We have all been gripped by the dreadful downturn for so long now that the “experts,” the economists and the media commentators have now stopped predicting the recovery. They now seem to be spending their time speculating on the SHAPE of the recovery that will occur at some time in the future. It all looks very complicated at first glance, probably because of the terminology or language that has been developed by the “experts” to describe the situation. Whether this has come about to confuse ordinary people like you and me, or whether it is a simple metaphorical means of explanation I will leave you to decide.
The speculation centers on whether or not we will see a V shape, U shape, W shape or L shape recovery. So, let’s start by offering a simple explanation to those four designations. First of all, to do this we have to imagine we are looking at the line on a graph which is demonstrating any of the important economic indicators. The stock market would be a good example.
The V shape recovery is the easiest to explain, the line on the graph falls sharply to a point at the bottom of the downturn and then recovers quickly to the point prior to the drop, hence the line on the graph looks like the shape of a V. We know that this is not a possible recovery shape because we have been down at the bottom for a good while now and haven’t bounced back up.
The W shape is similar in some respects; the sharp fall is followed by a “blip” upwards before it falls back again prior to the line going back up for the real upturn. Hence, the shape of the W. This one’s sometimes referred to as the double dip recession. It’s not going to happen! It’s not going to happen because we didn’t get that blip upwards!
So, that leaves us with the U shape and the L shape and out of the two we need to hope and the decision makers need to ensure that we achieve the U rather than the L. The U is when the line on the graph falls similar to the first part of the V, hits the bottom and then bumps along at that level for one to two years before bouncing back up again. That period when the line is horizontal along the bottom is what turns the V shape into a U shape. Inevitably, this scenario causes a good deal of hardship until the upturn arrives, but it is manageable.
The worst scenario of all is the L shape. This is when the economy drops as we have seen, but when it hits the bottom it simply flat lines for a protracted period of time, perhaps even a decade. In modern economic times this has been seen only very rarely. It happened in the U.S. post 1945 when the manufacture of tanks, guns, etc. suddenly came to an end, but more recently we have seen it in Japan in the 90’s. The “experts” are currently fairly evenly split between the U and the L and as a consequence, I would certainly like to have more confidence that the governments of the European countries and that of the U.S. were as one in the way that this crisis should be treated.
The same economic problems exist on both sides of the Atlantic. Unemployment, depressed housing market, credit problems, etc., etc. The reaction to this, however, appears to be totally opposite, with European governments advocating frugality through cost reduction and cuts in public spending, whereas the U.S. policy seems to be to spend, spend, spend and bring the economy back through investment.
Now I’m not qualified to comment on the correct strategy or course of action to take in order to strengthen the economy and, “move it on up,” but I am confused and extremely concerned that two diametrically opposite approaches to the same problem could cause the biggest economic catastrophe ITHOE.
I hope I’m wrong and I’m missing a big piece of this puzzle. Could somebody please enlighten me?