Download Economic Issues of the Great Depression

The Economy 2010 and
How We Got Here
Steven L. Cobb, Ph.D.
UNT Center for Economic
Education
The U.S. Economy is on a
Trajectory of Slow, but
Improving Growth for 2010
Guitar-string theory:
Deeper
recessions are followed
by stronger, more rapid
recoveries.
-Milton Friedman
 “The
aftermath of deep financial crises
shows deep and lasting effects on asset
prices, output and employment.
Unemployment and house price
declines extend out for five and six
years. Output declines last two years on
average. Even recessions sparked by
financial crises do eventually end, albeit
almost invariably accompanied by
massive increases in government debt.”
 -Reinhart and Rogoff(Dec. ‘08)
The Current Situation
GDP: 2-3%, more likely close to 3%
 Absent the financial crisis: 5-6%
Headline inflation: 3.0%
Core inflation: 1.5%
Unemployment:
10.4% peak in 2010 Q2
Sustained employment growth to begin
after Feb. 2010
What have we experienced?
 High
unemployment
 Actual deflation
 Negative
wealth shock
 Bursting of multiple bubbles
 Near-demise
system
of banking/financial
Unemployment
and Deflation
High Unemployment
High Unemployment
Deflationary Fears
Negative Wealth Shocks
The Bursting of the
Housing Bubble
A Softening of the Housing
Market As A Result Of Higher
Interest Rates (’04 – ’07)
The Inevitable Was Delayed
By New Mortgage Instruments
By 2006 Real Estate Prices
Were No Longer Rising
Sales of New and Existing
Homes Fall Rapidly
Construction Falls As Well
The Consumption
Bubble Also Burst
GDP Growth Was Fueled By
Consumption Expenditures
As Long As Home Prices Were
Rising, Consumers Were Using
Equity To Finance Their Purchases
Real Estate Concerns
Negatively Impacted
Consumer Confidence
Falling Confidence Led To
Falling Sales
Consumption Fell in Both
Nominal and Real Terms
Falling Consumption Led to
Declines In Retail Sales
Global Shocks
The Downturn Was Global
The Largest Economies Were
All Hit Hard
The Trend Was Similar In
Established and Rising Stars
The US Experiences a Rise in
the Value of the Dollar
But the Stronger Dollar Is Very
Hard On Exporters
The Result of All This Is
the Near Demise of the
Financial System
What have we experienced?
This Recession is the most painful
since the Great Depression
Longest, Deep, and Wide
It followed 25 years of growth interrupted
by two short, mild recessions
Bottom Line:
Relative to a generation of experience,
this was a truly traumatic event.
Headwinds
 Credit
to households and small
businesses
 Banking system –Capital, Commercial
Real Estate losses
 Anticipated taxes
 Policy uncertainty
 Higher energy prices
Crosswinds
 Monetary
policy
 Fiscal policy
 Regulatory policy
Tailwinds

Growth in temporary employment
 Declining initial unemployment claims
 Declining layoff announcements
 Employment gains in 11 states
 11 sectors showing employment gains
 Synchronized global recovery
 Industrial production bounce-back
Positives
2007
2008
2009
U.S. GDP Growth
2007
2008
2009
Low to Moderate Inflation
Year-end inflation?
 Given
fears of deflation at year-end
2008, economists thought a 1%
deflation over 2009 was the most likely
outcome.
 Federal Reserve Policy averted that
outcome, and that’s a prediction we’re
very happy to have been wrong about.
 Credit Chairman Bernanke and the
FOMC
Consumer Behavior
After
a number of years where
the U.S. saving rate was
negative, there is an indication
that Americans are beginning to
save again. This has the
potential to be one of the more
positive impacts of the
recession.
Remaining Concerns
Unemployment
not have peaked – some expect it
to hit 10.4% in the second quarter of
this year.
 Doesn’t measure discouraged workers
and part-time workers that want full time
jobs (may currently be as high as
16.3%)
 Some economists still fear a jobless
recovery
 May
Budget Deficits
 The
spending measures may have been
critical to avoiding a much larger crisis,
but our national debt is rising rapidly.
 It is now over $12 Trillion (more than
$40,000 per citizen)
 Current deficits are adding to this
number at record rates
Long-term concerns have
been put on the back burner
Social
Security
Medicare
Lessons Learned
Only traumatic events,
not hiccups,
produce behavior
modification.
What is the Bottom Line?
The circulation of
confidence is better than
the circulation of money.
-James Madison