Last year when the world was debating on what shape the recession will take they anticipated it to be a V-Shaped recession lasting about eight months or a recession even lasting longer than that. The opinions ranged from eight months to twenty-four months. Today, after fifteen months it can be easily seen that it has formed a U-Shaped recession. Further studies show that it can last up to a thirty-six month period even if the U.S. takes the necessary aggressive policy action. It won’t be until 2011 that we are able to see the growth rate reach close to two percent. And if these necessary steps aren’t taken we can see this U-Shaped recession goodbye and meet the horrible consequences of the L-Shaped recession.
An L-Shaped recession refers to a steep decline followed by a very low growth during many years. In other words it means the “deadly combination” of economic stagnation and price deflation. If America chooses the same path it is following than it is looking at an economy that will take years to redevelop. The L Shape will only cause the unemployment rate to increase, the adjustments to balance sheets will be even more painful than it is currently, the value of houses will decline further, and the U.S. current account assets will fall dramatically. The L Shaped recession will force the problems to worsen and take an even longer time to heal itself.
This L-Shaped recession occurring is not only affecting the U.S. but it is brutally hurting other nations. “The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan….” This L shaped recession will cause a depression which means no one will be able to afford a large deficit for a long time. And that would mean that the economic models of Germany and Japan will no longer work. Since these countries depend so much on exports they are falling to their doom. These countries must “undertake structural reforms that facilitate the shift towards non tradable goods.” The countries can’t see these and they chose to go down another path. Germany is obsessed with their exports and depending on them way too much.
“The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.”
The beginning of the article explains why U.S. has forced itself into this huge hole. The government is simply not taking the necessary actions of reforming the financial sector, major economies are depending on national strategies that no longer work for the economy we are presently in, and “exporters are unwilling to spend short term and reorient longer term to stimulate enough demand internally.”
Another article I found explains that the famous “Doctor Doom”, Nouriel Roubini, explains at first that the possibility of the recession being L-Shaped is only about the thirty percent which was about six months ago. Now he is saying that the possibility of this shape is about thirty percent. He implies that the world’s growth rate in 2009 will be negative 0.5 percent. Performances in the financial markets only seem to further prove this type of recession and two of the three indexes of the New York stock markets have reached their lowest levels. The ending of this article explains in simple terms what must be done. “…only when countries all over the world are aware of the gravity of the financial crisis, can they face it more bravely and adopt stronger anti-recession measures in order to pull together in times of trouble to weather hardships.”
