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A dramatic turnaround for the economy

Economics editor Chris Farrell

TEXT OF INTERVIEW

Scott Jagow: Today, the head of the International Monetary Fund said a U.S. recovery was possible by early 2010, if things go well. That seems to be the consensus forecast: a grinding, slow recession, kind of an elongated "u" shape. But our economics correspondent Chris Farrell is not really a consensus guy. He thinks the recovery will be more like a "v": a dramatic turnaround sometime next year. All right Chris, make your case.

Chris Farrell: You know what, there's a lot of money out there. There's a lot of money that the monetary authorities, the central bankers, the treasuries, have put out into the market. And it's all in the sidelines.

Jagow: It's, yeah -- it's all sitting in cash . . .

Farrell: It's all sitting in cash. It just seems to me that there is so much fear and so much cash on the sidelines that when people get a little bit of confidence, just a little bit of confidence, the money would just go from being static to opportunistic. "I can do pretty good if I put my money into the stock market." And it's just gonna be this "v," and then we're just gonna come right out of this recession, really fast.

Jagow: Chris, I love your optimism, but what is the possible obstacle to your theory of the "v"?

Farrell: The real obstacle is the banking system continues to lose confidence. And if the banking system continues to hoard money, and just hold onto it, you know then we're going to be talking about a much more serious scenario than the one we're talking about right now.

Jagow: All right, well let's say people jump back in all at the same time. What implication does that have for the rest of the economy beyond the stock market?

Farrell: Oh, for the rest of the economy, what happens is that businesses, they start rebuilding their inventories. Then you're right back into a classic post-World War II upturn in the business cycle, where businesses all of a sudden go, uh oh, you know, I don't have enough inventory here. People are coming into my store, people are going on the Internet, they want to buy my product, my goods, my services, and I don't have the inventory, I don't got the people -- I gotta call some people back. What the rebound in the markets will signal to business is better times are ahead -- I better position myself.

Jagow: With your theory of the "v," you're shooting up pretty quickly.

Farrell: Yes.

Jagow: Which is something we oughta be careful with I would think, based on what just happened.

Farrell: Absolutely. And at that point, it's going to be the real challenge for people's monetary policy and fiscal policy. We just look at what the government's going to do, because with monetary policy, then it's going to be a little bit of a mop-up operation -- 'cause we don't want to get into an inflationary situation. And on the fiscal side, what everyone's going to be asking is, "What are you going to do about the debt?" All right, you succeeded, you did, you succeeded. But now what? Now, how do you start paying it down? What's the plan? So both fiscal and monetary authorities will face a real challenge once the turnaround comes. But you wanna know something? Sometimes there's some challenges you want -- that's one of them.

Jagow: All right, our economics correspondent Chris Farrell. Thanks.

Farrell: Thanks a lot.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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Yes, Chris. There is a lot of cash out there, but also a lot of debt.

When we say there is a lot of money on the sidelines, it makes it sound as if the money is sitting in average consumers' savings accounts, waiting for future use. But the money pumped into the system is of course mostly in bank and bank-like reserves. Not saved money, but rather bank reserves. For *this* money to be spent would mean banks lend to consumers by increasing credit card lending, and also that consumers *want* to increase debt in order to purchase more stuff.

That seems especially unlikely, because there has been a psychological sea change.

Average people, with good jobs, are feeling they don't want to increase their debt levels.

They want to decrease their debt levels.

Richer people on the other hand can support demand some, but not enough. It's general consumer demand that has supported the economy until recently, and now that is decreased in a way that suggests it won't increase.

What a return of confidence could do is to slow the *fall* in demand, and thus reduce the depth of the recession, not end it entirely.

Clearly increased confidence would be very beneficial, in many ways.

It would only be a beginning of a turn around, not the middle stage of a recovery. Not that quickly.

I'd love to be wrong on this, but exactly how?

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