Dr. Norbert Walter is the former Chief Economist of Deutsche Bank. Dr. Walter is currently head of Walter & Töchter Consult.
In autumn 2008, I wanted to add my own personal flavor to the debate about the alphabet soup of shapes used to characterize the economic cycle. At the time the talk among experts was of economic recovery being “V”, “U,” “L,” and “W” shaped. Since the last of these four is pronounced “double-U,” the logical thing for me to do was to label my perspective on the cycle as “triple-U,” on account of its three broad cyclical troughs following in quick succession. My intention was to draw attention to the complex factors that overlap in the longer term as well as the fact that I did not consider a rapid and extensive recovery to be likely.
Because of the resolute monetary policy countermeasures and the extensive internationally-coordinated major Keynesian fiscal stimulus, however, the global economy post-Lehman recovered just as quickly as it had plunged into the crisis. Everywhere the economy developed in an almost perfect “V” shape. Accordingly, I chose not to propagate my “triple-U” theory any further.
As 2011 drew to a close, we evidently witnessed another global slow-down, not least as a consequence of the renewed outbreak of the banking crisis and the escalation of the sovereign debt crisis. With the markets primarily treating the sovereign debt crisis as a eurozone crisis—although there are no really convincing reasons to do so, given that the sovereign debt levels in many other countries are similar or higher—I gladly repeat what I called a plausible cyclical path in 2008: the first downturn was a consequence of the paralysis following the Lehman bankruptcy, with the recovery coming as a result of coordinated Keynesian policy. The second downturn occurred because the bailing-out of the banks did not bring about their restructuring and the bailout-driven high public debt levels in Europe led 2011 to a shifting of fiscal policy onto a tightening path. The recovery in 2012 should largely be the result of continued vigorous growth in emerging markets and the renewed emphasis in the U.S. in order to perk up the labor market situation ahead of the presidential elections. After all, everyone knows that: “It’s the economy, stupid!”—i.e., any U.S. president who fails to reduce unemployment gets voted out of office.
But it is already becoming clear that low interest rates and expansionary fiscal policy are losing their effectiveness. There is bound to be disappointment and one thing is certain: U.S. debt growth has assumed Italian proportions and the government deficit is higher than every record level in Europe. 2012 will be the fourth year in a row that the U.S. will post a double-digit deficit-to-GDP ratio. This will inevitably lead to downgrades by the rating agencies and international savers steering clear of U.S. treasuries with greater frequency. When this looms, the new Congress and the new/old president will have no option but to recast the fiscal policy paradigm. Saving will also become the order of the day in the U.S. This means higher taxes irrespective of election outcome, and it will mean cuts in defense spending if Democrats win and cuts in various entitlement programs in case of Republican leadership. This, together with higher capital market rates, will plunge the U.S. economy and the world economy in its wake in 2013/2014, into a third downturn. Triple-U after all!