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Im quite worried, Spence said in a Bloomberg Television interview in Hong Kong yesterday. A combined downward dip in Europe and America, which is a good chunk of the industrialized economies, Im quite sure will take down growth in China particularly, and that will then immediately spread to the rest of the emerging economies. He put the likelihood of such a scenario at about 50 percent. Spences remarks follow cuts in global growth forecasts by institutions from Citigroup Inc. to UBS AG as central bankers from around the world gather for a Federal Reserve symposium this weekend in Jackson Hole, Wyoming. Unlike the aftermath of the 2008 global financial crisis when China cushioned the blow with a stimulus program, this time it would only be able to buffer its domestic economy, he said.
China cannot make up for the kind of loss of demand that would go with a downturn in the advanced economies, Spence said. Because Chinese inflation is running at an official rate of 6.5 percent, a figure many economists say is understated, Beijing would be pretty close to nuts to fuel further credit growth, he said. Spence, a professor at New York Universitys Stern School of Business who won the Nobel Prize in economics in 2001, said Fed Chairman Ben S. Bernanke, who will speak at Jackson Hole today, has limited room to maneuver.
Awkward Spot
The Fed is in a very awkward spot, where they have limited additional capacity to do much more than prevent a frail economy and a frail financial system from failing, he said. But the expectations of them are so high, and its really the government and the fiscal situation and other things which they dont control that are kind of the main agenda items. Spence said that the Fed could seek to encourage lending in order to help bolster the real-estate market. They could focus more attention -- in their capacity as overseer of parts of the banking system -- on the housing sector, whose weakness is a big sea anchor thats holding the economy back.
Encouraging banks to lend more freely to home buyers or to provide relief to those whose homes are in foreclosure would help unlock consumer spending, he said. I just think weve been dithering on that front and its an important enough component of the problem that maybe the Fed could take a leadership role in focusing attention on it, the Nobel laureate said. The Fung Global Institute yesterday named Spence chairman of its academic board, which oversees the research agenda of the Hong Kong-based independent research institute. He is also a former dean of the Stanford Graduate School of Business in California.
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The republicans now control the house which has the primary job opf spending money.
That's because high unemployment could be a warning sign -- and the cause -- of the country falling into a double dip recession. Most economists weren't ready to call a new recession yet. But many were raising the odds of one. They're worried because weakness in the labor market can lead businesses and households to pullback on spending. And that is the worst thing possible for an economy where overall growth has slowed to nearly zero. "When employment drops, incomes fall. When income falls, sales fall. When sales fall, production falls. When production falls, employment falls," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
It's a tough cycle to break. "You can scream and shout, you can be the President, you can be the Congress, you can be the central bank, you're not going to stop that once it gets going," said Achuthan. Even so, the economy is still technically creating jobs -- albeit very slowly -- and Achuthan thinks the economy would need to actually lose jobs before tipping back into recession. One of the biggest worries from economists is there doesn't seem to be much that will be done to address the weakness.
The Federal Reserve is considering additional support, but even Fed Chairman Ben Bernanke has warned there are limits to what the central bank can do. Bernanke said in a speech last week that Congress needs to step in. Such fiscal stimulus would include either more government spending or more tax cuts. But Republicans and Democrats are having trouble even reaching agreement about what night President Obama can lay out a new jobs plan, let alone agree upon what action should be taken. "There is no political will in Washington...to stimulate the economy," said Carl Riccadonna, senior U.S. economist for Deutsche Bank. "The patient is extremely sick and needs some medicine, but by and large the economy is on its own to work this out."
Of course economists aren't the only ones growing more worried. Consumer confidence experienced the sharpest decline in August since the height of the financial crisis. John Silvia, chief economist for Wells Fargo Securities, said the economy remains at risk as long as most households are struggling with weak wages, rising prices and the loss of household wealth. Silvia puts the chance of a new recession at 30% to 40%, up from 20% to 30% before Friday's jobs report. "A significant number of Americans have never seen a recovery," Silvia said. "We're just skating on really thin ice. We can't take another shot."
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