeaky bum time”.
Many look to China as the catalyst towards recovery. Chinas growth is reaccelerating. In fact, it never stopped growing. But it is hard to rely on a country that is so opaque. Those behind the Chinese fiscal stimulus (15% of GDP) have given little indication where this money will be spent.
Perhaps the only economy that really matters is the US. Foreign policy over the past eight years has attempted to paint the US as the worlds policeman, yet a more accurate representation would be the worlds investment banker, and a fraudulent one at that.
Luckily for the US, the scene of the crime has been looking rosier. Housing today is more affordable than it has been for the past 40 years. An equilibrium for the supply and demand for new housing in the US has been reached. In fact, there is an excess supply for first time buyers, a situation unheard of in the UK housing market.
The US fiscal stimulus has also started to kick in, with an increase in government spending in non-defense goods and services. There is also an increase in Treasury bond yields, which despite popular opinion, is a positive sign for the economy, indicating that investors are selling Treasuries and venturing into riskier asset classes. It is important not to forget that capitalism is based on confidence.
It is also important to look back at the patterns of past recessions in order to understand what may happen next. Funds like to warn investors that past performance is not an indicator of future performance. In recent times, this has seen like a deathbed confession of their investment sins. Despite fund managers protestations, past performance may be the only indicator of future economic conditions.
Many financial and political commentators have been skimming through Wikipedia, hastily comparing the current financial crisis to the Great Depression. It is too early to tell if the two events are worthy of comparison, but nonetheless may bear some fruit to whether the current recession is reaching its nadir.
There were two recessions in the 1930s, from 1929-1933, and 1937 to 1938. With of the exception of World War II, the four years in the mid-Thirties saw one of the biggest economic recoveries of the US during the 20th Century.
This recovery was achieved despite insurmountable odds. In 1930, the Smoot-Hawley Tariff was passed. The Act raised US tariffs on over 20,000 imported goods, and in perhaps the only instance of unity within the profession, 1,028 economists signed a petition to this legislation. Other countries raised tariffs on US goods in retaliation, and American exports and imports fell by over 50%.
Much like today, the Fed decreased interest rates during 1929 and 1931 in an attempt to increase lending. Then in 1931, in the depths of the depression, the Fed raised interested by 2% in the space of one month due to attempts to defend the gold standard.
So far, the Fed has mirrored its 1930s ancestor, but has yet to increase interest rates. Luckily today there is no Gold Standard to threaten the recovery.
Unlike the great depression, the Fed has also embarked on quantitative easing. In 1930, 0% interest rates were the most the Fed could do. Today has seen a much more proactive and vigorous fiscal stimulus. If the US economy bounced back in the mid 1930s under much tougher circumstances, the hopes for today are far more positive.
However, if history repeats itself, it means we are in for another recession. Roosevelts New Deal politics may have damaged the US in the mid 1930s, but today the problem may be down to inflation, leading to a run on the dollar, causing the Fed to raise interest rates, resulting an another recession. It is often mentioned that Bernanke is a keen student of the Great Depression. It will be interesting to see if he can rewrite history. If not, the boom and bust roller-coaster will continue into the next decade.