The President's stimulus measures lost out at the G20, and are now in danger at home too. Stephen Foley reports
Barack Obama was in effect stretchered off the field at the G20, having failed to persuade fellow world leaders to sign up to a further round of economic stimulus. Instead, the final communiqué was an austere affair, promising efforts to curb government spending, reduce deficits and start reducing the mountains of debt. In the World Cup of Economics, it was Austerity 4, Stimulus 1.
And in the US? While the President has been admonishing others on the international stage, he appears also in danger of losing the same arguments at home. Congress has three times failed to pass a new mini-stimulus aimed at extending benefits for the long-term unemployed and, across the country, states are slashing spending in the teeth of a vicious budgetary crisis. The fear of sky-high deficits and the costs of servicing huge national debts have breathed life into an austerity movement in a country that is already instinctively sceptical of government spending.
For the gloomiest investors it is a worrying time: government cannot afford to stimulate their economies, and they cannot afford not to.
A new bout of nerves over the trajectory of the global economy sent shares plunging across the world yesterday. In Europe, the European Central Bank is about to end a year-long €442bn (£357bn) programme of lending to the financial markets, which has provided an important prop to the continent's banking system. In China, disappointing economic data suggested that its rate of GDP growth may be on the verge of slowing. And in the US, consumer confidence tumbled sharply in June, according to a survey by the Conference Board. The reading of 52.9 compared to 62.5 in May and was about 10 points below Wall Street forecasts, raising fears that the US consumer might pull back their spending and hamper the nascent recovery.
There was also a report on house prices which reminded economists once again that the US housing market, locus of the 2007-09 credit crisis, has been propped up by a government tax credit for homebuyers that has now expired and not been extended by Congress. By lunchtime in New York, the Dow Jones Industrial Average had fallen 2.3 per cent. Earlier, the London FTSE 100 closed 3.1 per cent lower.
Ben Bernanke, chairman of the Federal Reserve, was at the White House yesterday talking economic policy with the President, and both he and Mr Obama rehearsed an expansionary script in their post-game press conference. The recovery is progressing, the President said, and there must be further efforts to stimulate the job market and reduce stubbornly high unemployment. The official employment statistics for June are out on Friday morning, and are expected to show the unemployment rate back on an upward trajectory at 9.8 per cent.
Neither Mr Bernanke nor the President yesterday mentioned the elephant clomping around the room, namely the giant national debt. The current budget deficit, at 11 per cent of GDP, eclipses that of the UK and the eurozone as a whole, although at 66 per cent of GDP, the total debt is not at the levels of the so-called PIIGS of Europe (highly indebted Portugal, Italy, Ireland, Greece and Spain). These are historically high levels, nonetheless, and breach several economic rules of thumb. A deficit of 3 per cent of GDP is typically seen as the maximum sustainable rate, and the US does not manage to fall below that even in the best years of the projected economic rebound; Harvard professor Ken Rogoff has suggested that 80 per cent net debt to GDP rates are the maximum possible before sovereign debt crisis become likely, and the US comes close to reaching that later this decade as the rising healthcare and social security costs of the ageing population kick in.
Larry Kantor, head of research at Barclays Capital in New York, surveyed the scene in an investment note to clients. "The combination of a lack of fiscal discipline and the resulting build-up of debt levels over past decades, the sheer size of government spending relative to GDP, the impact on finances of the severe recession and policy response to it, and unfavourable demographic trends are challenging the fiscal capabilities of most developed countries," he said. "While the focus has been on Europe because of Greece, the severity of the problem and the extent of needed tightening are greater elsewhere, including the US, which has seen one of the sharpest deteriorations in fiscal position as it boosted its deficit aggressively to counter the recession."
These worrying forecasts for the US have emboldened critics not just of long-term government spending programmes – the "entitlements" to pensions and government health insurance for the elderly – but also of short-term stimulus measures.
Last week, a handful of moderate Democrats joined Republicans to defeat legislation that would have extended unemployment benefit for the long-term unemployed, for whom payments are coming to an end. The Bill had twice been watered down to try to ensure passage, but still proved unpalatable. The $85.5bn Bill was also going to send money to cash-strapped states to help pay for health benefits, and as many as 30 of the 50 states had already factored the money into their budgets. The loss of the cash will be another wrench as state governors fight to impose swingeing cuts in order to get budgets back into balance.
This is the unspoken austerity sweeping the US. Governor Edward Rendell of Pennsylvania called it "bloodletting". New Jersey, for example, yesterday passed a budget that cut hundreds of millions of dollars from education and added levies on businesses, students, the elderly and the disabled. Assembly budget officer Joe Malone said the decisions were "beyond difficult" but "New Jersey has experienced the greatest loss in revenue in state history. The end product is austere, honest and responsible for everyone in our state." Neighbouring New York, meanwhile, has failed to pass a new budget, three months after the end of the financial year, amid haggling over cuts and new taxes such as ones on soft drinks.
The local battles foreshadow a larger one looming on the national stage when Congress must decide whether to let the Bush-era tax cuts expire in part or in full. Barclays calculates that letting them expire in their entirety would amount to a 2 per cent fiscal tightening. The Obama administration is committed to keeping the cuts in place for all but the rich, but the debate will be a key test of how far Mr Obama has lost possession to Team Austerity.
I don't think experience really matters for a president. My point is that you can't really use his own words from 4 years ago against him.
1.20.2009 - The end of one error, and the beginning of another
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The Independent is a British newspaper published by former KGB agent Alexander Lebedev's Independent Print Limited. It is nicknamed the Indy, while the Sunday edition, The Independent on Sunday, is the Sindy. Launched in 1986, it is one of the youngest UK national daily newspapers. The daily edition was named National Newspaper of the Year at the 2004 British Press Awards. Originally a broadsheet newspaper, since 2003 it has been published in a tabloid format.
The Independent is regarded as leaning to the left politically, although it has not affiliated itself to any political party and a range of views can be found on its editorial and comment pages.
Why The Greater Depression Still Lies Ahead
Michael Pento, 06.30.10, 2:38 PM ET
If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution.
Messrs. Barack Obama, Benjamin Bernanke and Timothy Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second--if at all. Therefore, it is not wise to count on them to tell us when the Great Recession is over, or to provide a plan to prevent another one in the future.
The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.
The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.
Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt.
During this latest economic contraction, the Federal Reserve took interest rates to near 0%, and the Obama administration is leveraging up the public sector to record levels in a bid to re-leverage the private sector. The government's philosophy is tantamount to sticking a frostbitten man in the freezer so he won't have to suffer the pain associated with the thawing of his extremities.
During the Great Depression, real gross domestic product plummeted 32%. The Great Recession, which we are still struggling through, began in December 2007, according to the National Bureau of Economic Research. In contrast to the 1930s, GDP during this recession shrank only 3.6% from the fourth quarter of 2007 through its low point in the second quarter of 2009. Between the fourth quarter of 2007 and the first quarter of this year (the most recent period for which data is available), GDP contracted a mere 1.1%.
The contraction in GDP during the Great Depression was the direct result of consumers paying down debt and selling off assets. Household debt as a percentage of GDP reached nearly 100% in 1929. To put that number in perspective, household debt did not go back above 50% of GDP until 1985. It was not until the first quarter of 2009 that household debt once again approached the Great Depression level of 100% of GDP.
Between the start of the Great Depression and the end of World War II, household debt fell from 100% to just above 20% of GDP. Getting there was a painful process, but such de-leveraging was the only real cure for an economy swimming in debt. Thanks to government efforts to carry on our debt-fueled consumption binge, during today's Great Recession household debt has barely contract at all; it fell to 92.5% of GDP in the first quarter of this year.
To make matters even worse, during this current crisis our government's response has been to dramatically increase its own borrowing. At the start of the Great Depression, gross federal debt was 16% of GDP. It peaked just below 44% when the Depression ended. While the national debt did increase significantly during that period, it was still relatively benign when viewed from a historical perspective.
The U.S. entered the current Great Recession with gross national debt equal to 65% of GDP. It has since exploded to 90% of GDP! Comparing the relatively innocuous level of the 1930s with today's pile of government debt clearly illustrates the perilous state of the economy.
National debt did rise dramatically during World War II, topping out at 120% of GDP in 1946. But consumer debt plunged concurrently. So while the nation was adding debt to fight and win a global war, households were taking the necessary steps to ensure their balance sheets were well prepared for the aftermath of the battle.
Today, gross national debt and household debt are both at or above 90% of GDP for the first time in our history.
Many observers--unfortunately including most of those in power--have concluded that the government must spend more while consumers rein in their debts. Their strategy is based on the belief that once the economy perks up they can unwind that debt.
There are two problems with this Keynesian theory. One is that government spending doesn't increase GDP; it only chokes off private-sector growth. The other is that politicians never regard the present as a good time for the government to pay off its debts.
The result is that the country is left with a private sector reducing a massive overhang of debt. As households curb spending, GDP slows, and the ratio of debt to economic output grows even further.
Since we have yet to address the real cause of this recession, we are moving inexorably closer to causing The Greater Depression. If policymakers do not understand that the progenitor of a depression is debt, they will also be unable to provide a genuine solution.
Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.
The bottom line is that the "recent" economy has been fueled by consumption/spending, without a REAL base of money/assets to do so. That means that most of our economic prosperity has been brought on by debt. When the debt train slows down, so does what we perceive as a "good" economy; "good" meaning all the usual indicators appear good, when in fact it was all built on sand to begin with. Rather than accept reality and realize that propping up the economy on debt cannot last, Obama has continued (and doubled down even) on past POTUS' actions continuing budget deficits and ballooning the debt. IT can't continue - it simply can not - and the sooner we bite the bullet the better.
If it is left unchecked, illegal immigrants can artificially drive-down wages by undercutting the competition and not paying payroll taxes/medicare taxes etc. Also, if there is a social welfare/healthcare/entitlement system in place that they can take advantage of, they cost taxpayers even more $$$.
because ILLEGAL (a word you seem to have a problem remembering) immigrants undercut the labor market and put an equivalent number of LEGAL immigrants and/or US Citizens out of work, adding more to our debt as the government gets less in taxes, and pays MORE in unemployment...not to mention the burden the illegals place on our welfare and education system. Dont forget that a THIRD of federal prisoners are NON-citizens [newsmax.com](not all illegal aliens, but obviously a large portion would be), in jail for something unrelated to their immigration status...and that's just federal, not counting state and county prisons.
Last edited by Radeck; 07-02-2010 at 08:46 AM..
"None are more hopelessly enslaved than those who falsely believe they are free." - Johann Wolfgang von Goethe
"The federal government has taken too much tax money from the people, too much authority from the States, and too much liberty with the Constitution" - Ronald Reagan
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