Waist deep in the Big Muddle

August 9, 2011

A needed dose of Larry Kudlow to counter my gloom:

The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.

1) Our financial system is in vastly better shape than it was in September 2008. Vastly better shape.

2) The Federal Reserve is highly accommodative, as illustrated by the upward-sloping yield curve. Using the yield-curve measure alone, the chances of recession based on historical analysis are very low.

3) And energy prices are coming down, with oil moving toward $80 a barrel. Oil analyst Peter Beutel points out that gasoline prices in the last two weeks have fallen by 35 to 40 cents. Adding in other oil-related savings, the energy-price drop amounts to a $100 billion tax rebate for consumers.

4) Plus, corporate profits will continue to rise while business balance sheets are pristine and chock full of cash. Consider the combination of solid productivity, moderate wage rates, and falling commodity prices. These are all plusses for the economy and stocks.

So in light of all these factors, it seems to me that the economy can hold up. It’s not the kind of rapid growth I’d like to see. But it’s not the deep and dark recession that seems to be embodied in the stock market plunge. … The American free-enterprise system can weather these shocks, and I believe favorable political and policy changes are on the way

So no Great Recession 2.0, just a continued muddling though. High unemployment. Weak growth, with maybe a negative GDP quarter here and there. The American economy getting boiled one degree at a time.  I am not sure what policy changes are coming. President Obama hinted at some new ideas in his speech yesterday. One can hope.

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