The Living Room Times

Alan Sullivan: “When [investors] realize the V could really be a W, they will panic again.”

He’s talking about a V-shaped or W-shaped recession, of course. On the bright side, at least we’d know which president to blame for a “W”-shaped recession. Heh. (We’d better hope we don’t get an “O”-shaped recession, since that would involve the economy actually going back in time, and getting worse in the process!)

But seriously… I, too, am very concerned about the W-shaped, or “double-dip,” recession, that Nouriel Roubini (among others) has been warning about. We were able to avoid Great Depression II last fall because we were blessed to have the expertise of policymakers who had studied the mistakes the government made in the 1920s and 1930s, and knew exactly how to avoid those same mistakes. But now, precisely because of their success, we’re in a totally unprecedented situation, in which those same policymakers must somehow thread the needle between triggering very bad inflation by leaving stimulative fiscal and monetary policy in place too long, and triggering a very bad follow-up recession by cutting off those policies too soon.

Last fall, although the crisis had many historically unique elements, we at least had a history book to generally guide us — even if by “guide us” I mean “push us in the exact opposite direction of the one we historically followed.” This time, there’s no historical precedent at all, because the measures taken to prevent Great Depression II had never been tried before (at anything approaching that scale, anyway), so the steps necessary to walk back from the inflationary brink, while keeping the recovery going, are likewise unprecedented. As such, how the hell can anyone possibly know how to thread that needle? Maybe I’m wrong, and someone with more expertise in these matters can correct me, but it strikes me that this isn’t merely difficult — it seems, to my layman’s understanding, like it’s actually pretty damn close to impossible.

And the “panic” problem is a real one: one false move, in either direction, and either the inflation hawks will PANIC!!!!!! or the double-dip worry-worts will PANIC!!!!!! Or possibly both at the same time, if Group A’s panic triggers Group B’s fears of a reactionary wrong move to appease the initial panickers. Panic always feeds on itself, but this could be a particularly acute case of that, methinks. And severe panic alone could sink the economy again, all by itself, even if our flying-blind policymakers are doing a pretty good, but inevitably not perfect, job.

I’m the first to admit I don’t know much about economics or finance, but I really feel like the mass media and the public at large are far too sanguine about the economic and financial situation. For all the talk of “green shoots” and whatnot, it seems to me that everything still hangs by a pretty thin thread. The global financial system and the global real economy are, of course, mutually dependent, and both are still extraordinarily fragile. Policymakers are giving the economy the equivalent of a massive overdose of adrenaline, and yet the economy’s heart is only just barely starting to beat again. But too much more adrenaline will kill the patient, and so will cutting off the adrenaline too soon. And the longer the patient remains in limbo, the more vulnerable he is to new shocks making things even worse. And yet the media is already planning the homecoming from the hospital. Seems like it’s waaay too early for that. In fact, we might want to keep the funeral home on speed dial, just in case.