Monday, September 21, 2009

James Grant on An Economic Recovery

This past weekend's Wall Street Journal edition carried a prominent, long piece by respected market observer James Grant.

The Grant piece, which comprises the very long lead in the last section of the edition, is surprisingly positive. Given Grant's recent scepticism, he is unfailingly optimistic about an imminent economic recovery of monumental proportions.

In a way, it's too bad that Grant spent so much ink on something that, to sane, informed business professionals with any economics education, is so obvious. I don't disagree with him that really deep recessions produce really strong recoveries.

The question is when.

On that, I don't see Grant providing compelling evidence, despite his assertion that said recovery will be much sharper and sooner than many pundits now believe and forecast.

Grant omits any evidence as to why recent political changes are not different than prior ones, or, if the same, why. The truth is, today's more powerful government interventions are built upon FDR's original interventions, not instead of them. And the exit of the US from the Great Depression had more to do with rearming for WWII than it did with a magical, sudden change in consumer spending and subsequent employment.

Personally, from my reading of many economists and related pundits, I simply feel that Grant is, in a word, wrong. Too optimistic about the timing of a recovery.

What if one had been similarly optimistic at Carter's election in 1976? One would have been waiting a long time for the Reagan recovery, strong as it ultimately was.

Instead, I found this morning's article by E. S. Browning in the Money & Investing section of the Journal more useful and credible.

Browning is much more convincing, in my opinion, in his/her detailed assessment of the risks of this period of "economic instability."

Absent a major war, it's unclear what consistent, steady demand will arise very soon in the US economy to fuel all the economic recovery currently forecast by Grant and others.


Anonymous said...

Mr. Sceptic,

I am a subscriber to Mr. Grant's newsletter, and he has a longer explanation of his reasoning there based on an ECRI report from last spring.

However, I agree with you that Mr. Grant is wrong. I think the sources of growth (capital spend by businesses, exports, and domestic consumers) will all weak due to overcapacity and over-stretched consumers. Consequently, we are left with growth through monetary and fiscal stimulus. I think monetary stimulus will have limited effect due to limited desire to borrow due to overcapacity and stretched balance sheets. And I think government stimulus in make work projects will have limited effect, as it did in Japan.

I think Mr. Grant's blindspot is due to his fear of inflation and belief in the power of monetary policy.

C Neul said...

Thanks so much for your comment and elucidation of Grant's views. I appreciate your input from his newsletter.

And thank you for your own thoughts, as well.