Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Financial and Economic Situation Could Get Ugly Fast

Economics / Economic Stimulus Nov 21, 2009 - 03:27 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleThings could get ugly fast. With the Democrats backing-off on a second round of stimulus, the Fed signaling an end to quantitative easing, and Obama moaning about rising deficits; there's a good chance that the stumbling recovery could turn into another sharp plunge. Bank lending is shrinking, consumers spending is off, housing prices are falling, unemployment is soaring and the wholesale credit markets are in a shambles. This isn't the time to slash government support in the name of "fiscal responsibility". Obama needs to ignore the gloomsters and alarmists and pay attention to the Nobel laureates like Joe Stiglitz and Paul Krugman. They're the guys who know how to steer the ship to safe water.


But there are troubling signs that Obama has joined the ranks of the deficit hawks and is planning a policy-reversal that will pitch the economy into a nosedive. Here's what he said on his tour through Asia:

"I think it is important to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession."

So it's true. Obama has aligned himself with the faux-prophets and dollar demagogues who think that the end is nigh. But trimming the deficits now (when they should be expanding) will lead to a viscous cycle of debt deflation that will push-down asset prices, increase defaults, force more layoffs, slow consumer spending, lower earnings and send the economy into a downward spiral. The president is paving the way to a double-dip recession, a slump that could be worse than the first.

Has Obama perused the jobless figures lately? Has he noticed the Fed shoving more than a $1 trillion under the collapsing housing market with no sign of improvement? Has anyone told our blinkered accountant-in-chief that the entire financial system is propped-up with $11.4 trillion of dodgy scaffolding that could buckle in the first big gust?

Obama has either taken leave of his senses or he's spending too much time listening to the cheerless Jeremiahs on the Internet. He needs break their spell and seek the counsel of the experts who get paid to crunch the numbers---real economists. Cutting government spending and raising taxes--the two ways that deficits are paid off--is the fast-track to disaster. Don't go there.

If Obama needs more proof that the economy is still flatlining, he should thumb through Fed chair Ben Bernanke's speech to the Economic Club of New York which was delivered on Tuesday. The presentation was a sobering snapshot of lingering depression with precious few glimmers of light. Here's an excerpt:

"The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible....How the economy will evolve in 2010 and beyond is less certain....

Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans...

Household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

The demand for credit also has fallen significantly....Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by more than would have been predicted by the decline in economic activity alone.

Many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.  

The best thing we can say about the labor market right now is that it may be getting worse more slowly. (Fed Chairman Ben Bernanke Speech Before Economic Club of New York)

Is this really Bernanke speaking, or is the Fed chief channeling Roubini?

Okay, so credit is tight. Consumers aren't borrowing and banks aren't lending. Unemployment is rising and deflation is pushing down asset prices while the burden of personal debt is rising in real terms. Bleak, bleak, bleak. The only sign of improvement is that "things are getting worse more slowly". Now that's encouraging.

What the economy needs is a hefty dose of stimulus aimed at job creation and strengthening demand. Only the government can provide sufficient resources to rev up economic activity and put people back to work. Unfortunately, the TARP bailout soured the public on deficit spending due to the shabby (and possibly criminal) way it was handled. That will make it harder to do what is necessary. The political support for more stimulus on Capital Hill has vanished. But, without it, another hard landing is certain.

Despite rumors in the media, stimulus works. It speeds up recovery, minimizes unemployment and stops asset prices from overshooting on the downside. Here's an excerpt from "The effectiveness of fiscal and monetary stimulus in depressions" a scholarly analysis of stimulus by economist-authors Miguel Almunia, Agustin S. Benetrix, Barry eichengreen, Kevin O' Rourke, and Gisela Rua:  

"Where tried, fiscal policy was effective in the 1930s....The details of the results differ, but the overall conclusions do not. They show that where fiscal policy was tried, it was effective.

Our estimates of its short-run effects are at the upper end of those estimated recently with modern data....This is, in fact, what one should expect if one believes that the effectiveness of fiscal policy is greatest when interest rates are at the zero bound, leading to little crowding out of private spending. It is what one should expect when households are credit constrained by a dysfunctional banking system. Given similar circumstances in 2008, this underscores the advantages of using 1930s data as a source of evidence on the effects of current policy." (The effectiveness of fiscal and monetary stimulus in depressions" by Miguel Almunia, Agustin S. Benetrix, Barry eEchengreen, Kevin O' Rourke, and Gisela Rua, 18 November 2009 vox)

Stimulus works in multiple ways. It also helps increase inflation expectations which is necessary to get people spending again. In a deflationary environment, consumers shut-down and stop spending. The Fed tries to spur economic activity by convincing people that the dollars they hold will be worth less tomorrow. That's why Bernanke keeps pointing out that the Fed will keep rates at zero indefinitely. Regrettably, only the goldbugs take him seriously, which is why gold prices have zoomed to the stratosphere. Personal savings rates are still rising. There's been a sharp drop-off in consumption. Bernanke's psychological experiment has flopped. The masses still believe we're in recession. Without a gigantic fiscal expansion to jolt the economy out of its lethargy, the severe contraction could drag on for a decade or more. We're becoming Japan.  

Obama's deficit cutting plan is madness. It offers no hope at all. It draws from the half-baked theories of amateur economists on the Net who think that massive liquidation and years of bitter retrenchment and high-unemployment are the path to recovery. They're wrong.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Meremortal
29 Nov 09, 19:05
alleged libertarian calling for big government - Weird

Here we have an alleged libertarian calling for big government spending to save us. I thought big government spending got us into this mess. Not to worry, we will soon learn (again) that Obama is all talk, so no worries that he might actually cut the deficit. Congress is corrupt, so no worries about it cutting spending either.

We will eventually realize that the can has been kicked to the dead end of the alley. It doesn't matter what government does or does not do. The world is in for a long period of poor economic performance. The delaying tactics and market distortions undertaken by various governments will only prolong the misery.

Whitney writes: "It draws from the half-baked theories of amateur economists on the Net who think that massive liquidation and years of bitter retrenchment and high-unemployment are the path to recovery. They're wrong."

Take your pick, 3-5 years of bitter retrenchment and high unemployment or (with government "help" through higher deficits) 12-15 years of the same.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules