Double Dip Recession May Be a Little Too Optimistic

Economists are debating on whether our not the US will experience a double-dip recession. The prediction, however, may prove to be a bit optimistic.

Most said we are on the path of recovery. However, falling unemployment rates, decreased consumer spending, dropping house rates, and unstable global cues are, unfortunately, not signs of recovery. Some economists, who have realized the graveness of this situation, have termed it as ‘Lost Decade’, which means a prolonged period of weak growth.

An economist and professor at Cal State University Channel Islands, Sung Won Sohn, predict the probability of having a lost decade is much higher than a double dip recession. According to him, major engines that push growth of an economy like consumer spending, housing, and exports, are all down. For the next few years, our country might not even grow at 3%.

However, if something like Lost Decade hits America, it would be like a never ending recession for most citizens. More people might lose their jobs, and major investments like stocks and bonds will keep losing value. They are losing value on their major investment, houses, as well.

A similar lost decade took place in Japan, which started from 1992 and lasted till 1999. During this period, the economy grew by less than 1% each year. Although such recession ended in 1999, it is still recovering from the loss and economic weakness it suffered.

This impending lost decade in the US is very similar to the one that occurred in Japan. They too had a housing bubble burst, which paralyzed major banks and financial institutions resulting in poor lending ability.

The Japanese economy did everything to haul the country out of such prolonged recession, which also included dropping the prime lending rate to near 0%, and stuffing money into the market by purchasing assets. However, most of these steps were ineffective.

Subsequently, the country went through brief period of deflation. Most business, to deal with falling prices, had to cut back on employment and production, a scenario that’s now common to all US workers.

The US has not been through major deflationary period after the Great Depression. The inflation rate has, however, dropped till 0%, which is a potential threat.

A double-dip recession would be comparatively less harmful than a Lost Decade, as it would not affect the country politically, financially, and socially as it may in the latter case. This may occur because the US relied on weak growth pattern. Even if the country is able to avoid a double dip recession, expecting only slow growth would be optimism.

However, many economists also believe there is drastic difference between Japan’s lost decade and this situation. Japan, in that period, was growing through a phase of shrinking population and over-dependency on exports. So, they suggest, lost decade is unlikely. We, however, have no option but to be optimistic.