The economy in 2009: out of The Twilight Zone

Economic Monthly Report

We are at a unique moment in the evolution of the world economy, both because of growth and prices and because of the situation in the financial sector and the type of response coming in economic policy.

In the years of black and white television around the Fifties and Sixties, a television series captured big audiences. It was called The Twilight Zone. During the nearly five years it was being shown the mix of science-fiction, fantasy and terror attracted a huge public thrilled by its imaginative scripts. The secret of the series’ success was probably the disturbing sensation that took hold of the viewer from beginning to end of every episode that always had a surprise ending. It is worth remembering this famous television series because the year just approaching is beginning to show many disturbing factors some of which are quite strange. Undoubtedly, we are at a unique moment in the evolution of the world economy. This is so, both because of growth and prices and because of the situation in the financial sector and the type of response coming in economic policy. Let’s look at each of these factors.

We have to go back a long way to find a synchronized episode of economic contraction in nearly all the developed economies. In the United States, the recession that began in January 2008 looks like being the longest since the 1929 Depression. Many economic activity indicators have dropped to all-time lows and even to levels never reached in the period statistics have been maintained. Furthermore, the collapse of oil prices could take consumer price indices into negative figures in coming months, which has raised fears of moving into deflation. The Japanese experience reminds us that deflation is very dangerous territory. And what about Europe? Just one figure is noteworthy. The German IFO business activity index in December stood at the 82.6 points level, the lowest since this statistic has been published and pointing toward a deep recession in the leading economy on the Continent.

With regard to the global financial crisis, it would be difficult for pressures seen in 2008 to get any worse. The financial system at one stage was on the edge of catastrophe. The astronomical losses, problems of liquidity and widespread lack of confidence meant the disappearance of the big investment banks. Many of the international financial entities that have survived are now capitalized at a fraction of their value before the crisis and are now within the reach of more modest investors. These are investors who, if they prefer, can buy up nearly bankrupt industrial giants, like General Motors or Ford, at a very good price.

If we look at the response of governments and central banks, it must be recognized that they have acted rapidly and strongly. The United States has beaten them all with reference rates nearly at zero and major growth of the central bank balance sheet. The Fed has pulled out all stops in its fight against recession and deflation. More restrained, the European Central Bank has drastically cut its reference rate and also expanded its balance sheet. In general, governments have set in motion unrestricted aid to financial systems and, spurred on by the main international bodies, have announced major spending plans for emergency measures.

The end result of these measures is uncertain, given that recession has already begun in the main economies but we are confident that these will ease a situation that could become very critical. In any case, until the economic and financial scene becomes clearer it will be difficult to avoid a sensation of unease, much like the scriptwriters of the series The Twilight Zone wanted to pass on to television audiences.

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