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Thursday, 1 October 2009

America's "Very Soggy" Outlook: Why the Recovery Won't Be V-Shaped

"The deeper the slump, the zippier the recovery," Jim Grant declared in a recent WSJ op-ed, stunning many on Wall Street as the longtime bear joined the growing crowd forecasting a V-shaped recovery.

But the optimists are wrong, says David Levy, chairman of the Levy Forecasting Center, who is "very confident" the economy is "not going to be going up very strongly" in 2010.

Levy's forecast is the U.S. will experience "very soggy" growth over the next decade, based on Japan's performance after its debt bubble burst in 1989. Levy doesn't believe America's workout will be as prolonged, but says Japan's continued malaise is exhibit A in his counter to Grant's view that recoveries "always" mirror the shape of downturns.

"It's different this time" are the most dangerous words on Wall Street, but Levy says this recovery will be different than past post-war rebounds because of the nefarious effects of deleveraging.

"Balance sheet shrinkage...will assure that the economy cannot perform well and that new, serious financial problems keep arising," Levy writes. "Assuming that the cyclical recovery apparently under way will be much like past ones is a recipe for big trouble."

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