No Economic Recovery, Crushing Debt and a Credit Downgrade, the U.S. inching closer to European-Style Crisis

Posted by PITHOCRATES - August 5th, 2011

The Unemployment Rate is Down even though more People are Unemployed

That stubbornly high unemployment rate that has been dogging the Obama recovery has finally dropped (see Jobs report: A pig in lipstick by Nin-Hai Tseng posted 8/5/2011 on CNN Money).

The unemployment rate in July fell slightly to 9.1% from 9.2%

But…

The unemployment rate might have fallen slightly but that’s mostly because the number of people actively looking for jobs fell back – signaling that perhaps workers are feeling less confident about entering the job market.

So the only reason why it dropped is that more people have just given up looking for a job.  And the smaller the group is that is looking for a job the smaller percentage this group is of the total working population.  Ergo, smaller unemployment rate.  So the actual employment picture isn’t better.  It’s worse.

In July, labor participation fell by 193,000.

What’s more, though the economy added 117,000 jobs, it falls short of the 125,000 jobs a month needed just to keep up with population growth and prevent the unemployment rate from trending higher. And it would take at least twice that many to rapidly reduce unemployment.

“The bigger picture, then, is that two years after the recession ended the labor market has not really recovered at all, and may even have gone backwards,” writes economist Paul Dales of Capital Economics.

The economy is worse.  Not better.  So just how much ‘not better’ is the economy?

The Real Economic Recovery not as good as the Made-up One

Apparently pretty ‘not better’ according to the people who count the numbers.  They revised their past numbers.  And the new numbers are even worse than the not-so-great numbers of numbers past (see Distress signal by R.A. posted 7/29/2011 on The Economist)

BEA revised its national accounts numbers back to 2007 for this release, and the picture revealed is far darker than anyone previously believed. From 2007 to 2010, real output declined by 0.3% per year on average. Previously, BEA had estimated annual growth of 0.1% over that period…

Projected growth rates were simply overstated, and current unemployment is exactly what we’d expect given such a feeble recovery. Those overly optimistic assessments of the likely impact of interventions, from fiscal stimulus to QE, also make much more sense now. Policymakers were fighting a fire far more intense than they recognised.

So I guess the Obama administration was a little premature with that Recovery Summer talk.  Or they are not good at reading economic numbers.  Or they are good at reading economic numbers but they were stretching the truth a bit for political purposes in hopes that the real economic recovery would catch up with the made up one.

All right, so the economy isn’t doing so well.  What do we do?

The dire economic situation undergirds this point: Washington should delay immediate fiscal cuts. Indeed, it ought to be spending more now and revisiting the possibility of a payroll tax cut.

Really?  After the recent budget debate to raise the debt ceiling to avoid default and a credit downgrade because of excessive spending and debt?  The same kind of excessive spending and debt that has put Europe in an even worse financial crisis?  Shouldn’t we take a lesson from the European Union sovereign debt crisis?  And not follow them into a similar sovereign debt crisis? 

I mean, it was going to be Armageddon if they lowered our bond rating.  Don’t we care about that anymore?  (By the way, S&P did lower their bond rating today.  So hello Armageddon.)

A Small Negative Return in the U.S. is Preferred over any Investment in the Eurozone

Apparently not.  At least investors appear to be more worried about the debt crisis in Europe.  They’re so worried, in fact, that they’re dumping their European holdings and running to the safe harbor of U.S. banks.  Despite that possible downgrade (which has since happened).  And Armageddon (see Thanks a lot, Europe by Cyrus Sanati posted 8/5/2011 on CNN Money).

The massive selloff in U.S. markets on Thursday appears rooted in Europe as fears of a sovereign debt default in Italy and Spain caused traders to panic and run for cover…

The European Central Bank attempted to ease the market’s fears, but it seemed to have only exacerbated the problem. European leaders are now scrambling to avoid an all-out run on the euro as the European sovereign debt crisis enters a possible terminal phase. They will need to act fast to restore market confidence or the current correction could turn to capitulation.

This crippling debt crisis may very well take down the European Central Bank.  With the fear of default, investors don’t want to buy anything in the Eurozone.  They fear anything they buy today may lose most of its value in the not so distant future.  So they’re pulling their cash out of Europe and parking it in the United States.

All this cash is being dumped into custodial banks in the U.S. This led the Bank of New York Mellon (BK), the largest custodial bank, to start charging its institutional clients a fee for depositing what they consider an “extraordinarily high” amount of cash — it has no place to invest it either, and higher cash levels mean higher FDIC fees.

You know it’s bad when even the banks don’t want your money.

Indeed it is.  So investors will pay a bank to hold their cash.  Because that’s the safe ‘investment’ right now.  A small negative return versus what could be a catastrophic negative return.

The Economy may not be able to Survive much more Government Help

Employment numbers are bad.  GDP is bad.  Talks of an economic recovery appear to have been hopelessly premature.  Debt crises have gripped Europe.  And S&P downgraded U.S. credit and pushed them towards Armageddon.  The Keynesians advice, though, is the same.  More government spending.  Only this can stimulate the economy back to recovery.  Even though it was excessive government spending that gave Europe and the U.S. their crises in the first place.

It’s like Ronald Reagan said.  Government isn’t the answer to our problems.  Government is the problem.  It needs to do the things it does best.  And leave the economy to the private sector.  Because the economy just may not be able to survive much more government help.

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Crushing Debt is Crushing Europe and the United States

Posted by PITHOCRATES - January 15th, 2011

The Republicans are Irresponsible for not Allowing the Democrats to Spend Irresponsibly

Washington has maxed out their credit card.  They do like to spend.  But now they need to increase their credit line.  And the Republicans aren’t playing nice (see US debt passes $14 trillion, Congress weighs caps by Tom Raum, Associated Press, posted 1/15/2011 on Yahoo! News).

Remarkably, nearly half of today’s national debt was run up in just the past six years. It soared from $7.6 trillion in January 2005 as President George W. Bush began his second term to $10.6 trillion the day Obama was inaugurated and to $14.02 trillion now. The period has seen two major wars and the deepest economic downturn since the 1930s.

With a $1.7 trillion deficit in budget year 2010 alone, and the government on track to spend $1.3 trillion more this year than it takes in, annual budget deficits are adding roughly $4 billion a day to the national debt. Put another way, the government is borrowing 41 cents for every dollar it spends.

In a letter to Congress, Geithner said the current statutory debt ceiling of $14.3 trillion, set just last year, may be reached by the end of March — and hit no later than May 16. He warned that holding it hostage to skirmishes over spending could lead the country to default on its obligations, “an event that has no precedent in American history.”

Such righteous indignation.  According to Mr. Geithner, holding the debt ceiling hostage is just irresponsible.  The Republicans are using the financial wellbeing of the nation for political gain.  But I see it differently.  I don’t see the refusal to raise the debt ceiling as being irresponsible.  I see the runaway spending that makes the debt ceiling an issue as irresponsible.  And, yes, you can blame Bush for adding $3 trillion in 4 years.  If you blame Obama for adding $3.42 trillion in two years.  And then for passing Obamacare which will make us pine for the gold old days when the deficit increased only $3.42 trillion in two years.

Debt-level brinkmanship doesn’t wear a party label.

Here’s what then-Sen. Barack Obama said on the Senate floor in 2006: “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance the government’s reckless fiscal policies.”

It was a blast by the freshman lawmaker against a Bush request to raise the debt limit to $8.96 trillion.

Bush won on a 52-48 party-line vote. Not a single Senate Democrat voted to raise the limit, opposition that’s now complicating White House efforts to rally bipartisan support for a higher ceiling.

Apparently, reckless fiscal policies that explode the debt are only a problem when a Republican is president.  Obama, a tax and spend liberal Democrat, opposed raising the debt ceiling to $8.96 trillion.  Then he outspends George W. Bush and approves a debt ceiling somewhere north of $14.3 trillion.  And to add insult to injury, they bitch with righteous indignation when the Republicans object to their reckless and irresponsible spending.  As if there is no hypocrisy in their actions.

The Debt Dominoes ready to Fall in Europe?

But there is hypocrisy.  Worse, Obama is putting the nation in financial peril.  The debt ceiling is dangerously high.  It’s nearing 100 percent of GDP.  What does that mean?  Well, let’s take a look at Europe.

Greece is drowning in debt.  Even after their bailout, they project her debt to reach 165% of GDP in 2014.  Italy is close behind.  France, Ireland, Belgium and Portugal have debt between 80-99% of GDP.  Britain, Spain, The Netherlands, Germany, Austria and Hungary have debt between 60-79%.

Some of these nations are on the brink of bankruptcy.  Greece had to make ‘austerity’ cuts.  And the people rioted.  France increased the retirement age a couple of years.  And the people rioted.  Britain made students pay more of their own university tuition.  And the people rioted.  They just bailed out Ireland.  Portugal and Belgium have crushing interest costs on their debt.  Spain is of concern.  And Germany, the fiscally responsible nation in the Eurozone, is picking up the tab for a lot of these bailouts.  Not out of altruism.  But a Euro problem anywhere is a Euro problem for Germany.  She doesn’t have much choice.  But how long can she continue to afford this generosity?

Will the Debt Crises be the end of the ‘Cradle-to-the-Grave’ Nanny State?

Not long, it would appear (see Time for Plan B posted 1/13/2011 in The Economist).

This newspaper does not advocate the first rich-country sovereign defaults in half a century lightly. But the logic for taking action sooner rather than later is powerful. First, the only plausible long-term alternative to debt restructuring—permanent fiscal transfer from Europe’s richer core (read Germany)—seems to be a political non-starter. Some of Europe’s politicians favour closer fiscal union, including issuing euro bonds, but they are unlikely to accept budget transfers big enough to underwrite the peripheral economies’ entire debt stock.

Things are so bad with some of these Social Democracies in Europe that the Economist is recommending they just ‘file bankruptcy’ and start anew.  Their financial holes are just too deep.  Of course, this means they’ll probably screw the debt holders.  But there will be fair-shared sacrifice.  They’ll eliminate some of that debt.  But they will also eliminate a lot of that spending that caused their debt crisis in the first place.  Some of their ‘cradle-to-the-grave’ nanny state will go bye-bye.  Considering how ugly it was when France tried to raise their retirement age and when Britain cut back on tuition subsidies, these austerity moves will take ugly to a new level.

But like any problem, the longer you wait to address it the worse it’ll get.

And the longer a restructuring is put off, the more painful it will eventually be, both for any remaining bondholders and for taxpayers in the euro zone’s core. The rescues of Greece and Ireland have increased their overall debts while their private debts fall, so that a growing share will be owed to European governments. That means that the write-downs in any future restructuring will be bigger. By 2015, for instance, Greece could not reduce its debt to a sustainable level even if it wiped out the remaining private bondholders.

And this is our future.  Especially with Obamacare waiting in the wings.

The Road to Serfdom – from Medicare to Obamacare

We shouldn’t be talking about raising our debt ceiling.  We need to be talking about spending cuts.  Geithner, Obama, et al are playing a dangerous game.  They want to grow government at any cost.  To get it so deeply entrenched no matter the cost so that people will riot when faced with austerity cuts.  And they’re coming.  Austerity cuts. 

It’ll start with Medicare doctor reimbursements.  Then when Medicare collapses, Obamacare will add a public option.  This will be the end of private insurance.  Obamacare will then evolve into a national health service.  Which will ration health care services.  Then they’ll raise the Social Security retirement age.  Just like in France.  By then we’ll be well along the Road to Serfdom.

And then the rioting will start.

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