September 08, 2009

Let's Call It "Dubya's W"

Stiglitz warns of economic double dip
"It is difficult to know whether or when there will be a W," as such a course of events is often described, Stiglitz told AFP.

"There are a number of substantial risks to the economy going forward. The risk to the financial sector, for instance, from commercial real estate ...

"And there are risks to the real sector caused by states having a shortfall of revenue and the withdrawal of (government) stimulus packages in 2011 will be a negative shock to the economy."

Stiglitz, former World Bank chief economist and an adviser to US former president Bill Clinton, said household balance sheets had been "destroyed", which has meant that "savings have gone up from zero to 7-9 per cent".

A rising savings rate cuts into consumer spending, which is responsible for roughly two-thirds of US economic growth.

An "inventory adjustment" is under way, as companies build up their stocks, Stiglitz said.

But "because of the uncertainties, people are not hiring, unemployment is very high and foreclosures are likely to remain high," he said.

"The result of this is that if these negatives I have described play out, which is very likely, when the inventory readjustment is over, the economy will go into a double dip."

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