• Investing & Markets

Is the Economy Suffering From Acute Misdiagnosis?

September 26, 2011 | Daily Capital

In case you missed it, Harvard’s Kenneth Rogoff makes a compelling argument about why some inflation may be good in the current economic environment. It’s always dangerous to say “this time is different,” but it also seems this downturn has more dissimilarities than similarities to typical recessions (2008 excluded). To be sure, we’re not officially in a recession and we may still avoid one. But it makes one wonder whether recent policy moves, particularly those of the Fed, are based on a misdiagnosis of the current state of affairs. If so, won’t they ultimately prove useless?

Read more at the Project Syndicate:

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The Second Great Contraction

Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy. The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts. But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” …

Read the entire article at Project Syndicate.

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