recession, a good thing?

[Jim Devine <jdevine03@xxxxxxxxx>]

America needs adjusting

An economic slowdown in the US would be good news for the rest of us.
Bill Emmott

August 9, 2006 02:30 PM | GUARDIAN [U.K.]

The oddest thing about the world in the past three years has been the
complete disjuncture between politics and economics. Politics stinks,
with wars in Afghanistan, Iraq and now Lebanon, with tension high
between allies let alone enemies. But the economics has been fragrant,
with three straight years of rapid global growth of 4.5% or more each
year, the best three-year sequence in at least 30.

Faced with some good news, you can always trust economists to predict
that bad news must be just around the corner. And so it is with the
fashionable current prediction of a coming global recession. You never
really know what is around the corner: that is the trouble with
forecasting. But it is hard to see any good reasons why there should
now be a global recession. An American one, perhaps. But whatever some
Americans may believe, they aren't the world.

Yes, oil prices have risen a tad since the Hizbullah kidnappings. BP
has had to shut down a pipeline in Alaska too.

Yet given that they have risen 25% in a year and roughly sevenfold in
all since their 1998 nadir it is hard to see why the latest rise
should prove some sort of tipping point. What is genuinely happening
is that central bank interest rates are on the rise, in an effort to
tighten up monetary policy after five loose years (in America, western
Europe and Japan, at least) and to put a cap on inflation. But
short-term interest rates at 3-6% in America and Europe, and barely
above zero in Japan are hardly signs of apocalypse soon.

What is really happening is that America, at last, shows signs of
slowing down. It couldn't go on growing at 3.5-4% a year, living on
debt, consumer spending and rising house prices for ever. Higher
interest rates are halting the housing market and will probably dampen
consumer spending too. That is why the Federal Reserve Board yesterday
chose to stop raising its rates, following 17 successive rises. But if
inflation continues to rise, rates will probably rise further even if
the economy slows. If consumers truly go on strike and companies cut
their investments, this might lead to an American recession. Britain's
experience suggests otherwise, however: here, a period of flat or even
falling house prices produced a slower economy, but not a slump.

Even if it did produce a true recession in the world's largest
economy, it need not mean doom for the rest of the world. It accounts
for 30% of world output, that's all. Other countries do trade with
each other, too, rather than just shipping to Wal-Mart. Intra-Asian
trade has been one of the boom stories of recent years. Japan, the
world's second-largest economy, is recovering strongly. Even the euro
area has been showing signs of life recently. Although an American
recession would hurt the rest of us, the pain should be bearable.

Indeed, it would be good news, not bad. Economists and other pundits
have been demanding an "adjustment" from the US for years, to rid the
world of its huge financial imbalances. That is what a US recession
would be: a much-needed adjustment.

--
Jim Devine / "In science one tries to tell people, in such a way as to
be understood by everyone, something that no one ever knew before. But
in economics, it's the exact opposite." --- Paul Dirac [edited]