Global economic recovery may be W shaped: Steve Hanke

May 08, 2009 (LBO) – Recent rallies in stock markets may be short-lived, and a ‘W’ patterned economic revival is more likely if the Fed fails to quell an expected inflation bout early, a top monetary economist has warned. “I believe we are headed for a W-shaped recovery, with a down-up-down pattern,” Steve Hanke, professor of applied economics at the Johns Hopkins University in Baltimore, wrote in his column in Forbes magazine.

“We are approaching an up segment now, but my advice is to avoid being suckered into any stock market rallies.”

Hanke says a shrinking of the Fed balance sheet – bloated by acquisitions of dud assets and government debt on one side, and printed money on the other – is needed to avoid another bout of inflation.

This can cause another downturn.

Culprits

Hanke’s comments came as Fed chairman Ben Bernanke said in a congressional testimony on May 05, that he expected “economic activity to bottom out, then to turn up later this year.”

On May 07, US lawmakers voted to create a 9/11-style commission of experts to probe the causes of the financial crisis, but it is not clear yet whether the real culprits would be caught.

So far most analysts and the popular med