Wednesday, August 08, 2012

Don't Look To 2013 For The Economic Cure


Had a long chat with Bill today.  Bill and I have become acquaintances through this blog.  He emailed and then called several years ago and we have kept in touch on political and personal issues since then.  He keeps his finger on the pulse of politics and the economy in the southeast... and has not been very optimistic for awhile.  He expressed deep frustration with the lack of anyone resembling a "leader" to take the country out of this economic morass.  While Obama has been a disaster, he doesn't have much faith that Romney can fulfill the role of a leader or a plan for fixing this mess.

What follows is an email he sent to me and my reply:

Putting Off Addressing Fiscal Cliff Risks DepressionPeter MoriciTwitter @pmorici1
President Obama and Congressional Republicans are engaging in dangerous brinksmanship. Putting off addressing the fiscal cliff until after the election risks a second Great Depression.
Without a compromise by January, $400 billion in mandatory spending cuts and more than $100 billion in tax increases immediately go into effect. With GDP only growing $300 billion annually, such a shock would thrust the economy into prolonged contraction.   
With the federal deficit already exceeding $1 trillion, additional stimulus spending significant enough to rescue the economy is unlikely, and interest rates are at record lows. These leave policymakers with few tools once things start unraveling. However, President Obama has given Republicans few political choices but to roll the dice. Facing reelection, he promises to veto any extension of Bush-era tax cuts for middle- income Americans if Congress does not raise rates on upper-income families. He won't entertain meaningful cuts in entitlement spending or health care.
Even if Mr. Obama wins, he likely will be saddled with a Republican House.
Armed with a mandate, he will get higher taxes on upper income families. However, he has made commitments to expand the U.S. naval resources in the Persian Gulf and Asia to counter Iran and China. He can't finance those without giving Republicans some of the entitlement reforms they want but can't get now.
For the economy, one of three outcomes is likely.
President Obama wins but doesn't reach a deal with Republicans before February or March. Mass layoffs begin late this fall, especially in the defense sector, and the economy stumbles badly.
Mr. Obama wins and deals with Republicans in Congress by late December. Taxes go up, and overall spending is cut, but not as much as current legislation requires. The combination still derails the fragile recovery.
Governor Romney wins and implements a pro growth agenda, but the current situation is too urgent to wait for actions that won't take effect until at least next spring and summer.
Businesses are already curtailing investments in machinery and information technology as a hedge against a contracting economy in 2013, and consumers are spending less. Retail sales fell each of the last three months.
The Great Recession was caused by manifest structural problems in the economy: a wide trade gap with China and on oil, banks that had forgotten how to earn profits through sound lending, failed financial regulations, and skyrocketing health care costs.
President Obama's policies have mostly exacerbated those problems. That's why the recovery is so weak, and a second recession now could put the economy down for good.
Too many young adults unemployed or in poorly paying jobs are living with aging parents. Many older Americans are running down IRAs before reaching retirement age, hoping for better days.
The safety nets provided by parents and savings will soon tear. If the economy goes down again, the negative feedback cycle of fewer jobs, less spending, more layoffs, and so forth will be much more severe than in 2008.
The hallmark of a depression is a recession that does not sow seeds of recovery by creating pent up demand for business and consumer durable goods. Truck and car replacements played a mighty roll in the most recent recovery.
With many Americans slipping from the middle class, businesses may simply downsize for a permanently smaller U.S. economy, and families will own fewer vehicles, appliances and electronic toys. Unemployment in the range of 15 percent easily could become the new normal.
President Obama should risk upsetting his base and offer Republicans in Congress a reasonable deal now.
Republicans should admit what they already know-Mitt Romney is no messiah-and take the risk of compromising now.
American can't afford for their elected officials to dither any longer.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.
Peter MoriciProfessor        Robert H. Smith School of BusinessUniversity of MarylandCollege Park, MD 20742-1815
My reply:
We have had a period of antipathy toward business that has incentivized the bases of this present economic spiral.  One could point to the no-down-payment-homes-for-the-unqualified as the trigger, but the table was set a long time ago. 
I fear that we are entering a Japan-like malaise with regard to employment.  Businesses that remain have already adjusted to the new reality [hope and change] by outsourcing peripheral functions and becoming very lean in core functions.  More and more, the financial "magicians" come and go making a quick fortune with smoke and mirrors and outright fraud, while the old-line "build something people want and need" types have been disappearing.  That's why the Facebooks are the big IPOs.  Smoke, mirrors, no substance. 
MONDAY, AUGUST 06, 2012 
Recovery In Name Only 
What we are faced with an inverse relationship: the growth of government = the decline of the economy.

2012 IS HERE


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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)