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Krugman right to warn on the double-dip recession

with 2 comments

Nobel Prize-winning economist Paul Krugman warns that he sees a 30-40 per cent chance that the US economy will fall back into recession in the second half of 2010.

That double-dip scenario has been the argument on ArabianMoney for a while, although the odds look higher from a vantage point in Dubai (see this article).

Fading stimulus

Professor Krugman takes a slightly different tack. We have argued that emerging markets are not going to be strong enough to maintain the very modest recovery. Krugman is more US-centric and sees the early withdrawal of US stimulus packages as the biggest danger.

He says the Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and $175 billion in federal agency debt in March will lead to higher mortgage rates and smother the house price recovery.

In fact, US mortgage rates are already rising. The 30-year fixed rate rose for the four weeks to the end of December to 5.14 per cent. Krugman reckons any sales of mortgage-backed securities could increase mortgage rates by one per cent.

Inventory bounce

‘Stimulus we know starts fading and goes negative around the middle of the year,’ warns Krugman in a recent interview. ‘Inventory bounce, which is driving things right now, will fade out as inventory bounces do.’

Surely the onus is now on the recovery-in-2010-school to make a convincing counter argument. Simply projecting a modest recovery upwards is hardly enough, if all that underpins that expansion is panic stimulus packages by global governments.

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Written by Peter Cooper

January 5, 2010 at 1:49 pm

2 Responses

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  1. Bill Simpson makes a good point, but in reality, the US economy is already showing signs of a double dip; that’s why Krugman is trying to “jump on the bandwagon” at this point in the movie. There have been quite a few folks who saw this double dip coming back in early 2009, but Krugman certainly was not one of them. He, as well as Bernanke, remained supremely confident (and arrogant!) about their assessments back then.

    In reality, Krugman is like the emperor who has no clothing on. He views himself as the world’s economic genius and a gift to the world. Yet those who have studied his record and past assessments know he is a charlatan, and a simple-minded puppet for Bernanke and the FED.

    In all likelihood, he was probably told by Bernanke to make his current pronouncement; this will then make it easier for Bernanke to further debase the USD by late summer 2010, when he prints another trillion USD.

    obewon

    January 5, 2010 at 10:25 pm

  2. As soon as the US economy would start to show signs of a double dip, helicopter Ben would generate another trillion dollars of his magic money and shove it out into the economy.
    The US Government has only two choices, now that the Wall Street banksters, and their Washington puppets, have created an unsustainable level of debt. The government can foster inflation by trying to keep a sick economy on life support with money creation, or it can watch a dangerously deep depression occur if they pull the spending plug. (Think third political party.) Which one do you think they will choose? November is an election.

    Ed Note: Bill I just don’t have your confidence that they will judge this right.

    Bill Simpson in Slidell

    January 5, 2010 at 5:18 pm


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