~ The “square root” Economy and Goldman Sachs “Surprises”

The economy was center stage at the International Monetary Fund (IMF) meeting in Istanbul this week. So I thought I would share a few interesting bits that may have gotten overlooked in the reporting by the MSM.

From Politico:

Treasury Secretary Timothy Geithner expressed guarded optimism before an audience of world leaders at the International Monetary Fund and World Bank meeting this week in Istanbul. “We are now witnessing stabilization of the global economy and the beginnings of recovery,” he said. “But we cannot be complacent. Conditions remain fragile.”

So do others share Mr. Geithner’s optimism? And just how “fragile” are conditions?

Some leading corporate executives worry there’s no economic engine available to drive growth in 2010: Technology, construction, finance — all sectors that have powered the U.S. economy out of the doldrums in the past — are flat this year.

And some boardroom denizens offer a bleak assessment: An economy that was driven by consumer overspending for years and by government overspending for the past year will have a tough time making any headway when the government support is withdrawn.

So how is the US economy shaping up? And where is it going?

The best-case scenario is a “V”-shaped recovery — a sharp drop and a quick rebound. Next best is a “U” shape, with a sharp drop, a protracted trough, then a recovery.

The worst of all possible scenarios is the “L”-shaped recession, which is a sharp drop followed by a flat line. In other words: No recovery for you.

The numbers have been so bad recently that yet another shape has entered the lexicon — a “square root”-shaped recovery, in which a short bounce back is followed by a long period of stagnation.

So what do the economist have to say? From Bloomberg:

New York University Professor Nouriel Roubini said stock markets may drop

“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. …

“The real economy is barely recovering while markets are going this way,” Roubini said. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”

“In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets,” Roubini said. “For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability.”

More Bloomberg:

Nobel Prize-winning economist Joseph Stiglitz said U.S. unemployment will keep rising and should be the focus for policy makers, and gains in the stock market show investors have been “irrationally exuberant” about a recovery.

“There’s a lot of risk going ahead of some big bumps,” he said yesterday in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.”

Economic growth this year and next will “fall well short of what we need to stop unemployment from growing,” he said. The likelihood that the U.S. economy will be “out of the woods” before most of the measures in the Obama administration’s stimulus package expire in 2011 is “very small,” he added.

So what worries me the most? This interview:

In a separate Bloomberg Television interview yesterday, Goldman Sachs Group Inc. Chief Economist Jim O’Neill said the International Monetary Fund meetings in Istanbul are “stuck” in an outdated mentality that doesn’t reflect the rising power of emerging economies following the global financial crisis.

O’Neill also said the dollar probably isn’t the No. 1 concern for U.S. policy makers, and predicted 4.1 percent growth for the global economy next year.

Many countries will be “surprising” in their economic growth in 2010, he said, while adding that there is potential for more “positive surprises” that could help fuel global expansion.

Is it just me? Or does hearing the words “more ‘positive surprises’ that could help fuel global expansion” coming from Goldman Sachs sound ominous for the American taxpayer?

[Also posted at No Quarter]

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