SPECULATION ABOUT the prospect of a double-dip recession has become almost obsessive in the financial markets. The US central bank, the Federal Reserve Board, is worried that the American economy might slip back into slump.
It announced last week that it would continue to pump money into the financial system. The markets reacted by selling everything in sight.
But agonising over a double dip may in any case be the wrong place to start. As the Keynesian economist Robert Reich, who served as labour secretary under president Bill Clinton, put it, “We’re still in one long Big Dipper.
“More people are out of work today than were last year, counting everyone too discouraged even to look for work. Not since the government began to measure the ups and downs of the business cycle has such a deep recession been followed by such anaemic job growth.
“Jobs came back at a faster pace even in March 1933 after the economy started to ‘recover’ from the depths of the Great Depression.
“Of course, that job growth didn’t last long. That recovery wasn’t really a recovery at all. The Great Depression continued. And that’s exactly my point. The Great Recession continues.”
The Marxist economist John Weeks says the same in his blog: “There was one Great Dip, we are in it, and Mr Osborne’s policies made a strong contribution to it.”
Both Reich and Weeks are critics of the austerity policies taking hold on both sides of the Atlantic.
These are justified by the argument—stridently defended by David Cameron and chancellor George Osborne—that priority must be given to cutting government borrowing and spending.
Osborne is gambling that rising private investment will make up for the cuts in public spending that he will announce in October.
But, Weeks points out, “public expenditure is at least three times the size of private investment. Therefore, to prevent the economy from declining a given cut in public sector demand must be matched by a private sector increase three times as large in percentage terms.”
This is, as Weeks says, “very unlikely” to happen. He advises us to “forget recovery. There will be no growth in 2011 for Britain. Considerably more probable is that the economy will decline.”
But what about the eurozone, where output rose by 1 percent over April and June? The main reason for this was a leap in German output of 2.2 percent—equivalent to an annual growth rate of 9.1 percent.
But, as the Financial Times pointed out, the reality is that of “a two-speed Europe, with Germany as the healthy ‘core’ and much of southern Europe as the troubled ‘periphery’.”
So Spain and Portugal grew by 0.2 percent and the Greek economy shrank by 1.5 percent.
Moreover, Germany’s “health” derives from its strength as an exporter of sophisticated manufacturing goods, particularly to China.
“Without China we would hardly have seen this recovery—it’s a frightening trend,” says the head of the German engineering association.
The vast amounts of money the Chinese state spent to drag the economy out of slump have also been powering the German recovery.
But the Chinese government, worried about rising inflation and the price bubble in the housing market, is trying to slow the economy down. This could halt the German export machine.
Elsewhere, the fear is of the deflation—falling prices—that has trapped the Japanese economy in stagnation since the early 1990s.
Sushil Wadhwani, a former member of the Bank of England Monetary Policy Committee, said, “Markets are particularly vulnerable to event risk at the moment; that could push the economy into brief deflation. The sort of events that could materialise in Europe would make Lehman look like a garden party.”
It was the fall of Lehman Brothers in September 2008 that precipitated the Great Recession in the first place. If a financial panic worse than this is in prospect, plainly the crisis is very far from over.