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Double-Dip Recession?

 
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PostPosted: Sun May 16, 2010 10:35 pm    Post subject: Double-Dip Recession? Reply with quote

PeakTrader:

Will a double-dip recession originate from the E.U.? It's possible. European taxes will rise and spending will fall, which will slow growth even further, while the weaker Euro slows U.S. export growth:

"Greece is scheduled to have debt equal to 150% of GDP by 2011. Even at 5% interest, it will take GDP growth of 7.5% per year just to keep up with the interest payments. Since growth in Greece is not expected to come in anywhere near 7.5%, and will probably even be negative, it will sink further into debt.

Money is transferred from the private sector to the public sector...Future industries are deprived of the capital now being re-allocated to bankrupt governments...Overall, debt increases, as debt from the bailout is added to the original debt."

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1st Quarter GDP Is Not A V-Shape
April 30, 2010

"Real final sales of domestic product — GDP less change in private inventories — increased 1.6 percent in the first quarter, compared with an increase of 1.7 percent in the fourth."

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Biden Predicts Job Growth — but Where's the Evidence?
28 April 2010

Vice President Joe Biden predicted job growth of 250,000 to 500,000 jobs a month in the next two months, according to CNBC on Monday.

Biden claimed that the new jobs will be “because of good planning.”

Moody’s Economy.com forecasted...new jobs to be created this year at an anemic fourth-tenths of one percent. With a workforce of about 135 million, Moody’s forecast translates to 540,000 new jobs for the year, or about 45,000 new jobs a month.

The National Federation for Business Economics reported that 73 precent of respondents to the April Survey said that “the fiscal stimulus enacted in February, 2009 has had no impact on employment to date.” And nearly seven out of 10 surveyed believe that “a jobs bill such as the one recently enacted into law will have no impact on payrolls.”

“There are now 22.5 million government employees in the U.S….one in every six jobs in the U.S. is a government job. But what the government workers produce, build or sell is nothing at all.

William Dunkelberg, NFIB's chief economist, was surprised by the unexpected decline, saying: “Usually we see the small businesses leading the way out [of the recession] since they’re the first ones to see the consumer come back, but what’s happened this time is the customer didn’t come back.”

“Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery [and new hiring] without their participation. Once the gains from inventory rebuilding are exhausted, it is hard to see what will fuel growth. Small firm capital spending is at 35 year low levels and plans for future expenditures are equally low.”

David Stockman, President Reagan’s budget director, also argues that the job market is not going to recover any time soon. His careful and detailed analysis of the current state of the economy points out that the economy’s “core private sector income” dropped an amazing 6.2 per cent since the third quarter of 2008. He writes, “Quite simply, there’s never been a sustained drop in private sector money incomes of any magnitude — let alone 6 per cent — during modern economic history.”

Consequently, job gains from purely cyclical recalls are likely to be modest in scale, and generally not at all commensurate with the [administration’s] recovery scenario.

The problem is one of pure math. There’s simply little prospect of sufficient strength in final demand to trigger a rapid or extensive recall of the cyclically unemployed. It will be a slow slog.

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Recent doom and gloom predictions:

Harry Dent, author of "The Greatest Depression Ahead." He combines demographics with consumer spending patterns to estimate growth or contraction of the economy. His conclusion: depression in 2010-11.

Marc Faber, he told Bloomberg that the Dubai debt default was just the tip of the iceberg -- entire governments will default before this financial crisis ends.

Charles Nenner, a securities and trading analyst for Goldman Sachs for 12 years before forming his own firm, Nenner is a "double-dipper," forecasting another recession in 2011 as interest rates soar and strangle the economy.

Robert Prechter, CEO of Elliott Wave International, he was bullish in February and predicted the current stock market rally. Now? "I think 2010 is going to be a big down year very much like 2008." Prechter's interpretation of wave theory suggests the U.S. is heading into the worst depression in 300 years.

Jim Rogers, made the rounds on the financial networks, excoriating the theory that the solution to America's debt problem is more debt. "That's like saying to Tiger Woods, 'You get another girlfriend and you'll solve your problems.'"

David Rosenberg, the chief economist and market strategist for Gluskin Sheff & Associates Inc. writes that the U.S. household sector has imploded. "Even with the equities rally and the tenuous recovery in housing in 2009, the reality remains that household net worth has contracted nearly 20 percent over the past year and a half. That's an epic $12 trillion of lost net worth, a degree of trauma never seen before."

Nouriel Roubini, known as Dr. Doom, the New York University economics professor warns that the recovery will be anemic and U-shaped.

Economist A. Gary Shilling, a consultant and investment manager, Shilling says the U.S. consumer is dead, meaning slow growth and deflation for years to come.

More views: Double dip could come through a large, even increasing number of pressures. These start with unmanageable public debts in several countries, a run against the US dollar, defensive interest rate hikes due to returning inflation if the recovery builds, stubbornly high OECD unemployment and high budget deficits, geopolitical rivalries in the Mid East and West Asia. Trade conflicts could flare, including possible carbon tariffs and protectionism. The list of other possible causes is long.

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PeakTrader:

It's difficult to be optimistic, because government rather than helping households reduce their mountain of debt, created another mountain of (government) debt, which households will pay for.

The U.S. is in a weak position, because it can't afford another major crisis. The Fed's quantitative easing, TARP, fiscal policy (the stimulus plan, and subsequent spending, along with the health care law, energy policy, regulation, strengthening the yuan, cash-for-clunkers, etc.) resulted in slow growth, record budget deficits, and inevitable higher taxes, inflation, and interest rates.

The top priority should've been facilitating economic growth, which would've raised tax revenues. However, a bunch of lawyers decided instead to micromanage the economy, with more layers of laws, because prior laws had undesirable effects.

It's uncertain if a E.U. depression will help or harm the U.S. economy. When a firm's top competitor goes bankrupt, it helps the firm. Capital flows may shift from the E.U. to the U.S., and the Euro may collapse. After WWII, when Europe was in ruins, the U.S. economy benefited. Of course, there will also be a loss of optimism or confidence in Western Civilization.

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The E.U. is in worse shape than the U.S. (recent article excerpts):

Essentially, Greece has been living beyond its means for years. Think of Greece as a family that's maxed out its credit cards, taken out a second mortgage, and continues borrowing money to write itself a fat check even though it has no job.

It wouldn't be that huge of a deal if Greece could manage some fiscal austerity -- increase taxes, boost productivity, enact pension reform, and cut federal spending. But historically, Greece has a bad if not terrible track record of being able to crack down when it needs to.

And then there's the rest of the PIIGS: Portugal, Ireland, Italy, and Spain. These countries, in one form or another, all suffer from high debt, low growth, and looming financial obligations.

Desmond Lachman, an AEI fellow and a former IMF official, said that the euro zone could even "unravel in the next 18 months."

Greece is a potential domino that could knock over the economies of Ireland, Portugal, or Spain, he said.

He described Greece as the "Bear Stearns" of a general European fiscal crisis. The U.S. government and Federal Reserve engineered a takeover of Bear Stearns in March 2008 but by the time Lehman Brothers needed help seven months later, officials were sour on the idea of a rescue. The subsequent Lehman collapse triggered the global recession.

Lachman said that the euro zone's woes would be the big story over the next year.

We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:

First, there is a liquidity crisis in Greece (already underway).

Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash.

What Germany wants out of Greece is the equivalent of an economic anaconda. It will force Greece to meet the limits of the EMU Stability and Growth Pact (3% of GDP) by some period.

Of course that cannot happen without an epic surge in exports. Here’s the death spiral: sharp austerity measures translate into unemployment, economic contraction, deflation, and yes, higher deficits. There’s just no way out of it.

All of the GIIPS are in EXACTLY THE SAME UNCOMPETITIVE BOAT!

So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany.

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PeakTrader:

A comprehensive plan is needed to place the U.S. on a path to faster economic growth and smaller government instead of slower economic growth and bigger government.

Otherwise, debt levels will remain high and living standards will decline.

Americans, in general, have been living well beyond their means for too long. More adjustments need to be made to postpone the mass failure of neoKeynesian economics.

One way to help offset the ongoing and awaiting disaster may be raising the quota of skilled immigrants to 1 million per year.

Immigrants with a higher skill level and a median age younger than the domestic population will help compensate for demographic imbalances (including retiring Baby-Boomers), facilitate growth, expand the tax base, increase demand for houses, etc.

There are at least two major problems with neoKeynesian economics:

1. Partial equilibrium models are interpreted as general equilibrium models (there are no sound general equilibrium models of a large economy).

2. Keynes said we're all dead in the long-run. However, the problem is the long-run eventually shows up.

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Economic outlook is cautious even with spending up
(AP) – May 3rd, 2010

"Factories are churning out more goods. Consumers are spending. Government aid is fueling construction activity. But stagnant pay and weak hiring will likely restrain the economic rebound in coming months.

Unless employers boost pay and ramp up hiring, economists say consumer spending will likely taper off and dampen the recovery.

Consumer spending rose 0.6 percent in March, matching economists' expectations. But personal incomes edged up just 0.3 percent, raising new worries about lackluster income growth.

At the same time, the personal savings rate fell to 2.7 percent of after-tax incomes. It's the lowest level since September 2008.

The annual savings rate had fallen as low as 1.7 percent in 2007.

The savings rate rose to 4.3 percent in 2009, the highest level in a decade."

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It's remarkable, the U.S. not only leads the world in the Information and Biotech revolutions, it leads the rest of the world combined (in both revenues and profits).

The U.S. offshored heavy goods, higher cost goods, and goods with declining prices, imported those goods at lower prices and at higher profits, and shifted the freed-up limited resources into more profitable goods (e.g. in emerging industries and higher quality "core" goods in older industries).

Consequently, U.S. production became lighter (high tech goods weigh little), while U.S. consumption became heavier (Americans live in bigger houses, drive bigger autos, etc).

Globalization, e.g. open markets, free trade, and unrestricted capital flows, is one factor why the U.S. has the highest standard of living in the world.

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Questions for big government:

Kaliopi Margomenou: "This country has faced many difficulties, but now for the first time ever I don't feel proud to be Greek," she said. "I am humiliated because we always thought the IMF was for incapable, corrupt countries. That's what we are, incapable and corrupt, at least those who governed us in recent years."

Retired lawyer Maria Papaspyrou, 69, said she has always paid her taxes and is angry that her pension is being cut. "Where did the money go? Who took it? Why should honest people pay this terrible price?" she asked.

Marios, a 35-year-old bank employee who asked that his last name not be used. "How is any of this my fault? I am seriously thinking of going overseas."

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The E.U. fiscal crisis increased demand for U.S. dollars and Treasury bonds.

Falling exports and rising capital inflows should benefit the U.S.

Americans will work less for foreigners and the cost of capital will be cheaper.

It's better to exchange worth less paper assets for goods rather than goods.

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Greek riots make the Tea Party movement look like a tea party:

"Groups of masked youths hurled petrol bombs, stones and sticks at riot police as nearly 50,000 striking workers and public servants marched to parliament...marchers chanted "Thieves!" and hurled water bottles at riot police...news of deaths rattled investors, with Greek stocks falling by almost 4 percent and the euro losing ground to the U.S. dollar."

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PeakTrader:

What this country needs, and what Dr Perry has been peddling, is optimism, or more accurately what Greenspan coined in 1996 "irrational exuberance."

Unfortunately, the difference this time is rather than households becoming millionaires, they'll become road kill, if they're too optimistic.

Here's another example:

Michelle Obama to food industry: Shape up
May 12, 2010

(Reuters) - "First lady Michelle Obama has a message for the U.S. food and beverage industry: Take real steps to sell healthier products or the federal government will force you to do it."

The Obama's must of read Hugo Chavez's new book: "Why Work with People When You Can Just Dictate?"

If Obama's children are anything like their parents, they likely order the Secret Service to beat up kids who disagree with them.

Unfortunately, we have a two party system where one party spends too much money and the other party spends even more.

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PeakTrader:

The stock market rally over the past 14 months may have spurred economic growth more than monetary and fiscal policies, although the recovery has been weak.

Over the next year, home prices may need to rise to maintain the expansion, or accelerate growth, which would reflect increased demand and eventually more homebuilding. Also, there may be a wealth effect and a strengthening of weak household balance sheets.

Median home prices up in 1Q
May 10, 2010

The NAR is projecting prices will increase "very modestly" in the second half of this year, assuming unemployment and the economy don't take a turn for the worse.

The national median price was $166,100, or 0.7 percent below the first quarter of last year. Sales of foreclosures and other distressed properties made up 36 percent of all sales.

With the housing tax credits now over, many experts anticipate home sales will soften in the near term, and that could syphon some of the momentum in home price increases.

Prices also could be hurt as banks unload their backlog of foreclosed homes. And despite rising prices, nearly a quarter of all U.S. homeowners with a mortgage still owe more on their loans than their homes are worth.

That's why many housing experts project home prices will remain almost flat for the next two years, according to a survey of leading economists by the Associated Press last month.

Article:

"When you buy a new home...you're injecting a dose of adrenaline into the American labor market. Building a home requires architects to design plans, workers to hammer nails, and manufacturers to provide everything from lumber to bulldozing equipment. Purchasing a previously owned home also provides an employment jolt. By the time you sign the closing documents, you'll have created demand for real estate agents, lawyers, appraisers, inspectors, and mortgage lenders. And once you move in, you'll probably make a few more purchases, helping to support jobs for makers of carpets, home appliances, furniture, and other goods."
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