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Gluskin Sheff’s David Rosenberg: Economy Should Be Growing at Faster Pace

Thursday, 09 August 2012 10:27 AM

The economy should be growing much faster than it is, yet an exceptionally debt-fueled recession has allowed for an exceptionally tepid recovery, said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto.

After normal recessions, economies bounce back, but that hasn't been the case this time around, as unemployment rates have remained high and growth slow.

The U.S. gross domestic product grew 1.5 percent in the second quarter, according to advance estimates from the Commerce Department. The recession, the product of credit-fueled housing bust, officially ended in 2009.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Meanwhile the Federal Reserve has helped fuel what little growth the country has enjoyed via monetary-stimulus tools such as quantitative easing, under which the Fed buys assets like bonds from banks in a way that pushes interest rates lower and encourages investing and hiring.

The Obama administration has rolled out fiscal stimulus measures as well.

"The overall story is that with the massive intervention by the U.S. government and the Federal Reserve, they did manage to terminate the Great Recession in the mid part of 2009," Rosenberg told CNBC.

"But the reality is that we never had much of a recovery, at least in the economy. And in terms of what we're seeing going forward, I still think that there's more downside risk than upside potential."

As a side effect to quantitative easing, stock prices rise, and markets have arguably grown addicted to Fed stimulus.

Bad news such as weak unemployment rates in the U.S. and soft industrial output figures in Germany often prompt applause in stock markets on sentiment that poor numbers boost the chance of central-bank intervention.

"We're back to the situation where for the stock market bad news is good news, because the good news is that we're going to get more gobs of stimulus to push asset prices higher at least over the near term," Rosenberg said.

"That's a driving factor behind this recovery that we've seen in the stock markets globally in the past month or so."

Some Federal Reserve officials have said the time for more quantitative easing is now, including Eric Rosengren, president of the Federal Reserve Bank of Boston.

“For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” Rosengren said, according to The New York Times.

“I think it’s time to swim to shore.”

Since the downturn, the Fed has rolled out two rounds of quantitative easing (QE1 and QE2), buying $2.3 trillion in Treasurys and mortgage-backed securities from banks to fuel recovery by pushing down interest rates and flooding the economy with liquidity.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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