No Double-Dipping

According to this article, apparently President Obama doesn't think we have to worry about a double-dip recession...

Press Secretary Jay Carney said there is no question that economic growth and job creation have slowed over the past half year. But, Carney told a White House briefing, "We do not believe that there is a threat of a double-dip recession."

Too bad those idiots in the White House don't realize that we are already in a double-dip recession. It has already started. Yes, it will take another month or two to confirm it, but trust me, it's already here. You think I'm kidding? Well just consider the following:

1) The Obama Stimulus Package was a total failure. In Obama's own words, those "shovel-ready" projects weren't quite as shovel-ready as he thought. Worse, very little of the money in the stimulus package was designed to go towards infrastructure projects. Most of the money was aimed at public school teachers or state and local governments in districts that supported him during the 2008 election. In other words, the stimulus was used as a taxpayer-funded kickback to Obama's pals. It was cronyism of the worst sort.

Well, the bad news is that there is no more "stimulus" money left. Whatever positive effects on the economy that the stimulus program MAY have had, the program is essentially over... done... caput... finis. And as a country, we are too broke to consider another stimulus program, even a good one. Which leads to...

2) Layoffs in state and local governments. Without any further support from the federal government, state and local governments have been forced to make significant layoffs. According to CNN Money...

State and local governments are forecast to shed up to 110,000 jobs in the third quarter, the first time the blood-letting has risen into the triple digits, according to IHS Global Insight. "We're on a downward path," said Greg Daco, principal U.S. economist at IHS. "It's not looking good." State and local government employment has been a drag on the economy all year, averaging a loss of 23,000 jobs a month over the past three months.

And it's not only state and local governments that are laying off...

3) Private sector layoffs. According to Forbes, private sector layoffs are rising...

Chicago-based outplacement firm Challenger, Gray & Christmas reported that downsizing announcements surged to a 16-month high of roughly 66,000 in July, up 60% from the previous month, when employers said they planned to cut 41,000 workers. Last month’s layoff number was also 59% higher than the cuts recorded a year earlier, in July 2010.

A number of firms announced layoffs this month, including Merck, Borders, Cisco Systems, Lockheed Martin and Boston Scientific. A half dozen Wall Street firms also said they would be cutting their staffs. Goldman Sachs, HSBC, UBS, Credit Suisse, Barclays and Lloyds of London all said they planned to downsize.

4) QE2 is over. The Federal Reserve's second round of "quantitative easing", that is, buying billions of new federal debt (read: printing money), and dubbed "QE2", ended as of July 1st. The goal of the program was to prevent deflation, and in that respect it was successful. Indeed, it can be argued that printing $600 billion of new currency actually caused inflation. But more on that in a moment.

So, was QE2 a success? Well, according to TIME Magazine, maybe not so much...

At the end of the day, the Federal Reserve's program to purchase $600 billion of medium term bonds, which has been dubbed QE2 - because it was the Fed's second round of trying to lower interest rates by buying bonds, which in economic terms is called quantitative easing - did complete the task it was supposed to. Interest rates, i.e. borrowing costs, dropped. Since the start of the program last fall, mortgage rates dropped to a recent 4.6%, from 5%. Corporations, too, are now able to borrow more cheaply than they did before the program was started.

Yet, most Americans didn't see the pay off. Falling house prices and tight credit kept many people away from the housing market. Corporations didn't seem to use the money they saved on borrowing to hire more workers, at least not recently. So we come to the end of QE2 and the economy seems to [be] at best no better than when we started, and perhaps a bit worse. [Emphasis added]

So what happened to all that money that the Fed pumped into the economy? Why is credit still "tight"? You would think with all that liquidity, the banks would have plenty of money to lend. The short answer is that the banks who received that money from the Fed didn't want to lend it out to anyone but their "best customers" (ie, large companies).

The banks view small companies and individuals as "risks" to be avoided. And as we have seen, the large companies who benefited from lower borrowing costs, did not use the money they borrowed to hire new employees. Why? Because they didn't know what the ramifications would be of all the new regulations being pumped out of Washington, D.C. at a break-neck pace.

But what about the rest of the money that the banks got from the Fed? What did they do with that? Well, the banks used that money to invest in the stock market. That's why the Dow Jones and the other stock market indices were going up for so long. For all practical purposes, the Fed was pumping money into the stock market.

Well, the QE2 program just ended, so as you may have noticed, the stock market has now begun to falter... umm, crash? Today the stock market just dropped 512+ points. Don't be surprised if it gets worse. Investors seem to be fleeing the market. It seems that the safety of Treasury bonds is suddenly very attractive, even with the low rates of return. The banks are probably transferring their money (or planning to do so) even as I write this. In fact the rush by large investors to put money in the bank is so great, that one bank is charging fees to put money INTO the bank... unbelievable.

And if banks aren't buying stocks and investors aren't buying stocks, that means demand is down. And when demand goes down, prices naturally follow. Not just a few economists and stock market analysts have been predicting a stock market crash for some time now. The recent bull market was a Fed-fueled bubble that was bound to collapse. And a stock market crash will result in the loss of wealth and produce psychological pressure on investors to save rather than spend. That does not bode well for the economy.

5) Inflation is sapping spending power. The prices of oil, gas, food, and other commodities are all up. In fact, they are up so much that in some cases the increased prices are causing average families to cancel or postpone other discretionary spending. And, since consumer spending contributes roughly 70% to the economy, any negative effects in this area have serious repercussions.

And while it is convenient for the government to eliminate food and fuel prices from the general measurement of inflation, those are precisely the purchases that average American consumers are forced to make every single week, and the ones they are most familiar with. They know inflation far better than the government does. It hits them directly, and it hits them hard. High prices for food and fuel reduce wealth, and therefore spending in other areas. And if you don't think inflation is particularly bad, then what would you say if you found out it was close to 8.3%? That's what the folks at MIT are saying...


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6) Credit is still tight. Even with all that money that the Federal Reserve pumped into the economy, the banks are still reluctant to lend to small businesses and individuals. Since small businesses generate the majority of new jobs in this country, their inability to get credit prevents them from spending and hiring. Weak hiring by small businesses means that unemployment will remain stubbornly high for longer than necessary (if not in fact increase).

And when banks don't lend to individuals, then those individuals are unable to make the purchases they were intending to make with those funds. People don't borrow money from the bank at 4% or 5% so they can put it into savings at 0.25%. People borrow money in order to spend it. They take out loans to buy homes, cars, furniture, major appliances, or to start a business, etc. Inability for potential consumers to spend only hurts the economy. When home buyers can't get a loan, then it means that the supply of homes increases, and the price of homes decreases. Therefore...

7) Housing prices have dropped dramatically. (Ask me. I have personal experience in this area.) The effect of this price collapse is twofold. First, it puts some home buyers "underwater". In other words, the mortgage they took out costs well more than what the house they bought is now worth. Who wants to pay a $200,000 mortgage on a house that is only worth $150,000? The unfortunate result is that many people have simply walked away from their house and their mortgage. They packed up what belongings they could into their car, and simply drove off. Others have stopped paying their mortgage and are just waiting for the bank to foreclose on them. Dumping houses onto the market like this has caused the supply of homes to increase and the prices to decrease.

The second effect of this price collapse is that many senior citizens who were counting on the proceeds of a home sale to help fund their retirement years, are now forced to reduce spending and increase savings in order to make up the difference. Reduced spending means less money going into the economy. And increased savings is often accomplished by working later in life than originally anticipated. The continued presence of older people in the work force crowds out opportunities for younger people to enter the workplace.

8) Interest rates are TOO low. The Federal Reserve is trying to maintain artificially low borrowing rates in hopes that people and businesses will borrow (and hence spend). Therefore, they lend money to banks at interest rates that are at or near 0%. But as we have seen, the banks are unwilling to lend to just anybody who comes along, so the banks themselves are frustrating the plans of the Fed.

Worse still, because the banks have been able to acquire these huge sums of money from the Fed at or near 0% interest, they have had no incentive to pay out any significant interest rates to other lenders (ie, the general public). In other words, the interest rates that banks pay to lenders (on CDs or savings accounts for example) is completely dependent on the availability of cash. When cash gets tight, the banks are forced to raise the rates they pay to lenders in order to attract capital. When banks are flush with cash, because the Fed dumps it on them, the interest rates they pay drops.

The unfortunate effect of banks paying out low interest rates to lenders is that those who depend on their interest income to survive (ie, seniors), get burned. When seniors don't get the kind of interest income that they need, then it impacts their spending patterns. These people are forced to make decisions that might be unpalatable to other age groups. Do I spend the little income I have on food or medicine? Do I go to the restaurant, or just make a baloney sandwich? And since seniors are living longer and becoming an increasingly larger portion of the demographics, a negative impact in this area of the economy also has serious repercussions.

When the Fed stops printing money and cash becomes tighter for banks, then interest rates will rise and those who depend on interest income will feel wealthier and begin to spend again. The Fed's program of quantitative easing (ie, printing money) has been, in my opinion, a total failure. The Fed gave cheap money to banks who then refused to lend it to those who really wanted it to make purchases or to hire people for their small businesses. Instead, they lent it to big companies who then refused to hire new employees because they were afraid of what all the new government regulations might entail. And what money the banks didn't loan out, they invested in the stock market. Sure, it made them some money for awhile, but how much did those banks lose in the past month? How much did they lose in the past day? How much will they lose in the days ahead?

9) Government debt is too high. As of yesterday, one day after President Obama signed the new debt deal into law, the U.S. government borrowed another $238 billion which brings the national debt up from $14.29 trillion to $14.53 trillion. It just so happens that the entire national GDP at the end of 2010 was... you guessed it... $14.53 trillion!

In other words, if the United States government could confiscate the entire output of every single business in the country, it would just barely have enough money to pay off the national debt, which by the way, is rising faster than GDP! It has already been proven conclusively that a nation that reaches this point (ie, debt equals GDP), is at a significant risk of default. The credit ratings agencies have begun to issue warnings that the United States should reduce its debt-to-GDP ratio down to 74%, or face the possible downgrade of its AAA bond rating.

These problems might not be so bad if the U.S. economy was steadily expanding, clicking along at a robust rate, creating new jobs and new taxpayers. But instead, the economy is contracting, or... perilously close to doing so. The unemployment rate is at 9.2% and little change is expected in tomorrow's DOL employment report. This recession is already one of the longest in U.S. history, and if, as I suspect, a double-dip recession has already begun, then we could truly be calling this era the GREATEST RECESSION. God help us all.