posted April 18, 2012
Obama’s Economy and the Limits of Economic Recovery

Since January 2009 the U.S. economy has been mired in the weakest, most lopsided recovery on record since 1947. It has limped along the past three years in an historic ‘stop-go’ trajectory, during which two brief, shallow recoveries were followed in the summer of 2010 and again in 2011 by two short economic ‘relapses’—the latter defined as a condition where momentum toward recovery fails and the economy falls back to near stagnant growth in key economic sectors.

After two weak recoveries and two subsequent relapses, since last November 2011 the economy has been undergoing yet a third brief, shallow rebound. Although hyped by the media and public officials, this current ‘third recovery’ is limited once again only to certain sectors of the economy and is being driven by forces that are temporary and cannot be sustained. The ‘stop-go’ trajectory—characteristic of the US economy since early 2009—has therefore not been fundamentally checked or reversed. The economy remains on a path that will experience yet another relapse, or possibly an even worse double dip, sometime no later than 2013—as this writer previously predicted last January.

Repeated economic relapses since 2009 indicate an inability of the economy to achieve a sustained recovery. This failure to achieve sustained recovery stands in stark contrast to the 11 previous recessions that have occurred in the U.S. since 1947, the worst of which took place in 1973-75 and 1981-82.

The ‘Weakest Recovery’ on Record

Forty-five months after the start of the current recession in December 2007, the U.S. economy as of October 2011 was no larger in terms of GDP than it was in late 2007. In other words, nearly four years after the recession began there has been no net additional growth. That is, the net growth of the economy over the past four years was 0%. After nearly four years the economy was merely back where it began.

This ‘no net growth’ compares to the 1973-75 recession where, according to U.S. Commerce Department data, 45 months after its start the economy had grown by 15.95%, or at a rate of 4.25% per year. And it further compares to the 1981-82 recession, where after 45 months from the start of the recession the economy had grown by 13.65%, or at a rate of 3.64% per year.

Another way to illustrate the historic weakness of the current recovery is to consider the rates of annual GDP growth for the two non-recession years following the end of each of the three recessions: 1976-77, 1983-84, and 2010-11. The following Table 1 provides the comparison:

Percent Change in Gross Domestic Product After Recessions
Source: Bureau of Economic Analysis, Historical Table 1.1.1

1973-75 Recession 1981-82 Recession 2007-09 Recession

1976: 5.4% GDP 1983: 4.5% GDP 2010: 3.0% GDP
1977: 4.6% GDP 1984: 7.2% GDP 2011: 1.7% GDP

Once again the comparison is dramatic. The recovery the past two years has averaged barely 2% per year, after a fiscal stimulus of more than $3 trillion and monetary stimulus of more than $9 trillion. In contrast, prior recoveries from the two worst previous recessions averaged two and three times that.

The Weakness: Jobs, Housing, and State-Local Government

The Obama ‘recovery’ since 2009 has been the weakest of the 11 previous recessions on record not simply in terms of GDP growth, but the weakest in the three critical areas of jobs, housing, and state-local government. These three key areas have hardly participated at all in recovery since 2009. This fact in turn explains much of why the U.S. economy today still remains locked in a ‘stop-go’ trajectory and why another relapse is virtually guaranteed, or why an even more serious double dip recession in 2013 is increasingly possible.

For example, as of the official end of the recession in June 2009, there were a total approximately 25 million unemployed. After more than $3 trillion dollars in tax cuts and government spending by the Obama administration, today about 23 million are still jobless. That’s a cost of about $1.5 million per job. Since mid-2010 Obama has placed his bet on manufacturing, exports, and free trade to lead the jobs recovery. He put multinational corporation CEO, Jeff Immelt, in charge of his ‘Jobs Council’. Immelt delivered more free trade deals, more tax cuts for multinationals, and more deregulation of business as the latest ‘jobs program’. But manufacturing has not led a jobs recovery. There were 11,869,000 manufacturing jobs in the U.S. in June 2009; at year end 2011 there were 11,790,000 manufacturing jobs, for a net decline of nearly 80,000. So much for a manufacturing-driven jobs recovery.

The sad state of administration jobs creation program is illustrated by the recent misnamed JOBS (‘Jumpstart Our Business Start-Ups’) bill passed by Congress—a bill about jobs in name only and, in fact, a proposal for more business financial deregulation, more freedom for financial speculators, and more small business tax cuts.

In the housing sector, 3.6 million homes were foreclosed during the recession years of 2007 and 2008. Yet during the first three years of the Obama administration there were an additional 8 million homes foreclosed, with the number projected to rise by at least another million or more in 2012, according to the industry source, Realtytrac. While a couple dozen big banks got $9 trillion in bailouts from the Federal Reserve, 8 million homeowners facing foreclosure got nothing in mortgage principle reductions or else were given a pittance of less than $10 billion in temporary, partial interest rate reductions under the Obama HASP and HAMP housing programs introduced in 2009.

The Obama administration’s recent HARP 2.0 is another handout to the big 5 bank mortgage lenders. HARP is supposed to require mortgage lenders to refinance principle owed by homeowners with mortgages in ‘negative equity’, something the lenders have successfully blocked for three years now. In exchange for doing so, the Obama administration has forced States’ attorneys general to accept a $26 billion ‘cap’ on legal suits pending against the mortgage lenders arising out of the 2010 ‘robo-signing’ housing scandal where millions of homeowners were illegally foreclosed and thrown out of their homes by the banks. But HARP is already being gamed by the banks. As they put aside funds for refinancing negative equity mortgages, they are raising mortgage interest rates and fees on all non-negative equity mortgage applications to cover the cost of the negative equity refinancings. In other words, charging non-negative equity homeowners more to pay for the negative equity homeowners. Immediately upon announcement of HARP, mortgage rates began once again to rise, thereby dooming any nascent housing recovery.

In the previous worst recession in the 1970s and 1980s, the loss of jobs in the private sector were offset by hiring by state and local governments, thereby dampening the depth and duration of the recession and accelerating the recovery process. In contrast, since June 2009 state and local government has not only not increased hiring to offset private sector job loss, but has itself become the biggest contributor to job loss. From June 2009 through 2011 the number of state and local government workers declined by more than 640,000—most of them teachers.

The answer to the question previously posted—i.e. why has the Obama recovery been so short and shallow, so uncertain, and characterized by repeated relapses—can be explained in large part by the failure of Obama policies to address jobs, housing, and state-local governments. There have been three distinct economic recovery programs introduced by the Obama administration—in early 2009, late 2010, and late 2011. The fact that a third has been introduced in the past six months is testimony to the failure of the first two. But none of these three programs have resulted in a rapid recovery of jobs; none have resolved the foreclosure mess and continuing veritable depression in housing; and none have succeeded even remotely in stabilizing state and local government finances that would prevent layoffs, cuts in services, or rising local taxes and fees.

The importance of jobs, housing, and state-local government spending to recovery is evident by the fact there has never been a recovery from any recession since 1947 without increased spending and hiring by state and local government; without the housing sector recovery leading the way; or without job creation averaging at least 400,000 to 500,000 each month for at least six consecutive months.

The logical question of course is why has there not been a sustained recovery thus far—after more than $1.5 trillion in federal government spending since early 2009, after more than another $1.5 trillion in tax cuts, and after the Federal Reserve, the central bank of the U.S., has pumped in more than $9 trillion in virtually ‘free money’ into the banks (by purchasing at full price mortgage and other bonds worth pennies on the dollar and after lending banks all the money they can carry away at a mere 0.1% to 0.25% interest rates)?

The answer to the question is that a pittance of the cumulative $12 trillion of fiscal and monetary stimulus since 2009 has ‘trickled down’ to job creation, to stopping foreclosures or stimulating the housing sector, or to increase state-local government spending. What was once called the ‘trickled down’ economy in the U.S. in the past has basically changed since 2008. It has become, at best, a ‘drip-drip’, leaky faucet economy, with most of the $12 trillion spent by Congress and the Federal Reserve having been siphoned off by large multinational corporations and the big 19 banks, by speculative investors manipulating commodity, oil, and currency markets, by CEOs, hedge fund, and private equity managers ensuring huge personal income gains for themselves, and by the wealthiest 10% of households in the U.S., about 1 million of the approximate 130 million households in the U.S., reaping the harvest of record stock and bond market expansion set in motion by trillions of dollars of Federal Reserve free money.

The ‘Most Lopsided’ Recovery

The Obama recovery has not only been the weakest recovery on record, but also been the most ‘lopsided’ recovery of all the prior recessions since 1947. ‘Lopsided’ means large corporations, their CEOs, bankers, professional speculators, and the wealthiest 10% households that do most of the investing in stocks and bond have benefited nicely. For the wealthiest few and their institutions, the current recession was historically short, ‘V-shaped’, and their recovery fully complete after barely a year.

Stocks and Bonds

For example, in the first year of recovery alone the Dow-Jones index of US stocks rose between June 2009-June 2010 more than 90% from its prior lows. The bond markets have done even better. After a 30% increase in returns in 2009, high yield corporate bonds returned an additional 57% in 2010. Compounded that’s more than 100%. Stocks and bonds have surged a second time since October 2011 and currently approach their record highs of 2006-07.

Corporate Profits

Corporate profits have done still better. Having experienced the fastest recovery in 31 years, corporate profits today are higher than they were in December 2007 prior to the start of the recent recession. The average annual rate of increase of profits in the U.S. since 1948 has been around 10%. But pre-tax corporate profits nearly doubled in just a little more than two years, from their recession lows of $971 billion in December 2008 to $1,876 trillion by March 2011. By early 2012 they exceeded more than $2 trillion, well beyond their 2007 previous highs.

Yet another way to look at profits is profit margins. While profit levels rose to their highest levels in 31 years, profit margins reached levels not achieved in 80 years. Profit margins are defined as that percentage of revenue left over after expenses—i.e. profits as a percent of operating costs. Record profit margins during the recession meant profits recovery was due to cost cutting—labor cost cutting in particular. In other words, the record gains in profits have been largely achieved at the direct cost of workers’ wages, jobs, hours of work, benefits and the rapid productivity gains achieved after June 2009 that have not been shared by companies with their workers.

CEO and Executive Pay

After leveling off or slightly declining for one year during the worst of the 2008-09 economic collapse phase, top US executives’ paychecks rose significantly in 2010. Median pay for top execs at 200 big companies rose 23% to $10.8 million in 2010, and 36% according to most recent estimates for the S&P 500 largest companies by the corporate research company, GMI. CEO pay is estimated to rise another 36% in 2011, according to Forbes magazine, on the high end, and at minimum 10-20%, according to corporate consultants, the Hay Group.

Bankers’ Bonuses

Despite the near collapse of many of their banks, bankers did even better than non-bank CEOs and Executives during the recovery period. The average pay for the CEOs of the 15 largest banks also rose by 36% in 2010, according to a study done by the executive compensation research firm, Equilar. Those same 15 banks’ revenue rose by an average of only 2.9%. But that didn’t prevent the rapid recovery of bankers’ bonuses. Seven of the 15 banks actually reported a loss but their CEOs still got bonuses. The 36% is a low end estimate, moreover, as it doesn’t include contribution to CEOs’ retirement plans or stock accumulation.

Wealthiest 10% Households

The wealthiest 10% of households in the US own the vast majority of all common stock outstanding, about 80%. Among the top 10%, the wealthiest 1% own nearly half—38%–of that 80%. Their share of all the income generated each year in the US has risen from 8% in 1980 to 24% in 2007 of all income generated in the country. During the expansion years of 1993-2000 the income of the wealthiest 1% grew on average every year by 10.3%. During the expansion of 2002-2007 their incomes grew another 10.1% per year. In the 1993-2000 period they captured 45% of all the increase in national income. But by 2002-2007 they captured 65% of all the income gains during those years. Last year, in 2011, it has been estimated the wealthiest 1% received 93% of all total income gains in the country.

101 Million Workers’ Earnings

In contrast to the historic, lopsided recovery after June 2009 in favor of the wealthy and their corporations, the ‘bottom’ 80% American households had average income in 2008 of only $31,244 a year. During the expansion years of 2002-07 their income grew by less than 1.3%, and then collapsed in 2007-08 by more than -6.9% a year. In other words, their gains last decade were less than half their gains in the 1990s, but their losses in the recent recession were almost three times their losses in the 2001 recession. Since 2009 their real weekly earnings, adjusted for inflation, has fallen another –4.5%. Other indicators of their declining living standards include: More than 40 million U.S. workers today have no full time permanent job and earn on average 70% of full time pay as temp and part time workers. 47 million Americans live below the official poverty levels. And 45 million are now living on food stamps, including more than15 million children.

7 Reasons for Stop-Go Recovery

It logically follows to ask why has $12 trillion in fiscal and monetary stimulus has not resulted in a more robust, sustained economic recovery instead of the ‘stop-go’ economy of the past three years?
First, as even many mainstream economists have argued, the Obama recovery programs have all been insufficient in terms of magnitude. The government spending stimulus initiated in early 2009, for example, was insufficient—i.e. way too low—in terms of level of spending. It represented only around $400 billion in spending. The rest of the stimulus was tax cuts, mostly business tax cuts that would prove to have little impact on recovery given the nature and depth of the current ‘epic’ contraction. That $400 billion spending represented less than 3% of total output of the economy, the gross domestic product or GDP. In contrast to Obama’s weak fiscal response, other economies like China and Germany introduced far more fiscal stimulus when the 2008 downturn hit. China’s stimulus was approximately 17% of their GDP. Germany’s significantly more than the US as well. Both economies fared among the best in terms of recovery in 2009.
The Obama fiscal stimulus of 2009 quickly dissipated within a year, sending the economy into a slow decline by summer 2010. But there is a second reason for the failure of the Obama recovery: the stimulus was even more inadequate in terms of its composition. Spending was not focused on immediate job creation. It was composed largely of subsidies of various kinds. Most of the $400 billion spending was provided to State and Local governments, schools, the unemployed requiring unemployment insurance, subsidies to cover health insurance for the unemployed, more for food stamps as the use of the latter doubled, and other similar spending programs. At first Obama declared these subsidies would provide 3-4 million jobs. Then quickly re-framed this to proclaim millions of jobs would be ‘saved’ by the subsidies, once it was clear they would not create jobs.
But once subsidies are spent their economic impact is gone. And that’s exactly what happened a year later in 2010. In contrast, true net job creation results in a continued stream of spending by those now employed. But Obama never remotely considered direct job creation by the government. His program always counted on the private sector to create jobs, picking up about the time that the 2009 subsidies would run out a year later in mid-2010. However, in one of the greatest failures in US economic policy history, the corporate sector did not create jobs after the year of fiscal-subsidy stimulus. Corporations ended up hoarding record levels of cash—more than $2.5 trillion in fact—and not investing it in the U.S. to create jobs. To the extent they invested at all, it was offshore or in financial securities globally, neither of which produced jobs in the U.S.
Obama’s fundamental strategy then was to merely to try to provide a cushion, a floor, to the collapse of consumption—70% of the US economy—temporarily for a year. Once the stimulus ran out, the private sector was supposed to kick in. Banks were supposed to lend to small businesses too but didn’t. They also hoarded cash, more than $1 trillion in extra reserves obtained from the Federal Reserve at 0.1%-0.25% interest rates. Big corporations were, according to the Obama strategy, supposed to spend their now recovered profits in 2010 on jobs. Those getting the jobs would then be able to meet their mortgage payments and avoid a new wave of foreclosures. State and local government revenues would recover with the new business investment and jobs. It all turned on private sector corporate job creation—but that didn’t happen.
The third failure of Obama’s recovery program has been its over-emphasis and reliance on tax cuts for business and investors. Obama counted on tax cuts to boost corporate profits and margins. In turn, corporations flush with cash would spend on jobs. But they simply hoarded most of the tax cuts, or used the cuts to pay down debt, or else diverted it from the U.S. to invest abroad in emerging markets in Asia and elsewhere. Or, they held it for purposes of anticipated stock buybacks and dividend payouts to their stockholders. By mid-2011 the ‘cash hoard’, now more than $2, led to an explosion of stock buyback and dividend payouts.
Obama’s response to this third failure was to provide even more tax cuts to business in late 2010 to entice them to invest and create jobs. Small businesses got tens of billions of more tax cuts dollars, faster depreciation write-offs, and workers got a 2% payroll tax cut. And then there was the big event—the two year extension of the Bush tax cuts in December 2010. The Bush extensions added between $450-$500 billion to the US budget deficit for just the two years of extension, 2010-2011.
The fourth great failure of Obama’s recovery programs has been the President’s lack of an effective approach to the three ‘great mini-crises’ in the US economy: immediate job creation, foreclosures and spreading homeowner negative equity, and the chronic fiscal crisis of State and Local governments. Obama’s recovery programs never included a real jobs creation program, apart from tax cuts and nonsense about ‘saving’ jobs in the public sector by providing local government subsidies. He never had a foreclosures prevention program of any significance. And his stimulus aid to local government was essentially limited to one year. When the recovery did not occur after the first year, the states and local government were essentially ‘cut loose’ on their own to cut jobs in the hundreds of thousands, cut employees’ benefits, raise state taxes, and cut untold billions of dollars from services. The States then dumped the pain of spending cuts and fee hikes onto local governments, just as the Federal Government had turned the problem back to the States. The consequence is the widespread local government and teacher layoffs, the slashing of pension, health benefits, and wages at local government levels, the spreading cuts in social services, and desperate introduction of fee hikes by cities and counties now going on nationwide.
A fifth failure was Obama’s inability to understand where the economy was going by late summer 2010 and his failure to extend the bailout of big businesses, big banks and financial companies to ‘Main Street’. The summer-fall 2010 would prove a critical historical juncture. Obama’s failure to act aggressively and move to a higher stage of stimulus and recovery program mix doomed him and his party in the November 2010 midterm elections. Obama failed to seize the moment and opportunity to expand the recovery in the fall of 2010. Having lost the Congressional elections badly, he resorted to a weaker dose of monetary policy and still more business tax cuts. The economy would relapse once again in a few months. With the entry of Teaparty radicals in the House of Representatives, future stimulus in 2011 was effectively blocked and with it any possibility of seriously confronting the three mini-crises.
This raises the sixth program failure by Obama: his succumbing to policies of his opponents that now focused almost exclusively on austerity policies—i.e. on deficit and debt cutting. Instead of learning the lessons of the fall of 2010 and midterm elections, after the midterm 2010 elections Obama retreated further and embraced the policies of his opponents. Cutting deficits and debt—i.e. austerity solutions to the crisis—became Obama’s policy centerpiece by late 2011. But no economy ever recovered from a deep contraction by means of austerity programs. In fact, such programs all but ensure greater deficits and a more serious economic relapse.
A seventh reason is that the Obama bank bailout program has failed to eliminate banks’ financial fragility, thus laying the groundwork for sluggish bank lending and subsequent future credit and banking crises. Despite a $9 trillion injection of cash and liquid assets into the banks since 2008 crisis by the Federal Reserve, and hundreds of billions more by Congress and the U.S. Treasury, a good part of the banking system in the US remains ‘fragile’—in particular major institutions like Bank of America, Citigroup, and others.
The fundamental failure of the Obama policy with regard to banking was the policy never removed the trillions of ‘bad assets’ on the banks’ balance sheets. It only offset those bad assets with corresponding $ 9 trillion in cash injections from the Fed. In theory such massive offsetting liquidity injections into the banks were supposed to free up bank reserves to small and medium businesses dependent on bank loans. But just as the boosting of large business profits resulted only in cash hoarding and no investing or job creation, so too did banks simply ‘hoard’ the historic cash injection and refuse to loan to small businesses and consumers. Bank lending actually fell for 15 months during the post-June 2009 recovery period.
To summarize, Obama’s recovery strategy failed for the seven fundamental reasons:
§ Insufficient magnitude or level of fiscal stimulus
§ Government spending that was erroneously focused on subsidies instead ofjobs
§ Over-reliance on business tax cuts that were hoarded instead of invested
§ Failure to require bank lending as a condition of the $9+ trillion bank bailouts
§ Basic disregard of the three core ‘mini-crises’: jobs, housing, local government
§ Weak, traditional policy response to the first economic ‘relapse’ of summer 2010
§ Tail-ending opponents’ focus on deficit cutting and austerity solutions in the face
of the second economic ‘relapse’ in 2011

Is a ‘Third Recovery’ Underway?

Much has been said in recent months about indicators of a sound economic recovery finally underway. Proponents of the view that recovery is finally taking hold point to the jobs created the past five months, to rising consumer spending, to the manufacturing sector’s expansion, and even to select signs that housing is on the verge of recovery. They point to GDP in the fourth quarter of 2011 rising at a faster 3% annual clip.

The fourth quarter GDP 3% growth rate may seem significant relative to the 1.3% rate in the first 9 months of 2011, but it is a weak number for this stage in a recovery. Moreover, a closer look at its composition shows the 3% was the result of mostly two factors that are unsustainable: first, business inventory accumulation which accounted for almost two thirds of the 3%, an unprecedented share. Second, consumer household spending that was driven largely by credit and household dissaving. The credit-driven component is the consequence of banks showering credit cards once again on consumers and the result of auto sales and lending, as auto companies desperately tried to keep sales momentum going with discounting and attracting financing deals for new car purchases. The rest of retail sales in the quarter were actually quite below par for a holiday season quarter.

Sustainable consumer spending longer term depends primarily on increasing household real disposable income. And that has been, and continues to be, in decline—especially for the bottom 80% households. Real disposable income rose in 2010 by only 1.8%. In 2011 by an even smaller 1.3%. And projections are for even less real income growth in 2012, as yet another round of oil-gasoline driven price hikes in the first half of 2012 hit consumers’ wallets—the third such since 2008. As consumers are forced to pay more for gas due to price hikes, they will be forced to buy less of other items and thus slow down consumption (70% of GDP) in the first half of 2012. In fact, most estimates are that oil prices, a slowing of inventory build-up, and a slowing of manufacturing exports and sales will result in a GDP growth rate of 2% or less in the first half of 2012—significantly slower than the fourth quarter 2011’s 3%. The only sector consistently increasing consumption are the wealthiest 10% households, whose spending is strongly related to stock market gains which, since last October, have surged once again.

The causes of the oil price inflation has little to do with consumer demand, which has been falling for the past several years. It has everything to do with global speculators driving up the price of oil, and U.S. based gasoline refiners taking advantage of the situation as well by shutting down refineries, to drive the price of gas still hire. Should the Iranian crisis erupt before the November election and crude oil hit $150 per barrel, gas prices—now nearing $4.50 a gallon in many places—will certainly rise above $5 a gallon, which is the breaking point for consumption contracting in general. In other words, rising gas prices are a definite ‘wild card’ in terms of economic recovery in 2012 and could still throw a major wrench into Obama plans and hopes at seeing the recovery, even if tepid, continuing through the November elections.

Another indicator of imminent recovery favored by its proponents are the jobs market. Much is made of claims that job creation has averaged more than 200,000 each month for the past three months. However, much of these gains represent seasonal and other statistical adjustments to the raw numbers of jobs reported to the labor department over the winter months. Preliminary data for December 2011 through February 2012 show total private non-farm jobs actually declined by 1.7 million. That includes 300,000 construction jobs and 40,000 manufacturing jobs. But it also includes 1.4 million service job declines. While it is likely some job creation has occurred, it will require a shift in seasonality to determine how much of the job creation of recent months is real or just statistical smoothing.

Another area over-hyped is the housing-construction sector. With every blip in housing starts or home sales month to month, pundits declare the light is at the end of the housing depression tunnel—only to find the light has gone out in the next month’s data. Housing construction continues at less than 480,000 new units a year—about 1 million less than that of the pre-recession peak. Meanwhile, home prices are again falling in a second double dip, and home sales have again reversed in February. The only source of growth in the market is construction of apartment buildings, not surprising after 12 million foreclosures. Apart from that, construction spending recorded its largest drop in seven months in February that followed a nearly as large decline in January. In short, no convincing data here either, especially given the now rising home mortgage rates again.

Still another area hyped is manufacturing. But manufactured business goods fell in January by 3.7% and rose less than half that forecasted in February. But a longer term picture of the past several months indicates manufacturing, while not in decline, has been barely growing since last summer 2011.

Meanwhile, a second major ‘wild card’ continues to emerge with the chronic financial instability in the Eurozone. With the southern tier countries from Greece to Spain already deep in recession, and bordering on virtual Depression conditions, both the financial instability and the recession conditions are clearly spreading to the rest of Europe. France, Netherlands, the U.K. have all entered recession, and Germany is slowing as well. A full blown, deep recession in Europe can only impact the U.S. economy negatively as well via a number of channels. A Eurozone recession is a train that has left the station. How much and big an impact it has on the US only remains to be seen.

Concurrent with the Eurozone’s problems, it now appears China, India and Brazil are all also slowing rapidly, as global manufacturing and trade has been rapidly slowing. All had been growing at 8%-10% GDP rates. China and India are in the 6-7% range, and Brazil at less than 2%. The debate now is whether the landing will be ‘hard’ or ‘soft’. With Europe, Asia and much of the rest of the global economy slowing, it is impossible for the U.S. to avoid a further slowing as well. The only question is when and how fast will global economic developments negatively impact the U.S. There is no way the U.S. economy can continue to recover, as Europe and the rest of the world continue to slow. This is especially true if, as this writer predicts, yet another debt-banking crisis re-emerges in the Eurozone before year end 2012.

It should be noted that while this scenario is contrary to the general forecast of most mainstream economists today, it is not an isolated view. One need only read between the lines in the statements by Federal Reserve chairman, Ben Bernanke, to see even official U.S. government views on the still very weak and uncertain US recovery are not all that sanguine that the recovery can be sustained.

Another source, the highly respected Economic Cycle Research Institute, ECRI, insists that a double dip recession in the U.S. is on track and inevitable. ECRI has the distinction of having predicted nearly all the recessions in the past several decades in the U.S., including the 2007 advent of the current recession. Other notable forecasters with excellent prediction track records, such as New York University professor, Nouriel Roubini, financier George Soros, and others hold a view similar to this writer’s.

The U.S. economy still hovers on an economic knife edge. It may stumble to the November elections without major incident if it is lucky. But that luck will almost certainly run out once the election is over in November. Regardless who is elected, the ruling elite of both political parties will turn to additional massive deficit cutting immediately after November. Those new cuts in the trillions of dollars will be added to the already passed $2.2 trillion, which will start taking effect in January 2013. Combined with a Eurozone that can only get worse with time, and a rush toward a ‘hard’ landing in the economies of China, Brazil and others, plus the need to recycle record amounts of corporate junk bond debt in 2013—it is a scenario in which a ‘double dip’ recession is likely in 2013.

Jack Rasmus, April 2, 2012

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