Belfast Telegraph

On-off economy has US feeling deflated

By Stephen King

I could be wrong but, having returned from a holiday in the United States, I've concluded that Americans for the most part are focused on only three things.

(i) the proposals for a mosque near Ground Zero, (ii) whether Steven Slater, the Jet Blue flight attendant who quit his job in a fit of rage by escaping from a passenger jet via the emergency slide, is a hero or villain and (iii) whether the US economy, having shown signs of recovery earlier in the year, is now back on its knees, perilously close to a double dip.

I won't comment on the first two issues for the simple reason that, ultimately, ‘it's the economy, stupid’, as Bill Clinton reminded us in the 1990s. The double-dip debate is, however, a sideshow. It implies that the US economy has only two settings, recession or recovery. Sadly, that is no longer true. The US economy is showing signs of traumatic economic weakness unprecedented in the post-war era. Mere avoidance of a double-dip would be in no way a sign that America's economic trauma is over.

Traditionally, the US economy bounces back.

In nominal terms, recent economic developments look absolutely terrible. A combination of weak recovery and falling inflation has left the value of economic activity unusually depressed relative to both previous economic recoveries and the eye-popping amount of debt hanging around the American economy's neck today. This is not a good place to be. The stimulus measures were designed to put the US economy back on a recovery path, allowing the debt burden slowly to fade over time. In the absence of recovery, the debt burden is, if anything, getting bigger. In place of the usual virtuous circle, the US increasingly is in danger of becoming trapped in a vicious circle of debt, deleverage and deflation.

No doubt the Federal Reserve is examining with ever-greater scrutiny the various unconventional options to be found in its monetary toolkit to deal with this unpleasant situation, perhaps taking its cue from the Bank of England's earlier purchases of gilts. But, as Mr Bernanke noted in 2002, it would have been far better not to have got into such a dismal position in the first place. Back then, Mr Bernanke noted that the US had a far greater chance of dealing with deflation problems than had been true of Japan because “Japan's economy face[d] some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt.” In hindsight, it's an unfortunate conclusion — whether Americans like it or not, their economy is increasingly looking like Japan's. Perhaps that's ultimately why Steven Slater, Jet Blue's anti-hero, tried to escape.

Belfast Telegraph