The Pessimism Bubble?

In the world of economics blogging there are a few that stand out for providing good research (as opposed to mine, which is more like rambling commentary).  One of the more respected blogs is Econbrower, an offering from two economics professors, James Hamilton and Menzie Chinn.

Menzie has a post today that compares industrial production and manufacturing output drops in our current recession with prior recessions since WWII.  As usual, this data shows another record drop, reinforcing all the talk about the “unprecedented” nature of this recession.

But then, in response to reader comments, Menzie posts this:

I am going to repeat my predictions here just so that the record is thoroughly visible.

1) The recession trough, by NBER definitions, will be in Q309.

2) Jobless recovery persists into 2010.

3) Employment will ultimately bottom at 131M jobs (i.e. 3.5M more to be lost from this point on). The UE rate crosses 10%.

The funny thing is, my predictions for a recession totaling 20-22 months in duration and 7M jobs lost peak to trough is still widely derided as ‘delusionally optimistic’. So even though my prediction accounts for the longest duration and biggest percentage job loss of any postwar recession, people here still soundly dismiss it.

I have been consistent, and will stick by my predictions.

Pessimism, too, is prone to bubbles. The pessimism bubble is close to peaking. (Emphasis added.)

I certainly hope Menzie is right, but he is definitely in the minority at this point.  If he is right, that helps put a floor under stock market but it does not necessarily signal the return of a bull market.  We have decades of excesses to wring out of our economy.


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