January 09, 2002
From the desk of Jane Galt:MERRILL LYNCH is laying off
MERRILL LYNCH is laying off another 9,000 workers, perhaps because the economy isn't looking quite as perky as the media has been reporting. In an excellent column, Robert Samuelson points out that the forecasters are predicting the end of this recession based on previous post-WWII recessions, which don't necessarily have anything to do with this one:
"Truth be told, most economists don't understand this peculiar recession especially well. We know this because most of them didn't predict it, which wasn't surprising, because most didn't understand the preceding boom, either.
" . . . The standard post-World War II recession has followed a familiar pattern: (a) While the economy is expanding, inflation rises; (b) to dampen inflation, the Federal Reserve increases interest rates; (c) as the economy slows, businesses accumulate unwanted inventories (excess supplies of unsold goods); (d) to reduce inventories, companies cut production and lay off workers; (e) higher inventories and unemployment cause price and wage increases -- aka inflation -- to subside; (f) the Fed then trims interest rates, and the economy recovers. The process usually takes less than a year. Since World War II, the average recession has lasted 11 months.
"By this schedule, the recession must nearly be over. It started almost a year ago. Time for recovery. Unfortunately, this recession didn't follow the familiar pattern. True, inflation did rise (very slightly) in 1999 and 2000, and the Fed did increase interest rates beginning in mid-1999. But the economy's main problems weren't -- and aren't -- inflation and excess inventories, which could be speedily remedied."
He goes on to trace the roots of this recession to the speculative bubble in the late 90's, in which I absolutely concur. A speculative boom followed by a bust was also the cause of the Great Depression, Japan's current troubles, and many more. There is no reason to think that this recession will follow the Fed-driven recessions we're used to. Interestingly, the only other post-war recession which did not follow the normal pattern is the 73-74 recession, which was deeper, characterized by "stagflation", and lasted longer than other recessions. My Macro professor convincingly argued that the cause of that recession was caused by the oil shock, which caused a real decline in productivity.
Meanwhile, the empirical evidence rolls in: the Fed chiefs are much less sanguine about the prospects for recovery than the media, predicting that we won't rally until mid-year or later. Of course, since this agrees with my earlier predictions, I'll be vindicated if they're right -- but not too vindicated, as I'm still looking for that job.
Posted by Jane Galt at January 9, 2002 10:10 AM | TrackBack | Technorati inbound links