This weekend, Jim Grant presented his case for a V-shaped recovery, a call that turned heads given Grant’s longtime bearishness. His case was that economies rebound at the same trajectory at which they decline, and so sharp downturns are followed by sharp upturns.
We voiced our scepticism here. Basically, our argument is that it’s different this time — that due to high debt levels and the unsustanability of the pax economica that preceded the crisis, there would be no fast snapback.
For a more thorough attack on Grant, here’s Michael Panzner, author of the cheerily titled Financial Armageddon, who wonders if Grant’s article was a classic “ringing the bell at the top.”
Aside from discounting the fact that there are aspects to the current unravelling that are historically unique and extraordinarily unsettling (e.g., total credit market debt relative to gross domestic product is well beyond anything this country has ever witnessed), Mr. Grant makes a number of curious assertions.
For one thing, he assumes that the current downturn is near its nadir, instead of a temporary floor built on a massive stimulus injection and a knee-jerk bout of inventory restocking. Among logicians, such an analytical approach might be described as “begging the question.”
Mr. Grant also gives short shrift to the fact that in many ways — see “A Tale of Two Depressions” by Barry Eichengreen and Kevin H. O’Rourke for more on this subject — the economic episode that most closely parallels the current downturn is the one that occurred during the Great Depression, which lasted twice as long as the latest one has.
Perhaps our economy will rebound sharply in 2011, but from what level? Should we really be preparing for the best right now — instead of the worst — given how many icebergs –like the accelerating meltdown in commercial real estate and the mortgage reset timebomb — are only just floating into view?
History suggests that time is not on the side of the optimists when it comes to episodes like the one we are going through. As I’m sure Mr. Grant is aware, Professors Carmen M. Reinhart and Kenneth S. Rogoff have published a research paper, “The Aftermath of Financial Crises,” based on data going back more than a century, which concluded that post-crisis downturns tend to be “protracted affairs.”
To bolster his allegedly contrarian argument, Mr. Grant points to the swollen ranks of pessimists preparing to meet the future from “inside of a bomb shelter.” But after decades of bubble-induced euphoria and an economy built on massive debt and unparalleled overconsumption, I wonder if he is engaging in a bit of dot-com era relativism — where the Nasdaq was “cheap” at 4,000 because it was down 20 per cent from its peak (it is now 2,132).
If savings rates, debt levels, and the share of the U.S. economy accounted for by consumer spending were to return to, say, pre-Greenspan era norms, then one bomb shelter might not be enough to handle the economic onslaught that is still headed our way.
Finally, Mr. Grant makes the cardinal error of many ivory tower economists. He credits equity investors with the wisdom of crowds. Those are the same people who bid share prices to new all-time highs in the fall of 2007, just as credit markets were unravelling, home prices were collapsing, and the bottom was falling out of the real economy. Hmmm.