James Pethokoukis

Politics and policy from inside Washington

The long recession: 15 reasons why the U.S. economy faces a weak recovery

Aug 5, 2009 16:33 UTC

What sort of recovery will the American economy have?  With estimates of 3Q growth rising on Wall Street — along with the Dow — here is why the optimism may be overstated. First up is David Rosenberg of Gluskin Sheff (outline by me):

1. The foundation for any durable recovery in a modern industrial economy rests with the organic dynamism of the private sector. Ask anyone in Japan as to how repeated rounds of fiscal stimulus played out over the past two decades.

2. We are still in a post-bubble credit collapse world and there are still too many uncertainties associated with the outlook for the economy, corporate earnings, financial stability and fiscal rectitude (or recklessness is more like it).

3. Wages are deflating at a record rate and credit in the banking system is still contracting as banks continue to shrink their balance sheets.

4. Three-quarters of the corporate universe have no revenue growth to speak of.

5. Only one-third of the ISM industries posted growth in July and barely more than one in ten were adding to payrolls.

Now here is former bond guru David Goldman on why the recession “will last forever” (a bit tongue in cheek and in reverse order of importance):

10. No innovation. As Nobel Prize Laureate Edmund Phelps [put it recently]: “I’m not convinced that there’s going to be another wave of innovation in the offing.”

9.  Speaking of innovation, the US isn’t getting the clever immigrants it used to.

8. China will hold its own but its economy is too small to act as a locomotive for the rest of the world (maybe for Korea).

7. If the rest of the economy starts competing with the Treasury for capital, interest rates rates will rise immediately and suppress economic activity.

6. The rest of the world is full up on US Treasury securities …  the US is on its own financing the deficit.

5. The US consumer can’t get out of a hole.

4. American demographics look suspiciously like Japan’s in 1990, at the beginning of the “Lost Decade.” Japan’s elderly dependent ratio jumped from 18% to 26% over the 10 years; between 2010 and 2020, America’s will rise from 19% to 25%. … They have no savings to speak of and what they thought was their nest egg (home equity) just vaporized.  … . The combination of demographic and wealth shocks should produce a loop-de-loop in the “marginal propensity to save” such as we have never seen before, except, of course, in Japan.

3. More taxes are en route, to pay for health care, the interest on the federal debt, or whatever. No country ever taxed its way out of a rececession.

2. The rule of law has been severely weakened in financial transactions, through heavy-handed White House intervention into the bankruptcies of the auto sector, through mortgage renegotiation, and so forth.

1. Barack Obama! … . Obama knows that if the economy crumbles and he’s the only one left with a checkbook, then everyone has to come to him.  …  The banks, the hedge funds, the manufacturers, the municipalities  … Obama is the first American president (with the possible exception of FDR) to actually benefit from economic weakness.


David Goldman’s reason #2, “The rule of law has been severely weakened” absolutely does not get enough attention. I am a small (very very small) investor. Yet, this has definitely affected my confidence in corporate bonds going forward and makes me much less likely to invest.

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Double taxes on the rich and you still wouldn’t balance the U.S. federal budget

Aug 5, 2009 14:22 UTC

Here is some fun tax information: The top five percent of tax filers in terms of adjusted gross income earned $3.3 trillion and paid $676 billion in taxes in 2007.  (That accounted for 61 percent of taxes, by the way.) So if we doubled their average tax rates, America would still be running a budget deficit for years to come. And that assumes no economic impact from the higher tax rates.



To initiate an advance on the lengthy economic turnaround, the joy ride of debt-spending-with-wanton-abandon mindset enjoyed by Bush and continued by Obama must be brought to a close.

Here come the real tax increases on Everybody.

http://pacificgatepost.blogspot.com/2009  /08/obama-middle-class-income-tax-incre ases.html

North Korea: Global markets are also potential prisoners — and Clinton can’t help them

Aug 5, 2009 13:40 UTC

Strategist Andy Busch of BMO Capital Markets provides some interesting insights on the situation in North Korea:

While the Obama administration denies this, the fact Clinton was allowed to go signals a major shift in foreign policy by the US towards the rogue regime.  It could be laying the groundwork for good relations during a power transfer from Kim Jung-Il to his son which may happen sooner than most think.
It’s this transitional period that will be extremely dangerous and may see NK become more belligerent with missile launches and fishing boat seizures. Internally, North Korea could implode and their nuclear material may be at risk.  An incident would garner world-wide attention and a response from either China or the US.  China’s biggest concern would be for a mass of North Koreans coming into their country as refugees.  Japan and South Korea’s biggest concern would be for a missile to be launched towards them.
While I was at the Pacific Economic Conference in Vladivostok, Russia, attendees were very concerned over the developments in North Korea.  Everyone was worried about what would happen to Russian oil and natural gas exports should North Korea explode.
North Korea is inherently unstable.  During a power transition, it will be even worse and more difficult to predict the outcome. Markets should have a strong risk off reaction with equities sold, bonds bought, and US dollar bought.  Watch for it.