What’s normal for the economy?

By Felix Salmon
April 27, 2009

I’m at the Milken Global Conference for the next couple of days, where Pimco’s Mohamed El-Erian kicked off the first morning’s big breakfast session with the blunt statement that the assorted plutocrats have to stop hoping that things are going to get “back to normal” — ever.

The problem, he said, quite rightly, is that the crisis is “morphing” — a financial crisis became an economic crisis and is now becoming a socio-political crisis. It’s silly to hope that any government can get ahead of a morphing crisis, especially when government response is certain to be rife with unintended consequences — if you do what makes sense economically, you end up with a political backlash which creates a whole new set of possibly even more intractable issues.

As with all these panels, the panelists tended to talk their book: El-Erian was pushing the PPIP plan, Ken Griffin was asking the government to socialize housing-market losses, and John Micklethwait was literally talking about this week’s Economist covers.

But the point which resonated more than any other was El-Erian’s home truth: there’s going to be “a new normal, not an old normal” if and when we finally emerge from the current recession. Ken Griffin might hate the stealth nationalization going on at places like AIG, GM, and Citigroup, but we simply are entering what El-Erian calls “a period of deglobalization”, which is going to affect different sectors of the economy in very different ways.

To that point, there probably won’t be such a thing as “the recovery” — certain parts of the old economy simply might not recover at all. Any financial and economic crisis of this magnitude will have permanent victims. In sunny California, it’s easy to forget that things really can go to zero, especially when you are personally highly invested in them. John Micklethwait talked darkly about how a political hurricane ripped through Europe, in the form of World War I, just when many people in 1913 thought that things would only ever get steadily better. Or, to put it another way, if we are reverting to mean, which mean are we reverting to?


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I was wondering if you can elaborate on your statement that “Ken Griffin was asking the government to socialize housing-market losses.” I was not aware Mr. Griffin was calling for any such thing. What is he proposing?


El Erian’s point is well taken – he’s been banging this drum for some time: 1982-2007 was not “normal” in the sense of increasing systemic leverage built on a perceived great moderation. The coming Normal will be probably the longer term normal which includes 1945-1981, as an example, which is a very different world in terms of leverage, valuation, inflation, yield, etc.

The Knightian uncertainty as to what normal is now the new normal is something policymakers (Geithner, Summers) have not yet grasped as a problem.

Posted by Sunset Shazz | Report as abusive

‘Normal’ is either a statistical term, or a state of mind – a way for some people to perceive certain phenomena. As such, it is subjective, and dependent primarily on the the person’s or group’s preconceptions, goals, wishes etc.
Things morph all the time: The credit bubble morphed for more than a decade before decision makers took notice of it, although economists had seriously warned about it as early as 2001. Obviously, when decision makers take notice of problems those problems have usually ‘matured’, and therefore more difficult to deal with.
It is reasonable to assume that the solutions applied now to deal with the crisis will in their turn generate new problems, and those problems are not likely to be small ones…

Posted by yr | Report as abusive

People often suggest a V shaped recession is optimistic and an L shaped recession pessimistic, but a V shaped recession may imply a much deeper recession from which a bounce back can occur while an L shaped recession may be the most optimistic we can expect under the new normal.

Posted by Lord | Report as abusive

Stealth internationalization seems more like it – much of it not all that difficult to see.

Haven’t all notions of past Recoveries been somewhat of a statistical and political mirage, just looking at the ongoing spread in the rich poor gap throughout the ‘good’ years to start. On the other hand, aren’t El-Erian and friends still enjoying an extended boom? How’s attendance at the Milken conference this year?

Posted by mtm | Report as abusive