Mon Apr 28th, 2008 at 11:30:04 AM EST
A crater maybe? Wolfgang Munchau writing in the FT today, is happy to say that the subprime crisis is coming to and end.
But this would be disingenuous. It is no accident that our multiple crises – property, credit, banking, food and commodities – have been happening at the same time. The simple reason is that they are all part of same overriding narrative. The mother of all these crises is global macroeconomic adjustment – a rare case, incidentally, where the word “crisis” can be used in its Greek meaning of “turning point”.[...[
He enumerates the assorted bubbles that caused the problem here: he thinks the US and UK property markets might pick up by 2012 or so.
The really important question about the US economy is not whether the official recession starts in the first or second quarter, but how long this period of economic weakness will last overall. In Japan and Germany macroeconomic adjustment of similar scale took more than 10 years, starting in the 1990s. Even if you believe that the US is structurally stronger, the country will probably not replenish its savings in a couple years.[...]
Obviously inflation would make everything worse, and our future scenarios will depend critically on the inflation outlook. A rise in inflation might alleviate the pressure on some mortgage holders, but is not a good environment for a country to build up savings. If higher inflation were tolerated by the central bank, it would clearly prolong the macroeconomic adjustment process. If it were not tolerated, interest rates would go up and we might experience a re-run of the 1980s. It would get a lot worse before it got better.
Either way, adjustment would take time. Would you really want to predict that under any of those scenarios, the worst was already over for a fragile financial sector? There may be no global financial meltdown. But our multiple crises could easily return with a vengeance, like one of those bloodstained villains in a horror movie who rises to fight his last battle.
Our macroeconomic adjustment is not going to be as terrible as the Great Depression. But it might be longer.
I doubt that Europe is going to escape this one easily, and it's going to make it harder to persuade people that they need to change the structure of the economy to deal with global warming and resource constraints if they're more worried about putting food on the table. Or maybe not: how can we insert some sanity into the narrative?