Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Won't Admit to the Coming Double Dip Recession

Economics / Double Dip Recession Jun 08, 2011 - 04:59 AM GMT

By: Money_Morning

Economics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Despite what U.S. Federal Reserve Chairman Ben S. Bernanke said in his speech at the International Monetary Conference yesterday (Tuesday), it looks very much like we're headed for a double-dip recession.

Indeed, the economic reports of the last week or so demonstrate that the U.S. job machine was never really jump-started after the Great Recession of 2008-09.


The upshot: The U.S. economic recovery is stalling, and we're almost certainly looking at a double-dip downturn.

Recessions are always painful - and double-dip recessions are even more so.

And this second "dip" may be more of the same - a bloody economic downturn that leads into a feeble recovery with unemployment spiking to even higher levels than we're currently seeing.

But there's a slight chance that this double-dip recession could prove quite productive for the U.S economy.

Let me explain.

Anatomy of a Double-Dip Recession
That a "recession" of any kind could be productive might seem contradictory, but it's actually quite logical. That's not to say that we're ignoring the very real human toll - not at all.

But recessions can and do serve a productive purpose: An economic downturn can clean out the bad investments and misallocation of capital that tend to proliferate during boom periods, eradicating the "overhang" of surplus capacity across industries and set the stage for a more-vigorous - and ultimately healthy - recovery.

That opportunity for a healthy economic cleansing of precisely that type is especially apparent today. After the largesse of recent years - the subprime mortgage crisis, credit default swaps, mortgage-backed securities and the creation of far too much liquidity thanks to bailouts and easy monetary policy - there is a great mess that still needs to be cleaned up.

If we end up with a double-dip recession, the type of downturn - productive or unproductive - will depend upon the fiscal and monetary policies chosen. Unfortunately, if you're a wagering person, I'd have to say that the odds favor the wrong choices being made - resulting in an "unproductive" dip.

The Gloomy Scenario Bernanke Won't Acknowledge
The economy only added 54,000 new jobs in May - the lowest amount in eight months and only about a third of what was expected. That's pretty definitive proof that Washington's fiscal and monetary stimulus have not worked. (Not surprisingly, in his speech to the group of international bankers in Atlanta yesterday, Bernanke not only refused to acknowledge the likelihood of a double-dip recession - he even insisted that job growth will accelerate in the year's second half.)

Washington's fiscal stimulus - including the government dumping nearly $1 trillion into such unproductive pursuits as "new energy" projects and state employee labor union contracts - has generated massive budget deficits and given banks no incentive to play its key job-creation role by lending to small businesses.

Instead, the stimulus has provided temporary jobs with the government - and those jobs are now disappearing as Washington's money runs out.

Monetary stimulus has been more damaging. It has caused a worldwide commodities and energy bubble - which is single-handedly damaging the U.S. economy by making it more and more expensive for consumers to fill up their tanks. It is also likely to have contributed to the growing job-market malaise - and with good reason: Economic theory suggests that when capital is very cheap, businesses will use more capital at the expense of labor, reducing the demand for workers.

It is not surprising that the combination of extreme monetary and fiscal policies has now produced a downturn: The true costs of those policies was predestined to appear long after their benefits had disappeared.

But what happens now depends on how the authorities react to evidence of further economic weakness.

Why Pain Now is Better Than Pain Later
In the more likely scenario, the calls for another round of public spending "stimulus" will become deafening. Expect the same emotional call for a third round of Fed purchases of government bonds - aimed at holding down interest rates - to be created after the current round ends on June 30.

With this third round of quantitative easing - known as "QE3" - there may be a short-term boost to the economy. But the benefits will be very limited - and will be quickly overwhelmed by spiraling inflation as energy, commodities and other goods rise in price.

These price spikes will quickly suppress consumer spending, which accounts for about 70% of this country's economic output. That drop in spending will produce a further relapse in the U.S. economy - probably accompanied by a bursting of the bubble in commodities, energy, U.S. Treasury bonds and the stock markets.

Once that happens - Fed Chairman Bernanke's latest comments to the contrary - a double-dip recession is pretty much fait accompli. Rapid inflation will erode U.S. living standards, while low interest rates will cause the nation's already-pitiful savings rate to drop even more and capital to flee to Asia.

A recovery will eventually come, but that recovery will be one with much-lower living standards, and wage rates that are much more in line with those of emerging Asia.

Alternatively, it is possible that the politicians will come to an agreement about major spending cuts, while the Fed makes a frontal assault on the commodities/energy bubble by raising interest rates.

In the short run, this scenario will be much more painful, with a much higher human toll: The stock market will crash and a surge in real interest rates combined with the plunge in asset prices will prompt bankruptcies to spike.

However, the higher interest rates will raise domestic savings rates as well as the demand for labor. So when the recovery does come, it will be much healthier - marked by declining inflation, the elimination of the U.S. balance-of-payments deficit, and an unemployment decline as rapid as the one we saw back in 1983 (when job creation averaged 350,000 per month for the first two years of recovery).

With a rise in interest rates and a decline in public spending, a "double-dip recession" will be productive, returning the economy to a more-balanced track and wiping out much of the false investment of the successive bubbles. Unfortunately, given our current slate of policymakers, we are much more likely to get an unproductive double-dip, in which the economy's real problems are not addressed and unemployment fails to decline.

For investors, it is difficult to hedge against two such disparate potential scenarios as the "good" double-dip versus the "bad" double-dip. But here's the thing: T-bond yields have declined even further during the last month - even though inflation has increased. That means the market is betting on further Treasury bond purchases by the Bernanke-led Fed.

Since both "double-dip" scenarios include higher Treasury bond rates in the intermediate term - the one because of inflation and the other because of explicit rises in interest rates - taking a bearish position in U.S. Treasuries appears to be an excellent bet. To do so, you might consider the ProShares UltraShort Lehman 20+ Year Treasury Fund (NYSE: TBT), an exchange-traded fund (ETF) that takes a leveraged short position in long-term Treasury bond futures.

[Editor's Note: We'd like to share a secret with you.

Andrew Grove, employee No. 1 and the former longtime chairman of Intel Corp. (NYSE: INTC), once used the term "inflection point" to describe "a time in the life of a business when its fundamentals are about to change."

What's true of an individual business is also true for the entire global economy. And the global economy stands at such an inflection point.

Perhaps that doesn't surprise you.

But this will.

You see, there are seven "inflection-point catalysts" at work right now.

And they are going to turn the global markets... upside down.

To have so many forces all pulling in one direction at one time is a real rarity. But it's happening now.

Investors who see and understand the forces at work have a chance to make, well, buckets of money (pardon our crassness). But what really concerns us is that investors who don't stand the chance of being slaughtered by global market forces that they may not even know exist.

As today's story by Martin Hutchinson demonstrates, Money Morning was created to serve, and to protect - to help our readers identify the best profit opportunities, while avoiding the buzzsaw-like risks that abound in our increasingly complex global financial markets. For that reason, we want to share our secret with you - in a free report called "Lambs to the Slaughter: What to do as These Seven Inflection Points Turn the Markets Upside Down." Just click here to get it - and then take the time to read it.

What you don't know can hurt you.]

Source :http://moneymorning.com/2011/06/08/sorry-mr-bernanke-there-will-be-a-double-dip-recession/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

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


Post Comment

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