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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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March 30, 2005


Soft Landing, Or Hard: How Do We Know Who Wins?

Something has been bugging me about this hard-landing/soft-landing discussion:  What, exactly, are we talking about?  In particular, what would constitute a "hard landing"?  An outright recession?  A really severe one -- like 73-75 or 81-82?  Or even a relatively mild and short-lived downturn, like 90-91 or 01? 

Or would you call it a hard landing if the U.S. economy were to grow, but substantially below trend? If so, for how long?  Or, perhaps, you would call it a hard landing if the adjustment process results in substantial capital losses, even if the effect on overall economic activity is muted (as in the stock market "crash" of 87)?  How persistent do those losses have to be to constitute a hard landing?

I herewith solicit your opinions on this.  If you are a blogger and choose to post your answer on your site, I will dutifully link to it.

March 30, 2005 | Permalink

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Comments

If currency values dictate growth it is in the hands of CBs. Japans willingness to recycle export profits into US treasuries enable the games to continue. By US rates staying low it enables China to continue to build capacity to support cheap labor and a surplus of cheap goods to the world. A hard landing will ensue when it stops. Higher oil will most probably lead Japan to stop the intervention game. This will cause China to further build their oil reserves. The rising oil price will work as a tax to slow US consumption. The fed will view the rising oil price as inflationary and raise rates. This will inturn be a double tax. The remaining outcome is to your own imagination. A drop from this height will inevitably hurt.

Posted by: BE | March 30, 2005 at 10:05 PM

Brade,

You apparently assume that I was focusing on disorderly financial markets. I was not especially focused on financial markets. A few examples taken from real life will suffice:

1) political discontinuity: when China suffers a gigantic earthquake in the seventies, that is a discontinuity with revolutionary consequences for Chinese politics. That is a hard landing.

2) labor market discontinuity: when Thai workers burn down a Japanese owned factory in March 1997, the Japanese start running from every Asian emerging economy and do not stop until they get home. That is a hard landing.

2) product market: when Opec multiplies without warning the price of oil by 3 in 1973 and suddenly imposes an embargo on the consumers, no actor has time to adjust. That is a hard landing.

The point I am trying to make is that if we want to make this sort of dichotomy between hard and soft landing (and actually I am not personally saying that I want to), there must be a real difference in nature between both. If one says a US recession is a hard landing, I am sorry to say that the US economy suffers hard landings every 5 or 6 years, and hardly ever benefits from a soft landing.

The view that the difference would be an upward adjustment (export growth) as opposed to a downward adjustment (import decline) does not satisfy me either for the simple reason that all adjustments that I have ever witnessed contain a mix of both to a certain extent.

This is the reason why I posit that a necessary component of a hard landing must be a conceptual discontinuity, which does not occur with a soft landing.

Speculatively for instance, one might wonder if a no vote to the Constitutional Treaty in France on May 29th might not constitute a conceptual discontinuity, leading to a real estate market crash in Europe (see, David, I am actually thinking about this as you asked...).

Posted by: godement | March 31, 2005 at 04:12 AM

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