Exposing Ideas to the Envelope of Serendipity

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Saturday, April 18, 2009

APRIL 16, 2009

More bad news on the recovery

The IMF's partially-released World Economic Outlook makes two points which significantly alter my priors with respect to the speed and vigor of the recovery in the advanced nations--for the worse. 

First, the IMF authors find that recessions created by the bursting of financial bubbles are different--they are more severe and last longer--from recessions that are produced by other causes (for example, supply shocks). The likely reason is that pre-crisis growth in the former case is based on an illusion of rising wealth and is more artificial. 

Second, synchronized crises (in which several major economies are simultaneously hit) are also more difficult to get out of.  You cannot rely on other economies to pull you out of it through their demand for your exports.

The current crisis is both finance-driven and synchronized. So we are in the worst of all possible worlds.

In hindsight, both of these points are rather obvious, but it is remarkable that so few of the comparisons with previous experiences have taken them on board. 

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