Double Dip Recession

Krugman Sees 30-40% Chance of U.S. Recession in 2010 (Update3)

By Steve Matthews
Jan. 4 (Bloomberg) -- Nobel Prize-winning economist Paul Krugman said he sees about a one-third chance the U.S. economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.

It is not a low probability event, 30 to 40 percent chance,” Krugman said today in an interview in Atlanta, where he was attending an economics conference. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”

Krugman, 56, said growth will slow as the Federal Reserve ends purchases of securities, the Obama administration’s $787 billion stimulus program winds down and companies stop rebuilding depleted stockpiles.

The Princeton University professor joined Harvard’s Martin Feldstein and Columbia’s Joseph Stiglitz, another Nobel laureate, in sounding an alarm for the world’s largest economy during the annual meeting of the American Economic Association. Feldstein yesterday called the fading stimulus “a serious cloud,” and Stiglitz said growth won’t be “robust” soon.

While inventory rebuilding may have raised U.S. growth to a more than 4 percent annual pace in the fourth quarter, this year’s rate will be “more like 2 percent,” with the risk of outright declines late in the year, Krugman said. Unemployment “ends the year a little higher than it began,” Krugman said.

Survey of Economists

Krugman’s forecast is more pessimistic than the median estimate of 58 economists
surveyed by Bloomberg News in early December, which called for a 2.6 percent expansion this year following a 2.5 percent contraction in 2009.

The Federal Reserve’s plan to end purchases of $1.25 trillion of mortgage-backed securities and about $175 billion of federal agency debt in March could spur an increase in mortgage rates and lead to declines in home sales and prices, Krugman said.

“Probably mortgage rates go up some,” he said. “New home sales are still pretty weak and new home construction is a joke by the standards of a few years ago. But they probably falter.”

The Fed should consider buying another $2 trillion in assets to reduce unemployment, Krugman said, citing research by Joseph Gagnon, a former Fed staff economist.


It is not very often I agree with Paul Krugman.  However, on most of the points he brings up, I share his concerns.  Yes, there is very likely a second dip coming in this ongoing recession.  I would put the odds at better than 70% rather than 30 - 40%. 
Structural reform needed to correct the mal-investments of the past two decades have been resisted at every turn by the Federal Government, State Governments, Unions, Lobbyists, Banks and the Federal Reserve.  We have a serial bubble blower in charge of the Fed and horrible monetary and fiscal policy from Treasury.
Krugman then comes up with the hair brained idea that the solution to the deflationary environment is more mal-investments by having the Fed buy more assets! 
Yes, let's borrow our way to prosperity.
It has never worked before, but "this time is different"!  Right?



  1. PW, does the double dip mean that the dollar will go into crisis mode immediately? Or does the dollar crisis come much later on?

  2. In my view, the dollar is set to rise in the short to intermediate term as deflationary forces manifest themselves and a sovereign near-default promotes a run to treasuries.
    The true dollar crisis will come later.

  3. The treasury doesn't conduct monetary policy. And you are from Canada!

  4. Anonymous 12:15 pm is correct about monetary policy being theoretically governed by the Federal Reserve rather than Treasury. The reality is somewhat different - The Fed is strongly influenced by political forces, including Treasury as the low interest rate, bubble inducing Alan Greenspan years proved. The last time we had a relatively independent Fed was when Paul Volcker was chairman.
    Anonymous you appear to be offended that I am an ex-pat living in Canada. In my view, location should not determine freedom of speech.

  5. Why not stick it to the Fed? After a century of manipulation, at least three generations (to forget....) let 'em have it.

    Then audit them as per Ron Paul (HR. 1207, SR. 608).

    Then, let's just see the taxpayer bail out the private Federal Reserve Corporation.

    Then, they foot the bill.


Post a Comment