Posted by
john on Tuesday, November 11, 2008 5:03:40 PM
Larry Kudlow posted some interesting graphics today (kudlowsmoneypolitics.blogspot.com) to support a thesis I think bears repeating: the recession we are in NEED NOT be terribly severe. Here's his argument in a nutshell: the price of gasoline is collapsing to a more "normal" level (in terms of per capita disposable income); and the credit markets are loosening. Regarding the latter point, the graphic of the 3-month libor tells the story best. The rate had been steady-as-she-goes at about 2.8% until mid-September (and I really should be back at school), when it exploded 200 basis points in a month's time. Now, in only another month, it has collapsed to a 2.175 close this afternoon. Moreover, the 10-year is at 3.75%, and the 6-month is at 0.81%. Larry is right: all of this is great news for everyone who wants a strong economy and a quick return to GDP growth.
These data points suggest strongly that the credit markets are returning to rationality. There is little appetite for risk, yet for the moment, there is little fear of inflation. This is all as it should be during a contraction. Low borrowing costs should eventually attract entreprenuerial activity, and a new recovery should begin soon enough. The business cycle was never repealed; when recession hits, the market adjusts, and growth returns (where government doesn't interfere).
Mr. Kudlow ended his piece with the following:
"The bottom line is that we are experiencing short-run pain as excesses are wrung out
of the financial system. It's all part of the business cycle. When the dust clears, the
mustard seeds of the next expansion will begin to bloom."
Sadly, I'm afraid that the esteemed Larry the K omitted a key sentence. His conclusion, unfortunately, should have concluded with the following: "If, that is, the new administration doesn't embark on a program of radically expanding government and the deficit, offering up subsidies, bailouts, sops to Big Labor, and otherwise inducing moral hazard and misallocating (very) scarce public resources, ostensibly for the purpose of fixing a problem that is already fixing itself."
Dear readers, recessions tend to cure themselves, if government doesn't get in the way. In my study of GDP data, I have found that recessions are commonly followed by big snap-back GDP increases. This is the natural order of things. But my fear is that Barry O and his panel of oligarchs (did you see the big color photo and the front page of the WSJ Saturday?), in their zeal to be the "new" FDR, the "new" "Camelot", and the "new" New Deal, will inevitably strangle an economy that was already fixing itself. Then, of course, they'll blame Bush, the tax cuts, Wall Street, "malefactors of great wealth", and probably Ronald Reagan too, before engaging another round of ineffectual money-tossing at political favorites. Just like Barney Frank, they'll blame everyone but themselves. Thus to me, the question isn't IF this program will bring us back to the glory days of stagflation, but how fast. To see how it ends, treat yourself to a Saturday Night Fever rental.