Economic Outlook: The next bet

By ANTHONY HALL, United Press International  |  Oct. 9, 2012 at 10:14 AM
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The International Monetary Fund says the global economy will get worse before it improves and there is no sign of that happening soon.

"Risks for a serious global slowdown are alarmingly high," the organization's World Economic Outlook says, just ahead of the IMF's annual meeting.

The IMF report says "no significant improvements appear in the offing," claiming the global economy would expand 3.3 percent in 2012 and 3.6 percent in 2013.

A scant three months earlier, the IMF had its forecasts at 3.5 percent for 2012 and 3.9 percent for 2013.

The standard definition of recession is two quarters of consecutive contraction in the gross domestic product. The Wall Street Journal points out, however, that on a global scale the IMF does not use that yardstick.

Furthermore, it would appear that few nations appear ready to deal with another downturn. In hindsight, it also looks like they failed miserably do deal with the first one.

In 2009, the IMF urged nations to spend their way out of the downturn by passing stimulus spending bills. In Europe that strategy lasted until Greece became a thorn in the side of the eurozone with announcements that its deficit to GDP ratio was not only far above what the target limits set by the European Commission, but that Greece had actively concealed the size of the problem.

With Greece suddenly in need of international loans, it was quickly apparent the relationship between Greece and Germany, for example, pivoting on whatever central authority existed with the European Commission, meant that politically the eurozone was a millstone around everyone's neck rather than a form of unity.

Figuring out how to help Greece became not only a tortuously slow process, but a putative one. Europe exacted loan terms on Greece you would not wish on a family member.

Long and the short, Europe was suddenly interested in austerity budgets and this became all the rage. Even Germany and France, which were prospering at the time, cut back on spending, turning a marginal recovery into a mess in short order.

If you take $1 to the racetrack and lose that bet, you bet $2 on the second race. That ensures you cover your loss in the first race. If you lose again, you put $4 on the third race, and so on. If you double your bet each time, eventually you may win enough to cover your previous bets.

The way this backfires is simple: Lose three or four races and then give up. Then you don't even recover your losses.

Similarly, spending to put an economy back on its feet is a simple, sound strategy. That's why nearly every country on the globe did so at the start of the previous recession.

Then Greece came along -- and Europe stopped spending. Debt in Greece sparked the fear that debt everywhere else was the problem that needed to be solved first.

The other strategy killer is impatience. If spending does not work right away or the gambler runs out of funds before the payoff, you can expect a second recession will ensue.

In international markets the Nikkei 225 index in Japan lost 1.06 percent while the Shanghai composite index in China gained 1.97 percent. The Hang Seng index in Hong Kong rose 0.54 percent while the Sensex in India added 0.45 percent.

The S&P/ASX 200 in Australia added 0.52 percent.

In midday trading in Europe, the FTSE 100 index in Britain shed 0.24 percent while the DAX 30 in Germany dropped 0.23 percent. The CAC 40 in France added 0.16 percent while the Stoxx Europe 600 was flat, dropping 0.04 percent.

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