Wednesday 11 February 2009

We’ll Be Lucky If Downturn Only as Bad as Japan’s, FT’s Wolf Says

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Guanyu said...

Economy at a Crossroads: We’ll Be Lucky If Downturn Only as Bad as Japan’s, FT’s Wolf Says

By Aaron Task
11 February 2009

The stimulus bill and latest bank bailout plan expected to be announced this week are obviously key to turning around the U.S. economy. But they’re of even greater importance given the world economy is at such a critical juncture, says Martin Wolf, chief economics commentator for The Financial Times.

“There’s no precise definition of a depression” but the global economy “looks incredibly bad - far beyond a normal recession,” says Wolf, author of Fixing Global Finance. We “could have a very severe and prolonged recession.”

Wolf, who is also a professor of economics at University of Nottingham, believes “it will be lucky” if the current downturn is only as bad as Japan’s so-called lost decade. Unlike the U.S. today, Japan was able to count on a strong global economy to mitigate the effects of its burst bubble and struggling financial system. “There is no world economy to rescue the U.S.,” he says. “Chances are [it will prove] much worse than Japan.”

We discuss Wolf’s recipe for avoiding this outcome in subsequent segments but he offers three major recommendations here:

• Use government spending to boost short-term demand.
• Aggressively restructure and recapitalize banks - and have central banks lend directly into the economy if need be.
• Rebalance demand so countries with big surpluses (like China) increase consumption to help the global economy move away from its reliance on “massive” deficits in the U.S. and U.K.