So let's get on with it. Whack-A-Mole brings up the idea of a mole's head popping out of a board and before you can really hit it with your hammer, it disappears back in the hole. Like a roller coaster, it goes up and before it can reach the sky it goes back down again. I like this picture because I think this describes the course of the US economy for at least a couple of years...if not more. Thanks to colleague Mike B. for the idea of the children's roller coaster -- it goes a lot slower than an adult one. That's the second point -- not only are we stuck in roller coaster purgatory, but the average speed of the roller coast is pretty slow.
So I have two points -- a slower-than-average recovery typified by spurts and fizzles. This is very different from a typical V- shaped recovery -- which would have stronger-than average growth for a year of more following the recession. It also differs from the W-shape which imagines two recoveries sandwiched between two recessions. What's the deal? The deal is that we have the buds and shoots of a sustainable recovery around us now but it is complicated by at least three factors. First, the sources of the real estate and financial crisis that started all this have not been fully digested or addressed with policy. Second, we have a huge monetary overhang that must be withdrawn. Third, we have a lot of government debt to sell in the next few years.
So what? The problem is that good economic news -- news of growth in short-run economic activity will be met with rising interest rates and inflationary expectations. The rising rates will panic a lot of people. They will keep the average firm and consumer in a state of perpetual uncertainty. Even without the panic, a time of good growth will mean increases in credit demand from the private sector -- putting it on a collision course with the government for sparse domestic saving. Thus good news is bad news since strong growth will create the seeds of its own partial destruction. How long will we be in growth limbo? That's simple. We will be limbo as long as we have not full resolved housing and bad debt; as long as we have a significant money overhang; and as long as we have a government deficit/debt problem. We won't return to a second recession in this scenario because we have made progress -- housing and stock prices are higher and firms are making positive earnings...but our three longer term factors make it difficult to break out into a gallop or growth.
Of course, we don't have to completely solve these three challenges -- the more it appears that we are on the road to real solutions for them, the higher will be the growth rate of the recovery. But with today's partisan approach to politics it is hard to see that outcome arising. Some might say I am being overly pessimistic but I don't think so. It makes no sense to stick your pinky in a small whole in the dike was a tsunami approaches.