The chances of recession gripping the US again are troubling – and NZ will be hit by the fallout

All eyes will be on this country tomorrow – all eyes from financiers and their analysts, anyway – after the latest blow struck to the battered world financial markets by America’s loss of its Triple-A credit rating.

New Zealand’s market, and then Austalia’s, will be the first in the world to have to deal with the shock waves.

The downgrading came late on Friday night in New York, after world markets had closed for the week.

So what does this stuff bring to the good people of Eketahuna North?

Uncertainty is the short answer.

A commentator at the Herald Sun in Australia has summed up:

But we might have, to coin a phrase, not seen anything yet. The mighty United States of America, the good old Uncle Sam, losing its Triple-A credit rating takes us into totally uncharted, almost certainly volatile waters.

The Herald Sun fellow goes on to remind us that the US has $14 trillion of debt.

Alf can’t get his brain around $14 trillion. He imagines it would buy him more than a few rounds in the Eketahuna Club.

The political deal struck in Washington to lift the debt ceiling and stop immediate default enables the US to borrow another $2 trillion-plus.

In fact, the US promptly went out and borrowed some more, which pushed its debt to just over 100 per cent of its GDP.

The Herald Sun goes on:

That’s heading to European-level territory.

More, there was nothing in the deal to really reduce further deficits and stop the debt continuing to spiral. That’s why S&P downgraded.

The size of the US debt and the nervousness before the downgrading accounts for the dive of the US stock market last week. Other exchanges followed suit.

Alf’s investment portfolio was looking sadder at the end of the week than at the start.

One matter of concern is whether the economic recovery is over in the United States and whether the country will slip back into recession.

If that happens it would be bad news for our trade. The US is our third-biggest trading partners, and any slowdown there is bound to slow things down in other economies to which we sell.

So what are the odds of the US economy entering another recession?

Let’s ask an economist.

No, let’s ask more than one economist Then we can be sure of getting a range of answers.

A bloke called Justin Wolfers has done a Twitter round-up and gives us the answers.

Larry Summers: “at least a 1-in-3 chance.”

Marty Feldstein: “now a 50 percent chance.”

Ryan Avent: “more likely than not.”

Justin Wolfers: “40% chance and peak was 4 months ago” and “The guacamole has spoken.”

Don Kohn, Vincent Reinhart, Brian Madigan: “between 20% and 40%.”

Matt Yglesias: “precisely 31.22%.”

Brad DeLong: “the odds now are 50-50.”

Christy Romer: “The risks have gone up…compared to where we were six months ago.”

Bob Hall: “We certainly are in a more vulnerable situation now.”

Jeff Frankel: “not necessarily enough to push the probability over one half.”

Jay Carney: “we do not believe that there is a threat there of a double-dip recession.”

So there we have it, folks.

Take your pick.

Mind you, Alf is tempted to discount Justin Wolfers’ assessment.

True, not only is he an economist at the Wharton School of the University of Pennsylvania, but he is a contributor also to the New York Times (where he writes for the Freakonomics blog) and the Wall Street Journal, and he is an editor of the Brookings Papers on Economic Activity.

His research has explored the economics of sports, sports betting, prediction markets and the family.

In 2007, he was named in David Leonardt’s New York Times column as one of 13 young economists who were the future of economics.

Ah, but he is also a bloke who once wrote that the size of the gay population is the best measure of a great place to live.

He and a colleague were addressing the question: what sets apart the world’s great cities?

They picked up on an article by four economists in the Journal of Urban Economics that argued the gay population was a good way of measuring which city has the best amenities.

The argument is simple. Gay men do not have children, and hence they have more money to spend on the finer things in life, including living in the hippest
locations. As such, they tend to congregate in cities where the living is good. So we should expect gay cities to be fabulous cities.

The four economists’ careful analysis of census data finds strong support for their theory within the
United States, where San Francisco and Washington have
the highest proportion of gay residents.

Interestingly, city quality is a more powerful predictor of where gay men live than differing degrees of homophobia. Outside the US, the nexus between city quality and the proportion of gay residents also appears to hold true for most of the world’s great cities.

Justin Wolfers seemed to endorse this view, although any visitor to Eketahuna will soon find that this is the greatest place in the world to live, despite its low poofter count.

Another thing about Wolfers: Alf suspects he is an Australian. Enough said, eh?

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