Economic recovery? US must solve its debt problem first
鈥淐all it a nightmare,鈥� says Dave Rosenberg.
Markets all over the world went down again yesterday. The Dow dropped below 10,000 in the morning trading鈥hen came back to give up a modest 22 points by the closing bell.
The Wall Street Journal says it鈥檚 time to start worrying about a 鈥渄ouble dip recession.鈥�
We suspect that output will dip below zero again 鈥� giving us, technically, a 鈥榙ouble dip鈥� recession. But calling it a recession misses the point. It鈥檚 not just a pause. It鈥檚 a change鈥 Great Correction.
There鈥檚 something else going on鈥omething much more important and much harder to deal with than an ordinary recession. The feds have thrown everything into the battle to stop this downturn. No matter how you look at it, the ammunition spent in this fight has been spectacular.
And it hasn鈥檛 worked. Unemployment has actually gotten worse. Private sector credit has declined. And what鈥檚 this? 鈥淔alling home prices raise fears of new bottom,鈥� says a headline.
People talk of 鈥榬ecovery,鈥� but it鈥檚 now three years after the crisis began and there is no recovery. Instead, there鈥檚 another crisis on the horizon.
And now the trouble is, the feds don鈥檛 have much ammunition left to fight this . Interest rates are already at zero; they can鈥檛 go lower. And the federal deficit is already as much as 10% of GDP.
Besides, it鈥檚 becoming clear that all that ammunition fired off so far was wasted! It got us nothing but more debt.
The problem was never a recession. It was too much debt in the private sector. But the feds misunderstood it. They thought it was a regular recession that they could 鈥榗ure鈥� with more credit and more spending. So, they added trillions of new debt in the public sector!
They claimed to have spared the world economy a worse disaster. But now that worst disaster is happening anyway. The bad dream has turned into a nightmare. Because it鈥檚 not just the private sector going broke; governments are going broke too.
Not that we have any new information on the subject. And we wait to be proven wrong. But we can add and subtract. And when we add up the debt totals in the developed world 鈥� the US, Europe, and Japan 鈥� what we get are some pretty big numbers. Government debt alone is $32 trillion. That鈥檚 for a combined economy of about $34 trillion.
Right now, with the lowest interest rates in 30 years, it鈥檚 still possible for most 鈥榳estern鈥� governments to pay the interest and finance their deficits. But Europe has already run into trouble. Every government in Europe is scrambling to come up with a credible plan for budget cuts. David Cameron announced his plan just yesterday.
鈥淎usterity plans multiply in Europe,鈥� says the headline in yesterday鈥檚 Figaro. And those poor French bureaucrats! They鈥檙e supposed to cut expenses by 10% next year.
In Japan and America, on the other hand, deficit spending still looks easy. Aside from a few cranks, clairvoyants and Daily Reckoning readers, everyone seems to think things will be all right forever. There is no serious pressure to cut budgets 鈥� except at the state level. The Pentagon still has a blank check 鈥� it just fills in the amount each year. Health care expenses still grow like weeds without winter.
Few people realize that America鈥檚 finances are already no better than those of Greece. Fewer still care.
But heck, we鈥檙e not going to go around with a long face about it. Nope. So what if the stock market begins the terminal phase of its long bear market 鈥� the one that began ten years ago? So what if the real estate market takes the next stairway down towards more foreclosures and lower prices? So what if the feds go broke?
We鈥檙e not going to sweat it. Instead, we鈥檙e going to enjoy it.
But how? Ah鈥� Well, first, we鈥檙e going to stay out of US stocks in the short run. Then, we鈥檙e going to get out of US bonds and the US dollar鈥oo. We鈥檙e going to stay in cash and gold鈥�
And maybe we鈥檒l learn to speak Chinese鈥�
------------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
