The consequence of attempting to force economic recovery on a nation is the same as Peter returning to a now broke Paul demanding payment in full, plus interest. In the case of America, Peter is the consequence of a stimulus and other government spending initiatives named Paul.
The probability of a double dip recession is now at 40% as the stimulus and programs like cash for clunkers come home to roost. What is happening is very simple. Stimulus and like programs are followed by short term economic activity which ebbs as fast as it surges. As with any ebbing tide, it recedes further than the preceding flow. In terms of economics, it causes more damage than it creates good.
Where we have gone wrong is using economic strategies that are proven to have severe repercussions and have deployed them at a time when the benefit will be most short lived by the fewest people. The very few targeted individuals who felt temporary relief in turned have stopped spending forcing stagnation of an economy which must now pay Peter. As a consequence, the third quarter growth is predicted to be less than 1%.
“With growth at a stall speed of 1 percent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases,”
“Thus a negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double-dip,” stated Nouriel Roubini of the economic crisis. It was Roubini who predicted the global economic crisis.
The market had the chance of course to reset itself citing normal economic ebb and flow patterns. Forced upon the people was the stimulus followed by spending programs and the hiring of census workers in order to delay aspects of an economic crisis that could not and cannot be permanently offset. For the economy to flow, it must occasionally ebb. Rather than allowing the economy to ebb and correct it by fiscally conservative and responsible spending, the administration has done the exact opposite. The effect of the cause is persistent recession followed quite possibly by further economic contraction – a double dip.
The Commerce Department predicted second quarter economic growth to be at 2.4 percent. This has been corrected to 1.4 percent in the wake of the consequences of programs that sought to force recovery through volatile means of spending. From a prediction of 2.4 percent to only achieving 1.4 percent followed by a third quarter of less than 1 percent growth are not the indicators of recovery; they are the indicators of a further failing economy. The Obama Administration’s response? Spend more and indebt faster. While the spending is a clear problem, the indebtedness is of equal concern.
In the U.S., the debt as percentage of revenue is 358 percent! This is one of the highest in an stricken world economy and serves as another good indicator that double dip recession possibilities have increased. To make sense of this, take the cash for clunkers programs. The driving incentive was indebtedness, not taking gas guzzling, high emission rated cars off the road. You get “cash” per se for your clunker, but you also now have (in more than 90% of the cases) a new car note to show for it. The perceived relief was cash in hand to push into the economy, the reality was personal debt. Making it worse, those who received cash saved it causing a double whammy effect. Citing that more Americans were saving in the year prior to the program only meant the program was ill advised and poorly timed. It is a tremendous leap in logic to assume that saving Americans would suddenly spend with no other economic factors in place to support spending over saving. What the Obama Administration did get was the indebtedness they have been in pursuit of; only because Americans again fell for yet another government scheme. This was of course before the administration announced publically that their agenda was to force indebtedness to such degrees, but consumer logic should have been enough to encourage the American to not indebt themselves so deeply in troubled economic times.
As nationalized European banks are beginning to hinder economic growth abroad, it is safe to say the bailout of financial institutions in America will only further exacerbate the financial plight here. Underestimated is the expense of nationalizing financial institutions. Here, we are slow to admit that banks have been nationalized, but the fiscal reality is that they have. The administration boasts the factors of only what banks have paid bailout monies back while they remain silent about the expense involved to manage the program. These expenses are identical to the expenses crippling the European economy today as they pertain to nationalized banks in the wake of the global economic crisis. To put it simply, we are next.
If you remember, President Obama declared to the world that he would cut U.S. spending to aid the global economy. This triggered incentives of indebtedness to curtail available spending dollars allowing the freedom of foreign markets to surge. They were too weak to surge and could not respond the sacrificial lamb the American economy was being turned into. The individual saved while the government incrementally increased spending creating an unsustainable leveraging within the confines of the American economy. Yet another double whammy due to ill advised fiscal policy.
In the end, the American consumer has learned the importance of saving and now uses better saving practices as a back-up plan in an attempt to protect the family unit from a failing economy. Because the American economy is supported by consumer spending over all else, consumer prudence is temporarily the enemy of recovery. Only time can balance this out. Time the Obama Administration is unwilling take. The lost stimulation of the economy due to lack of free spending will only force this administration to seek further and more aggressive means to infuse money. Increased taxes is their only remaining viable option. If the American is to save, the dollars going into savings must be cut before they get there. Of course this will in turn force even more saving strategies by Americas further complicating the recession, but given the impatience of the Obama Administration this is what they will do.
Expect the Bush tax cuts to expire, anticipate the VAT and be assured that all bills being signed into law will involve some sort of spending. If the government cannot get the cash into the economy through the people, it will seek to circumvent the people rather than express the same fiscal prudence many Americans now have a new found appreciation of. If you will not give it to them, they will just take it from you.
It is also safe at this juncture to predict the government will begin defaulting on government bonds. Taking the American’s money is fine; paying it back in full is all the more unlikely as the economy contracts into a second recession. The most probable strategy; devalued monies in return on investment into the government. A current index of economic data surprises fell to minus 59 last week. This is the lowest since January of 2009. Yet another clear indicator that the U.S. is not in, by any stretch of the imagination; recovery. Not even close to it. Yet, Vice President Biden continues to tout the need to increase spending.
[Surprise Index more or less measures economic outlook for a given period of time; usually a week. Better than expected news is assigned 1. Meeting expectations is assigned 0. Worse than expected news is assigned -1. We are currently -59 which essentially invalidates the Obama Administration’s claims of any semblance of a “Summer of Recovery” at the hands of increased spending.]
This spending versus saving imbalance is what the Obama economic plan is all about. Though it defies both economic logic and reason, they insist upon it. They will barrow to spend. As the sources of their barrowing dollars begin to deplete, they will fully turn on the American to support their spending. The most detrimentally impacted will be the lower income levels which are barely scraping now. As prices increase, the lower incomes will assuredly fail. This will increase the needed dollars being driven to support them and only further indebt the nation in general.
A double dip recession is said to have a 40% chance to afflict this nation. If the Obama Administration continues it’s failing plan of barrowing to spend while seeking avenues to indebtedness, it is more like 60%. It is not the second recession that should be of concern however. The bigger question should be addressed to how America, on its current economic course could recover from a second recession. Right now it does appear that we can.
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