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Now We've Heard Everything: The "Reverse Square-Root-Shaped Recovery"

Posted Sep 25, 2009 08:17am EDT by Henry Blodget in Investing, Recession
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Some people think the recovery will be "V-shaped": a sharp fall down followed by a sharp rise up.  Some people think it will be "W-shaped": a sharp fall down, a sharp rise up, and then another sharp fall down when inventory restocking and stimulus run out.  (Some people used to think it would "L-shaped" or "U-shaped," but the sharp recovery so far appears to have proved them wrong.)

Last month, we described how Charles Schwab chief investment officer Liz Ann Sonders thinks the recovery will be neither "V-shaped" or "W-shaped" but "square-root-shaped" recovery: a sharp fall down, a sharp rise up, and then a long period of treading water.

Well, now we've heard everything.

Greg Ip, the brainy U.S. economics editor for the Economist, thinks the recovery will be "reverse square-root shaped": a sharp fall down, a sharp rise part of the way back up, and a long struggle.

(Okay, the image isn't perfect, and we hope Greg doesn't think the economy is just going to END).

Why does Greg think we're due for a long workout?

Because that's what history suggests happens after financial crises like the one we just had.  It takes a long time to work off the debt that got you into the pickle in the first place, and while you're working off debt, you just can't grow as rapidly.

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