The Foreign Service Journal, February 2011

44 F O R E I G N S E R V I C E J O U R N A L / F E B R U A R Y 2 0 1 1 once it becomes entrenched. The most pernicious feature of the phe- nomenon is that monetary and fiscal policy become nearly impotent. Any attempt to stimulate the econ- omy instead encourages consumers and businesses to hoard the funds instead of spending or investing them. For that reason, such measures are often described as being as futile as “pushing on a string.” 13. The paradox of thrift is no paradox when you’re in a liquidity trap . This is a twofer of related wonkisms that are, in turn, related to conditions for deflation. The para- dox of thrift holds that collective thrift may be bad for the economy. If everyone tries to save more money, aggregate demand will fall — but total savings will be lower because consumption and economic growth will also decrease. A liquidity trap exists when neither monetary policy nor fis- cal policy is able to stimulate an economy, perpetuating the paradox of thrift. The proceeds from lower interest rates, increased money supply, lower taxes or stimulative government spending will simply be squirreled away by consumers and businesses, especially if they are in a mood to reduce debt and build up reserves. Under the present economic circumstances, U.S. fiscal policy is fairly well tapped out (at least from a political will point of view), interest rates are at their zero bound, and the effi- cacy of further and extraordinary quantitative easing by central banks is in question precisely because of this phe- nomenon. 14. Alphabet soup is needed to describe your recession. A double-dip recession is when an economy briefly re- covers only to slip back into recession again. A typical re- cession, including the one just past, resembles the letter “ V ,” with a sharp drop in growth followed by a rebound— so far, at any rate. A double-dip recession more resembles a “ W ,” where growth drops sharply, returns to near nor- mal rates, and then plunges again, eventually to recover. Nor does the alphabet soup for describing the Great Recession just past (hopefully) stop there. Some econo- mists worried that it would turn out to be an “L” reces- sion , where growth rates drop sharply and stay depressed; or a “U” recession , where growth rates remain depressed for quite a while before recovery. Neither of those shapes appear likely now. Some economists, however, still sus- pect that the present recession will end with a “ square root ” recovery, so named for the mathematical symbol that would trace a sharp decline in growth rates followed by a weak recovery to a flat line well below recent growth rate performance. This list is by no means exhaustive. Moreover, it changes over time, depending on what is happening in the global economy. Just when you think you’ve mastered the meaning of current wonkisms, some fool will invent a new one you’ve never heard of (see the ‘Quadlemma’ above). For as long as this list is relevant, however, the reader can demonstrate that he/she is among the most informed guests at the next Georgetown cocktail party. Just imagine the admiring glances you will garner when the topic of a “V”- or “W”-shaped economic recovery is raised, and you knowingly respond that, in your opinion, it will no doubt be a “square root” recovery, due to the ques- tionable efficacy of the Fed’s QE2 in the face of the econ- omy’s liquidity trap that is likely to lead us into dangerous deflationary circumstances. F O C U S Negative growth is an oxymoron only economists could love. Buy all your travel guides, language books and pleasure reading through the AFSA bookstore. Buy the Amazon Kindle and download and read first chapters for free before you decide to purchase that new book. When you access Amazon.com through our bookstore all your purchases will benefit AFSA at no additional cost to you. Find State Department and AFSA Reading Lists Online at www.afsa.org/ads/books/ Start your purchase on our site: www.afsa.org/ads/books/