A Double Dip Recession or Off the Cliff? (Common sense from Peter Morici)

[Soul Crusher]

A Double Dip or Off the Cliff?
Epoch Times ^ | 07/03/10 | Peter Morici

Posted on Thursday, July 08, 2010 9:36:44 AM by TigerLikesRooster

A Double Dip or Off the Cliff?

By Peter Morici

Created: Jul 3, 2010
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The U.S. economy has had two crises that were followed by long periods of depressed economic activity, high unemployment, and instability lasting more than a decade—the Panic of 1973 and the Crash of 1929.

Conditions are emerging that could cause that to happen again, and without a radical change in policy, the nation is at risk of a terrible calamity.

The economy has many natural resuscitative qualities that usually return it to growth after it falters. During downturns, businesses run down inventories, and after a time, those must be restored. Efforts to slash costs go too far, and businesses begin investing again in critical equipment and software, and then some new hires.

Inventory rebuild, capital spending and some new jobs jumpstart growth, and this pattern emerged from July 2009 through March or April of this year.

Now faltering retail sales, jobs creation and consumer confidence, and stubbornly high new unemployment claims, indicate the economic recovery may be quitting.

If the economy goes down a second time, now, its resuscitative qualities will have been spent when government deficits can’t be much increased, and the Federal Reserve can’t further cut interest rates.

If the economy goes down a second time—for example, GDP declines significantly two quarters in a row—then it likely goes down for good. Unemployment would rise into the teens, and the economy would sink into a depression—a deep and painful slump from which it cannot soon recover. President Obama’s policies are not helping.

More than one trillion dollars in stimulus was squandered, creating few jobs, and the President’s spending commitments are not proving temporary. Instead, federal finances are burdened by indefinite annual deficits exceeding one trillion dollars—much worse than when George Bush left office.

Obama’s health care reforms are long on mandated benefits and short on cost controls. This combination is raising insurance premiums for businesses and individuals, forcing state governments to increase taxes or trim other programs, and discouraging businesses from hiring.

The President touts green industries to radically reduce petroleum use and seeks to end much offshore drilling, but experts familiar with alternative energy technologies realize that windmills, solar panels, and converting crops to fuels won’t appreciably reduce petroleum use for decades. Either Americans develop more domestic petroleum or pay dearly for more foreign oil.

Financial reforms moving through Congress will impose costly new regulations that raise the cost of credit, create few meaningful consumer protections that are not already being implemented by the Federal Reserve, and leave the biggest banks largely free to continue speculative activities, controlling an even larger share of the nation’s deposits than before.\ Big banks more dangerous

Big banks remain too big to fail and are becoming more dangerous.

Smaller banks are cash starved and burdened by assets made toxic by the crash—for example, mortgages on shopping malls that have too few customers.

Businesses need customers and capital to grow the economy and create jobs. The trade deficit—in particular, imports of oil and the trade imbalance with China—cuts huge holes in demand for U.S. goods and services. Without meaningfully addressing petroleum use and China, other efforts to create jobs are futile.

Detroit can build many more attractive and fuel-efficient vehicles now, but for union contracts and cumbersome regulations. A national policy to replace the existing fleet would reduce imports and create many jobs.

China’s purposely undervalued yuan makes its products much cheaper on U.S. store shelves than its labor cost advantage require, destroying millions of U.S. jobs. China has rebuked diplomatic efforts by President’s Bush and Obama to change this policy.

President Obama should counter Chinese protectionism and abuse of free trade with a tax on dollar-yuan conversions that raise prices of Chinese imports to their true cost to the U.S. economy.

A Savings and Loan Crisis era Resolution Trust could relieve regional banks of troubled loans, earn a profit for taxpayers, and give small and medium sized businesses adequate bank credit again.

Much of this runs counter to President Obama’s progressive principals but hard realities, not utopian dreams, must dictate the decisions of a leader or his nation fails.

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Good article.  I always liked Morici's writings.  

[Soul Crusher]

Mind the gap: why the bond markets are signalling a depression (Something momentous has happened)
Daily Telegraph ^ | 07/08/2010 | Jeremy Warner

Posted on Thursday, July 08, 2010 10:06:40 AM by SeekAndFind

Virtually unnoticed, the yield on long dated pan-European sovereign debt has slipped below that on equities. So what, you might say; that's what happens when shares go down and bonds go up. But in fact this reversal in the traditional relationship between bonds and equities is an extraordinarily unusual event. It's happened only three times in the past 50 years. Alarmingly, all three of those occasions have been in the past decade. What are markets trying to tell us?

There are two ways of looking at the phenomenon. Either it is an aberration, and therefore a buy signal for stock markets, or much more worrying, it marks the final death knell for Europe's 60-year love affair with equities, and therefore the start of a generalised retreat from risk that will see the economy stagnate or worse for perhaps decades to come.

I'm an optimist, so I tend towards the former view, but even I would concede that the situation looks ominous; a double-dip recession in either the US or Europe continues to seem unlikely, yet the odds are shortening fast. If the economy starts to contract again, there are plainly highly negative implications for corporate earnings.


(Excerpt) Read more at telegraph.co.uk ...

[Soul Crusher]

U.S. Crash Looms Without Roadmap Directions: Caroline Baum
July 07, 2010, 9:20 PM EDT
 More From Businessweek

July 8 (Bloomberg) -- The U.S. debate over more government spending versus fiscal austerity is captivating the nation’s capital, dominating the airwaves and providing the best excuse in at least a millennium to recycle St. Augustine (“Lord, make me chaste, but not yet”).

What it has failed to do, with rare exception, is produce any viable alternatives. The choices are warmed-over Keynesian pump-priming or “passively waiting for disaster,” as Harvard University historian and business school professor Niall Ferguson put it on the July 4 edition of CNN’s “Fareed Zakaria GPS.”

There’s got to be a better way. And there is. Ferguson advocates “radical fiscal reform” to address America’s entitlement problem -- Medicare and Social Security will eventually consume the entire federal budget -- and simplify the tax code by introducing a simple flat tax and a lower corporate rate.

“It’s pretty radical,” Ferguson told Zakaria. “It has almost no congressional support. But it is an option that we should be discussing much more seriously.”

At least one congressman is doing just that -- and learning how lonely it can be crusading for real change. Paul Ryan, Republican of Wisconsin and ranking member of the House Budget Committee, introduced his “Roadmap for America’s Future,” version 2.0, in January. (He proposed his first Roadmap in 2008.) President Barack Obama called it a “serious proposal” when he dropped in on the House Republican retreat.

Solid Report Card

Compared with the current fiscal crash-and-burn trajectory, the plan reduces deficits and debt, putting the federal budget on a sustainable path; results in stronger per-capita economic growth; puts Medicare and Social Security on a sound footing; and lowers health-care expenses while reducing the number of uninsured.

And that’s not Congressman Ryan talking. That’s the assessment of the non-partisan Congressional Budget Office, which gave the Roadmap a test drive and found that it performed well.

Ryan calls his Roadmap a prosperity plan, not an austerity plan that slashes benefits to the sick and needy and imposes growth-killing tax increases. Anyone 55 and older will remain in the existing Medicare and Social Security programs. For those under 55, benefits will be means-tested and health-adjusted: The poor and sick will get more than the wealthy and healthy. Even an individual’s initial Social Security benefits would be “progressive,” with more generous wage-indexing retained for low-income workers. The retirement age would increase gradually, as it should with longer life expectancy.

Empowering Individuals

What’s more, individuals would have the option of investing a portion of their payroll taxes in personal-retirement accounts that they can pass along to their heirs.

Those qualifying for Medicare would be given a voucher to purchase health insurance, letting market forces create competition and lower costs.

The same goes for Ryan’s “patient-centered health-care reform.” Increased transparency would let consumers of health care get a better sense of what things cost and what they’re getting for their money -- before they get sick. The Roadmap provides a refundable tax credit and eliminates the tax exemption for employer-based health care.

The best part of Ryan’s plan relates to taxes. Taxpayers would get to choose between filing their taxes the old-fashioned way (devoting endless hours to complying with or gaming the tax code, or paying someone else to do it for you); or they can file their return on a post-card equivalent, paying one of two flat rates with virtually no deductions or exemptions. I know which one I’d choose.

The Roadmap would eliminate the alternative minimum tax and replace the corporate tax with an 8.5 percent business consumption tax, making the U.S. more competitive globally and spurring faster growth.

Room of No-Shows

Ferguson said when he was invited to a dinner in Washington for folks committed to fiscal reform, he wondered “how big a hotel” it would take to accommodate all the interested parties. Three congressmen showed up, he told Zakaria.

“I’m depressed how few people in Washington are prepared to talk about this option,” he said. “It seems to me actually our best hope.”

It is. So why is there so little inside-the-Beltway enthusiasm outside of Ryan’s 12 co-sponsors in the House and a handful of reform-minded individuals in the Senate? Where is the courage to confront, and solve, this country’s real, intractable fiscal problems? In its latest budget outlook, the CBO warned that federal debt could reach 185 percent of gross domestic product by 2035.

Status Quo Ante

Instead of engaging in meaningful discussion of Ryan’s or alternative Roadmaps, lawmakers are teeing up the same old debate over more government spending, the effect of which is highly questionable (and that’s being generous); and draconian spending cuts and tax increases, which are never fashionable in an election year, nor a good prescription for a weakened economy. (Come to think of it, there’s never a good time for the political class to impose discipline.)

Our elected representatives continue to sidestep a real fiscal fix, hoping U.S. Treasuries will be perceived as the least-bad option by international investors for a while longer.

The other conclusion is even less palatable. Congress may prefer the status quo, using a loop-holed tax code to reward favored constituencies in exchange for campaign contributions that ensure lifetime employment.

Can there be a better argument for radical fiscal reform?

--Editors: James Greiff, Steve Dickson

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To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net