> [The bourgie consensus is now that the U.S. economy is bottoming, or
> has already bottomed, and is about to turn up, perhaps strongly. The
> leftie consensus is that it's only begun worsening. Hmmm.]
So far no one has successfully refuted Wynne Godley's argument that the financial imbalance in the US private sector will prevent any real recovery.
The private sector is running a deficit of almost 6%. The historical average since 1960 is a surplus of almost 3%. That's an enormous departure from historical norms. Every other country that's gone this route in recent times - Japan, Sweden, Finland, England - have all eventually experienced a sharp reversion to the mean - and then overshot.
Godley's most optimistic scenario is that over the next 5 years, the deficit shrinks but doesn't disappear - a much more mild outcome than the above-mentioned historical cases. Under these circumstances, he calculates (even figuring in the fiscal stimulus in the pipeline) a growth rate averaging 1.7% through 2006, ending in an unemployment rate of almost 8%. That would be the weakest "recovery" on record and still wouldn't end up putting the private sector's fiscal house entirely in order.
His intermediate scenario - which merely assumes that the private deficit goes back to normal and then slightly overshoots - entails the unemployment rate rising steadily til it reaches 10 percent in 2006.
Apparently, the Fed has so far been successful in its effort to stall this process of reversion toward historically normal private surpluses. Cheap money is straining to reinflate already overvalued asset markets - the stock market, the housing market. That's allowing people to put off paying down debts and rebuilding saving.
But the deficits are still there and somehow they have to gotten rid of. Who can believe that this can be put off forever?
Seth