A number of economist are starting to join the V-shaped recovery bandwagon. With positive numbers starting to come every month and the stock market having a nice jump, there is a growing group that wants to predict the economy that will explode out of the current deep recession. There is a lot of prior evidence of this type of deep-in-deep-out recovery. The evidence we are starting to see is a jump off the lows and what looks like the beginning of a recovery in many countries. The V-shaped recovery people see a pop in productivity as well as increasing in manufacturing and trade.
The "new normal" group has a different view.We can call this the credit crisis flow crowd. The foundation for the "new normal" is that the recession was a financial banking problem and that these types of crisis take longer to work out because there is a greater wealth effect or realization of losses from bad loan. As long as credit is not expanding smartly, there is little room for a recovery of any strength. The credit expansion will be tied to the balance sheet of banks. If banks cannot improve their balance sheet they will not lend new money. The new normal view takes into account that a strong portion of the growth in the last decade was associated with cash out refinancing which allowed homeowners to take money out of their housing gains and transfer it into consumption. Now the debt has to be paid back and the liquification of wealth will not occur. The latest Deutsche Bank study suggests that in the next few years almost 50% of US mortgages will be underwater. Th new normal suggests that any recovery will be slow. The places where there has been the strongest recovery are countries which did not have the banking crisis problem, for example, Asia.
Another way of looking at this comparison is to say the new normal economists are wealth effect pessimists while the V-shaped recovery are current production optimists. I fall into the new normal camp. History suggests that the credit cycle recovery is long and slow. The V-shaped recovery is still based on future optimism which has yet to be realized.
The "new normal" group has a different view.We can call this the credit crisis flow crowd. The foundation for the "new normal" is that the recession was a financial banking problem and that these types of crisis take longer to work out because there is a greater wealth effect or realization of losses from bad loan. As long as credit is not expanding smartly, there is little room for a recovery of any strength. The credit expansion will be tied to the balance sheet of banks. If banks cannot improve their balance sheet they will not lend new money. The new normal view takes into account that a strong portion of the growth in the last decade was associated with cash out refinancing which allowed homeowners to take money out of their housing gains and transfer it into consumption. Now the debt has to be paid back and the liquification of wealth will not occur. The latest Deutsche Bank study suggests that in the next few years almost 50% of US mortgages will be underwater. Th new normal suggests that any recovery will be slow. The places where there has been the strongest recovery are countries which did not have the banking crisis problem, for example, Asia.
Another way of looking at this comparison is to say the new normal economists are wealth effect pessimists while the V-shaped recovery are current production optimists. I fall into the new normal camp. History suggests that the credit cycle recovery is long and slow. The V-shaped recovery is still based on future optimism which has yet to be realized.
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