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Tuesday, March 18, 2008

A crisis in the US? Or a mere recession?

I've long been worried about how the US economy will shape up, and about the consequences of a downturn in the US for India. But writing in Business Standard today, I disagree with some of the more extreme doomsday scenarios about the US. We're all well schooled on emerging markets crises, and I think we're inappropriately extrapolating too much to the US. I think there's a good chance that the US will hit 0% GDP growth for a few quarters. But I don't see things getting much worse than that.

Update (19th morning). I wrote this article at 2 PM yesterday (18th, Tuesday). This morning, when I woke up, I saw the S&P 500 was up 4.24% and VIX is down sharply from 32% to 26%. These are massive moves. The standard deviation of a one-day change of the S&P 500 over the last 1000 days was 0.81%, so this is a 5.3 standard deviation move.

I feel a lot of people are not understanding the death of Bear Stearns correctly [example]. Jim Hamilton has an excellent blog post on the subject.


  1. Ajay,

    Do u think a few quarters of no growth or slow growth in US would not damage it's own economy as well as others with it.

    US accounts for 40% China's exports. It will surely take global economy down with it. And that cant be good.

    Btw: Thanks for the link at Econbrowser


  2. Today article is really a masterpiece. The article really differentiates between what is exaggregation and what is common sense.

    I am following blog for long but still I couldn't find regarding "what lies ahead?" (just like today's masterpiece for US). Even though Indian economy is facing slowdown because of current policy fremwork (monetary, cap controls and fiscal), but I am not able to gather info on How economists are painting medium to long term scenario. IIP numbers, stock markets are revealing too much in short term but whether they will carry forward and No change policy will continue for how long.

    Please opine on long term under this "No Policy Change" framework.

    Best Regards,

  3. Let me introduce myself, my name is Kunta Kinte and 0 % reserve is my nomination for the Nobel Prize. Is it the key of my salvation or it is the reason for my starvation, you decide. God bless Plunge Protection Team.

  4. It was bale out for JP Morgan, not Bear Sterns! In fact Bear Sterns was given a really bad deal...may be it deserved it...

    Isn't it too soon to say there is no crisis in US. Surely if something like that happened in India or another country it would be called a crisis because of lack of regulations or whatever - the usually list of things...The only saving point is US economy is flexible compared to other countries and probably clean up the mess faster than others, years instead of decades, say like Japan which still has a hang over from 1990s real estate blow up.

    I can't imagine what our response would be if the current real estate bubble blows up in India...

  5. It was a bailout of bondholders.

    It is a crisis but of course the US will survive though not in the current state.

    With Martin Wolf of Financial Times screaming for the "US Public Sector" to come rescue the financial industry, hopefully we will end up in a different world.

  6. The US is a resilient market economy with good institutions. In my mind, the real question about what comes next lies in China. China lacks sound institutions and the framework of stabilising macro policy. Things could get ugly there.

  7. ajay, by "resilient economy" do you mean the following:

    - enormous current account deficits (i.e. the most indebted nation in the world)
    - huge national debt
    - negative savings
    - 70% of GDP is consumption
    - very little manufacturing/production
    - currency is crashing, and there is high inflation

    A posted a comment about the article itself in your guestbook.

  8. Not sure how resilient it is. I hope it is resilient but I don't see any signs of it.

    There was a debate among people about whether it will be global inflation or deflation. I believe it will be the latter. We are seeing deleveraging and end of cheap credit leading to years of subpar growth.

    Also there are signs that the Indian economy is slowing. Manufacturing down, property market topped out, lending getting curbed....

    Can't get a break :(

  9. Thanks Ajay I read the links you provided on Bear Stearns. Wht I am surprised is the author compares $1.2 Bn of Bulidings Value with the $2 of share price, as Bear's liabilites could be in billions of dollars. I understand tht from the American Economy point of view it would not have been a good idea to file for Bankruptcy, but from a share holder perspective do you think it makes better sense to file for bankruptcy than to accept $2/ share?


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