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A Phantom Recovery?

NEW YORK – Where is the American and global economy headed? Last year, there were two sides to the debate. One camp argued that the recession in the United States would be V-shaped – short and shallow. It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.

Others, including me, argued that, given the excesses of private-sector leverage (in households, financial institutions, and corporate firms), this would be a U-shaped recession – long and deep. It would last about 24 months, and the world would not decouple from the US contraction.

Today, 20 months into the US recession – a recession that became global in the summer of 2008 with a massive re-coupling – the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were – as most likely - to be over at the end of the year, as is likely, it will have been three times as long and about fives times as deep – in term of the cumulative decline in output – as the previous two.

Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth, and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.