09/03/2010 03:09 pm ET Updated May 25, 2011

A Two-Track Global Economy

Terms like 'single scoop' and 'double dip' are normally heard only in ice cream shops. But at the moment, the economic and financial pages of news organizations the world over are using these types of terms to try to predict and explain what is going on "out there." Indeed what is going on is unusual and defies conventional categorization.

The underlying problem causing this confusion is that the circumstances out of which today's conditions arose were quite different from anything that ever came before. The several important differences account for what appears to be an entirely new scenario. Historically, economies have generally risen and fallen more or less in sync -- at least among given countries and often globally. For example, it was said for a long time that when the US sneezed, Europe would get pneumonia. No longer, it appears to be the case, despite the fact that information flows more completely and rapidly than ever before, creating feedback loops which normally would knit all economies more closely together.

The several important differences which may account for why the economic world is behaving in a brand new way include the following:

  • The casino effect is much larger than ever before. The casino effect is the scale and depth of financial transactions as a share of GDP. Since the credit meltdown in 2008, banks have started lending again, although not at previous levels, so that the rest of the economy, which had depended on cheap and easy money, has not been as robust as normally is the case for an economy rebounding from a recession.
  • The big powerful companies have an enormous store of cash, in part because they slowed inventory accumulation and capital spending during the lowest points of the recession.
  • Employment has been unusually slow to come back, probably because it had been allowed to grow too much and fast in the run up to the recession and because post recession the bigger employers found they could grow again with fewer employees and the smaller employers still could not afford to put people back on their payrolls.
  • People who remain employed and whose savings/investments had rebounded nicely between 2008-2010 began to spend again out of proportion to the population as a whole--for example Apple sold several million iPads for several hundred dollars apiece to people who already had smart phones and computers. Go figure?
  • The stimulus package, which was applied so relatively quickly and early [and brilliantly] in the recession, evidently had both an immediate effect and a drawn out promise, which had different effects at different times on the economy at large. That echoing process probably accounts for the broad confusion about the benefits of the stimulus not unlike the parable of the three blind men describing an elephant.

Those differences appear to add up and account for what we see today, which is less a prospect for a double dip, but which really boils down to a two track economy. One track is carrying the businesses and people who were relatively unscathed by the recession. The other track is carrying the businesses and people who have yet to recover completely from the recession. It is not surprising that the two tracks run at different speeds at different moments, which may account for the appearance of the economy as a whole seeming to be slowing or speeding up.

What we may need to do more of is recognize the increasing significance of the two tracks and follow them more closely. One of the other factors is that it also appears that the separate tracks seem not to much affect each other, which means that the strong track may not help the weak track recover as fast as in the past when the economy was more integrated.

In all events it appears we are looking at quite a slow, long term recovery which will leave us with all the nettlesome troubles of very low employment, limited growth in personal income and spending as well as cautious capital spending. Perhaps we need a period of regrouping and re-finding our bearings after such a powerful and widespread period of growth and overspending on too much borrowed money.