Global financial markets are starting to heal and the U.S. economy could begin to grow again this year, but a strong recovery is unlikely, said President Barack Obama's top adviser Paul Volcker.
"An expectation of some growth late this year and next in the United States seems reasonable," Volcker, a former Federal Reserve chairman who leads a panel advising Obama on economic recovery, said in a speech Thursday at a conference of global bankers in the Great Hall of the People, the seat of China's legislature.
However, "a really strong recovery, typical of most recessions, seems unlikely," he said. "Rather, it is going to be a long slog, with continuing high levels of unemployment."
The slump also is easing "most clearly" in Britain, trailed by other European economies, with less evidence of recovery in Japan, Volcker said. He said a "healing process" seems to be under way in financial markets.
Volcker cautioned that U.S. growth depends on stimulus spending and "years of deficit spending far beyond past peacetime experience lie ahead." However, he said inflationary pressures were unlikely for some time to come. That could allow greater leeway to combat the downturn by expanding the money supply.
There's a lot in here. Let's take it piece by piece.
1.) Volcker -- like many economy watchers (myself included) -- see growth by year end. I think we'll see it in a three quarter window starting in 4Q09. The reason is simple: we've seen massive easing from the Fed and the stimulus really starts to kick in in 2010. Between those two developments I think it's fair to say we'll see some growth. However,
2.) The recovery won't be strong. I've written a ton about why growth will be wanting. There are two reasons. The consumer is retrenching. His balance sheet has taken a massive hit over the last few years: total assets have been dropping and debt is still uncomfortably high. Business has tons of slack meaning they have little reason to invest in new plant. Finally, housing -- which is usually a primary driver of growth in the first year after a recession -- is horribly overbuilt right now. In other words, for the US to experience a really strong recovery we will need to have some new factor enter the picture which will drive growth. Right now, I just don't see that happening.
3.) The deficit/debt picture is downright ugly. I haven't delved into this in a lot of detail, but even a cursory look indicates we'll be skirting some pretty serious limits. Currently, total debt stands at 81.25% ($11.375 trillion in total debt/$14 trillion in nominal GDP). According to CBO projections we're looking at the following deficits for the next four years: $1.845 trillion, $1.379 trillion, $970 billion and $658 billion. Looking at those numbers I don't see how we're going to avoid a 100% debt/GDP ratio by the time this is done. The possibility of that going higher is pretty high.
4.) Inflationary pressures just aren't there and won't be. There will be tons of slack in the system. Consumer spending will be subdued. And the argument that the increase in spending will lead to inflation doesn't pan out in a slow growth environment.
