MacroScope

The Great Stagnation

Federal Reserve Chairman Ben Bernanke’s verdict on the U.S. economy is sobering. Boiled down, this was the message delivered at his news conference today:

    Brace for roughly three more years of sluggish growth – or longer Some of the unemployed will not find work in the foreseeable future America’s economic power has downshifted Global financial markets could upend recovery yet again

It is a bleak outlook. Bernanke has left little doubt that he sees the United States in the midst of very long and painful period of sub-par growth, dousing some of the optimism stirred by recent reports that showed unemployment falling, the housing market hitting bottom and businesses starting to spend again.

Conditions could worsen, especially if the European crisis deepens and tips the world back into recession as the IMF warned this week. Bernanke said the central bank is ready to pump even more cash into the economy to keep it afloat if necessary. And by formally announcing for the first time that the central bank has inflation target of keeping prices at 2 percent, Bernanke has bought himself the leeway to provide extra support to growth without stoking inflationary fears.

He may need to use the wiggle room. If the Fed’s outlook proves correct, it will have taken 7-1/2 years from the time the credit bubble burst in 2007 for the U.S. economy to find its moorings – the worst performance since the Great Depression. And some of the 17 Fed policymakers are even more gloomy. Rates on hold at least until 2014 was the central view, and six of the Fed officials see no need to raise interest rates until 2015 or 2016. Think about that – a decade of virtually free money for banks.

Here are the numbers that tell the tale. The Fed lowered by a notch its assessment for trend growth to the 2.3-2.6 percent range. Only seven months ago it had estimated healthy growth in the order of 2.5-2.8 percent. Maximum employment now is seen in the 5.2-6.0 percent range in the longer run. In the boom years, full employment was  under 5 percent. Bernanke also said some of the unemployment now is structural – meaning that discouraged people have permanently dropped out the workforce or lost the skills needed to get jobs today.

from Jeremy Gaunt:

When things stagnate

Goldman Sachs researchers have been hitting the history books again, trying to divine what happens to currencies when economies stagnate. Answer:  Not as much as you might think

Looking at exchange rates for years before and during "stagnation", Goldman found that year-to-year FX volatility in such periods is lower than in normal periods. But a lot of it depends on the type of stagnation.

First, an average stagnation -- a period of sub-par economic growth lasting for at least six years: