Whose fault is that?

The recovery from the great recession of 2008 has been extraordinarily slow.

Now, as more data is available, the reasons for this sluggish convalescence are becoming evident. Businesses, uncertain of what the future holds, are not investing. The piles of cash that large American and Western European businesses are now hoarding provides proof.

Interviewed executives of Western European companies have explained that uncertainty about the euro is the reason. In America it’s the “fiscal cliff”.

Recently announced statistics reveal that unemployment is now below the magical 8% figure. Two researchers from the Federal Reserve Bank of San Francisco have established that unemployment would be 1% lower, were it not for the uncertainty.

The politicians will be pointing at each other, and for once they’ll be right.

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Employment will decide the election. Really?

Apparently American voters won’t re-elect a President when unemployment is above 8%. At least the debate is about a substantive issue.

The impact of the jobs figures on the stock markets is an indication of how much relevance employment has. But it needs to be put into perspective.

The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. (The Economist Dec 10, 2011)

Unemployment rates in 1933, four years after the 1929 crash and before the economy started to recover, topped 25% . Presently, unemployment in the U.S. is at 8.3%, down from the peak of 10%.

Monetary policy, which failed in 1929, provided most of the relief needed after 2008. The Federal Reserve, which is beyond political control, has the responsibility for monetary policy.

Deciding who should be President, based on something that’s not part of the President’s mandate is crazy. Not only that, the 2008 crash is not over. What happens in the next few weeks in Europe will have a big impact on the world economy, and that’s also out of the President’s hands.

Europe’s problem is much bigger. The European Central Bank, the body that should have control of monetary policy in Europe, doesn’t have the same level of mandate that the Fed has. The politicians from the 17 countries that make up the Eurozone, led by Angela Merkel, need to provide that mandate. They are not even talking about trying, let alone working out how it should be done.

This will be a big decision, and would require relinquishing autonomy that many of the members indicate they have no desire to give up. Voters in the union are increasingly feeling that membership is not beneficial. The chances of getting consensus are low.

What follows next is looking bad.

And in the U.S., the debate is about whether unemployment figures will be above or below 8%.

Nero fiddled while Rome burned. What else could he do?

More at:
Lessons of the 1930s There could be trouble ahead
Business cycles Lessons of the 1930s
Lost economic time The Proust index
The euro crisis The growth problem