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'Green Shoots' of Recovery? Don't Fall for the Media's Economic Triumphalism

A narrative is emerging that we're seeing the first signs that a recovery is around the corner, but the reality is less encouraging.

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Krugman dismisses fears of inflation as ideologically grounded fearmongering, noting that in past recessions policymakers have deemed the strategy too painful to pursue. But as Roubini notes, "Inflation may indeed become the path of least resistance for policymakers, as it is easier to run the printing presses and cause inflation than it is to implement politically difficult tax increases or spending cuts."  

Rising Interest Rates:  

So far, fears of a massive run away from the dollar as the world's reserve currency or of foreign investors fleeing the U.S. market appear to be overstated. "Talk that foreign central banks will diversify out of their dollar and Treasury holdings is so far just talk," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, told Bloomberg News . "The worst financial crisis since the Great Depression is still ongoing, and foreign investors and central banks still have a safe haven demand for U.S. Treasuries."  

But the demand for U.S. assets has declined in recent months, and as the public debt increases, the amount we'll have to pay on that debt in order to keep selling it will likely increase. That will create upward pressure on interest rates which may further limit the recovery in the medium term as businesses and families face higher interest rates for financing various purchases.  

Tax Cuts Expiring:  

The Bush-era tax cuts were an abomination of priorities; at the end of Bush's term in office, the top 1 percent of Americans bore the lowest share of the tax burden and raked in the largest chunk of the national income at any point in at least the last 20 years. It's good that they are set to expire -- it'll  raise revenues and restore a semblance of equity to a system that's become painfully skewed toward the interests of an exceedingly small and very wealthy minority.   

But in purely economic terms, it's likely to be another impediment to a robust recovery -- those cuts will expire at just around the time many green shoots optimists expect a return to at least respectable growth at the end of this year.   

Similarly, (good) "cap-and-trade" legislation, if it passes Congress, is necessary for curtailing greenhouse gas emissions and averting catastrophic climate change. But it will result in an effective tax hike that may also slow down any potential recovery. (Again, this is not an argument for extending the Bush tax cuts or opposing new regulation of greenhouse gasses .) 

Yellow Weeds  

There are other potential obstacles to a robust recovery that are more technical in nature. Readers interested in a wonkier analysis should check out Roubini's piece, " Ten Risks to Global Growth." In it, he notes that one "cannot rule out a sharp snapback of [economic activity] for a couple of quarters, as the inventory cycle and the [stimulus spending] lead to a short-term growth revival." But "unless structural weaknesses are resolved," he predicts that climbing indicators over the short term will prove to be only an illusion of economic health.

Yet the green shoots crowd predicts an end to the recession -- already the longest and most painful in decades -- toward the end of this year. They see it as a V-shaped dip -- a sharp decline followed by an equally strong period of recovery. That's what has happened in recent decades, following "normal" periods of recession. 

But a more likely outcome is a U-shaped recession ending (that is, being declared over -- wages and employment typically lag behind the official end of a recession) sometime next year, with a long and painful tail, which may then be followed by a period of less-than-stellar economic performance for several years.  

 
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