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US economy - the last decade was a lost decade

As the 1st decade of the new millennium came to an end, the US has technically come out of one of the worst recessions since the great depression. At a relative level, this maybe one of the worst recessions ever recorded. The uniqueness of this recession lies in the fact that unlike the previous recessions, which mostly saw the inventory led boom bust cycle playing out, this recession saw the US financial system plunging to its nadir. And, being a system whose tentacles are spread all over the world, it pulled others into the vortex as well. For this, however, while a majority of the blame goes to the financial whizkids (a euphemism for thugs on the loose), the regulators also need to take a lot of blame for failing to take appropriate action at the opportune moment. Despite clear faults in the system, the runaway assets prices backed by the obscene expansion of the opaque derivative products, were used by the regulators to justify that as a success story of their own policy acumen. And, when the bubble burst, asset prices collapsed.

The last trading day of the year saw the Dow close at 10,428.05, down by 9.3% (despite a major recovery from its March low, which is not necessarily backed by the economic fundamentals) as compared to its closing value of the previous decade i.e 11,497.12. This was the first time ever since the great depression that the Dow actually posted a loss during a decade.

Image 1

This decade also experienced two recessions, one in 2001 (lasting for 8 months) and the other in 2008 (lasting for 19 months). Not surprisingly, the economy expanded the least (in real terms), leaving aside the decade of the great depression. Even after assuming a 4% annualized growth in the 4th quarter of 2010, US real GDP would expand by a little above 20% during the decade - and this, despite a substantial improvement in productivity. Looking at it, the last decade can be termed as a lost decade for the US economy.

 

There was a virtually zero job creation (less than 400,000 jobs have been created) during this period.

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Not surprisingly, the US consumers were highly affected. During this decade, the inflation adjusted median household income dipped for the first time, while the consumption binge that the US households indulged in (since the baby boomer generation entered the fray) led to their debts skyrocketing. With house prices falling and equity prices down, wind has been knocked out of their sail.

Posted by Kunal Kumar Kundu on January 21, 2010 2:32 PM |

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