Chapter 9 of Jobenomics covers a number of different economic recovery scenarios, and what each scenario could mean for the US economy. Core problem areas for recovery include whether corporate and household defaults will increase; fiscal costs of bank rescues will escalate; financial institutions (including life insurance companies and pension funds) will run into serious difficulties; stress in the financial sector will drive greater leveraging and asset sales, tightening of access to credit, greater uncertainty, higher saving rates, and even more severe and prolonged recessions.
Other catastrophic and unpredictable events include a nuclear event, a massive energy crisis ($500 barrel of oil), a second major real estate crisis, a cyber-attack against government infrastructure, and similar disastrous events.
The premise behind most of these scenarios is that is the market rebounds, then decreases, and rebounds again returning to historic highs. Compared with previous recessions, the current US recession is already severe.
The key question facing the world today is what will happen when the US “extraordinary policy stimulus” is withdrawn?
A future double-dip recession could be induced by another domestic financial crisis or an international event.A small but growing number of economists reject the idea that the US economy is a self-stabilizing paradigm, and predict no near-term recovery for the following reasons: The tyranny of hundreds of trillions of public and private sector debt trumps historical precedent. Declining output and employment are causing declines in loan repayments. The infusion of government stimuli may have covered up fundamental flaws in our economic system that will not be able to regenerate after the stimuli end. In addition, government intervention has increased, rather than decreased, which disincentives economic growth in the private sector.
The damage to bank balance sheets is tightening access to credit, feeding back into private investment and consumption. Since the US economy is still the largest and most powerful in the world, Americans should expect both peaks and valleys in greater degrees than before. A key challenge facing the nation will be to try and calibrate the pace at which the extraordinary monetary and fiscal stimulus now being provided is withdrawn. In addition, so much of today’s economy have become so top heavy that their future tax bases may no longer support the load.
Economists further argue that the normal business cycles are a series of peaks and troughs.
This chapter concludes that the current economic outlook is exceptionally uncertain, with risks that are still weighing heavily on the downside. Economists who believe that the current economic crisis has been caused by flawed economic principles think rue recovery might take decades. Numerous anti-capitalists also ascribe to this point of view since they believe that the American-era is over, and is in decline. As the previous chapter outlined, the American financial system produced a significant financial crisis every three to five years for the last thirty years. Wide-ranging and often unorthodox policy responses have made some progress in stabilizing financial markets, but have not yet restored confidence nor arrested negative feedback between weakening activity and intense financial strains.
Consequently, the future is unknown, and current economic models may no longer be valid.
