The minutes of last month’s Federal Open Market Committee showed that there is deep concern about the economy among the members. That concern was not confined to just a downturn in the economy but also to a debilitating period of disinflation.
Over the past several days, several other economists have come forth with fairly dire warnings about the likely depth and length of the recession. One particular report that struck me was from Kenneth Rogoff of Harvard and Carmen Reinhart of the University of Maryland. They narrowed their study of recessions to those which derived from financial crisis and came up with some interesting observations. Among them:
They find that unemployment rises by 7 percentage points on average after a severe financial crisis and doesn’t peak until four years after the crisis. The jobless right bottomed at 4.4% last year. If history is a guide, it could rise above 11% by 2011.
They find that housing downturns last six years — meaning a recovery is still about three years away. Moreover, stock-price declines last three and a half years and total 55%. That would put the Dow Jones Industrial Average below 6500 before this is done. Moreover, government debt reaches 86% of gross domestic product –- or $12 trillion. This last data point on government debt is particularly sobering. Despite all of the hope that policy makers are putting on fiscal stimulus, it’s not like it hasn’t been tried before.
Their paper is refreshing because they do throw out a lot of caveats as to what makes the U.S. different, which is a tribute to their intellectual honesty. The study they present is sobering and no more than a guide, but I think when you take it together with the Fed minutes a picture of a pretty sick economy is evident.