May 22, 2016


Murder most foul : When periods of economic growth come to an end, old age is rarely to blame (The Economist, May 21st 2016)

The Netherlands holds the record: its longest [expansion], which ended in 2008, lasted nearly 26 years. Australia may surpass that early next year: its continuing expansion dates back to 1991. If expansions have a natural lifespan, it is longer than a decade.

Earlier this year Glenn Rudebusch of the Federal Reserve Bank of San Francisco constructed an actuarial table for America's historical expansions, much as a life-insurance company would for people. In rich countries the probability of a person's death rises gradually from middle age until the mid-80s, then quite steeply thereafter. Expansions, however, do not seem to become more vulnerable with age. There have been only 12 American expansions since the end of the second world war; the universe of people who have lived and died is somewhat larger. But the data available suggest that there was a time when cycles aged like people. Before the second world war, Mr Rudebusch notes, the odds of tipping into recession rose as an expansion got older. Yet since the 1940s age has not withered them: an expansion in its 40th month is just as vulnerable, statistically, as one in its 80th (each has about a 75% chance of surviving the next year). [...]

Post-war expansions are longer (and recessions shorter) than was once the case, but business-cycle immortality remains elusive. The end of some expansions is clearly the result of foul play. In the early 1980s, for instance, both America and Britain suffered recessions that were deliberately induced in order to bring down raging inflation.

In other cases the culprit is human error. As central bankers freely admit, their control over the economy is imperfect. Policy works on a delay. Since not every shock can be anticipated, a bad blow may start a recession before a central bank can adequately respond. Or an inflation-averse central bank may discover, after it is too late to adjust course, that it raised interest rates once too often. What's more, with interest rates in many economies near zero, central bankers find themselves increasingly reliant on unconventional tools, for which the margin of error is larger.

But there is a difference between misfortune and recklessness. Central banks that worry more about high inflation than low will tend to err on the hawkish side, and will find themselves steering into recession with some regularity. 

There is a particular danger with a new Fed Chair, as witness Greenspan in '87, Bernanke in '08 and Yellen in December.  Thankfully, the last seems to have learned her lesson. You can't raise rates into the teeth of deflation without stalling out the economy.

Posted by at May 22, 2016 8:36 AM