Thursday, May 21, 2009

Green shoots?

All the perfervid talk of the economy showing some "green shoots" because the second derivative of some key economic variables has turned positive is producing a classic suckers' rally. In order to believe that the economy really has found a bottom, you need to believe all of the following:
  1. That the stock market won't overcorrect to the downside, the way it has in every previous major recession of the last century. Hmmm:
  2. That the real estate market is at or near the bottom. Hmmm:
  3. That the U.S. Fed has the information and tools to thread the needle between deflation and inflation: specifically, that Geithner and the other central bankers will (a) know exactly when to pull back on the massive amounts of liquidity they have injected into the markets, and then (b) actually be technically capable of doing so, and then (c) won't end up yanking the cord too hard.
  4. That the Japanese and the Chinese will keep buying Treasuries, come hell or high water.
  5. That all the various government stimulus bills are actually an efficient allocation mechanism and that there actually exists aggregate global demand such that the stimulus bills bring back jobs and growth in the medium term.
  6. That the intellectual awareness of the benefits of free trade will outweight the populist pressures of democratic polities during a major recession.
  7. That there are no big exogenous shocks, such as a major war in the Middle East, or a return of the swine flu in nastier pandemic form when the season returns in the Fall.
If you believe all that, well, then dive right in! Then again, if any of those propositions seem dubious to you, you might want to wait a little (or a lot) longer.

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