Monday, August 30, 2010

We are heading into another recession?

Just when we thought the American economy is on the path of recovery, and hence there is hope for the world economy, we have started to see signs of a second recession - what we normally call a 'double-dip' recession.

Many economists have tried to study the impact of the stimulus spending by the US government on the actual GDP growth. And from what we know, close to $800 billion has already been spent since the second quarter of 2009. Many are now predicting a slow down in the American economy as these stimulus spending has already run out, and this is evident from the predictions shown on the chart above.

The Fed Chairman Ben Bernanke last Friday expressed some hope for the year 2011, however, he also acknowledged that the economy was weaker than hoped and promised additional measures.
However, there is serious doubt as to how much intervention Bernanke is referring to, as the politicians at the Congress are less willing to spend additional money as stimulus, despite policy recommendations by some economists like Krugman and Stigilitz, on continuing the stimulus spending.

Hence, with low investor confidence and a dearth of policy interventions, there is every reason to believe that we are headed into a double-dip recession. What's more disturbing is the fact that many have started to predict that this recession could turn into a prolonged depression, similar to that experienced by Japan recently for a decade. “There are many ways in which you can see us almost surely being in a Japan-style malaise,” said the Nobel-laureate economist Joseph Stiglitz,

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