We're Seeing Dangerous Proclamations Of Optimism All Over The Place

ECONOMIC optimism fills the air, like the petals of the cherry blossoms around the tidal basin. On its front page Thursday the Wall Street Journal declares, “Evidence mounts of strong recovery.” USA Today blares, “New jobs fan rising economic optimism.” Newsweek’s cover proclaims America “The Comeback Country” and Bloomberg BusinessWeek tells us, “Obamanomics is working better than you think.”

Curb your enthusiasm. Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery. At the risk of gross oversimplification, the debate is this: do we follow the strong recovery model (the “V”) which holds that deep recessions are followed by strong recoveries, or the weak recovery model (the “U”) that holds that recessions caused by financial crises are followed by weak recoveries? I have long been in the latter camp. In fact, I describe my forecast as “reverse square root”, sort of a cross between a V and U (credit to George Soros for the term): an early cyclical rebound followed by muted growth. I’m still there.

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