Morgan Stanley economist (and perennial bear) Stephen Roach says the current US recession will be far worse than the one that followed the dotcom crash. The Telegraph:
“We have, as relatively sophisticated, well-developed economies, gotten hooked on credit as never before,” said Roach [at Davos], speaking about the UK and US. “If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we wouldn’t be in this mess we are in now.
“Maybe the growth we have been realising has been something of an illusion predicated on levering our assets, and unfortunately we didn’t fully understand the risks we were taking on. The US may be in recession right now…. The US has more vulnerablility to a post-bubble shake-out today than it did seven years ago, and [more] than in the UK.”
The reason this crunch will be so much worse, he said, is that the chunk of the economy which is shuddering to a halt – homebuilding and housing dependent consumption – is six times bigger than the spending on IT, which triggered the last one.
“The magnitude dwarfs anything we saw seven years ago.” The endgame, he said, is an “average recession” meaning just over a year’s worth of economic shrinking – three times the depth of the recession seven years ago.
Only a year? No problem. Then the stock market should stop cratering and start rising by the fall (leading the economy by about six months).
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