Of course, the extent to which the economy dominates the '08 election depends on what happens to the economy. To help us figure where we are headed, I share two insights from Paul Krugman. It is always hard to know when he is being intentionally ironic.
Exhibit 1: "Right now, economic statistics are telling mutually contradictory stories. Gross Domestic Product, the usual measure of economic growth, surged in the summer; Gross Domestic Income, which should basically be an alternative measure of the same thing, was sluggish. Estimates of payroll employment grew fairly fast; other data related to employment did not.
The truth is that I often feel that people interpreting economic data are taking a kind of Rorschach ink blot test — what they’re seeing is more of a random pattern than anything else, and their interpretation of that pattern is telling you more about their personal demons than it is about what’s really happening in the economy.
And right now that’s utterly true. Since there are now data telling you more or less whatever you want to hear, you’re free to believe whatever you want."
Exhibit 2: "How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created...“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”
The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one."
So, are we heading toward recession (and possibly a nasty one), or is that just Krugman's personal demon talking?