Double-Dip Scare

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Published July 29, 2011

| FOXBusiness

The latest GDP numbers show the U.S. is in a cyclical downturn.

And now a double-dip scare is upon us, as first quarter results were revised down to stall speed of 0.4%. The second-quarter came in worse than expected at 1.3%.

Those numbers could get revised again into negative territory, meaning, we could now be in a double dip.

The U.S. Commerce Department also published GDP revisions going back to 2003. The revisions show the Great Recession was worse than reported.

The 2007-2009 downturn was actually a full percentage point deeper than reported, a 5.1% drop from the fourth quarter of 2007 to the second quarter of 2009, vs. the previously reported 4.1% drop.

The Commerce Dept. ranks this downturn as the second-worst since 1945, the worst being the 3.7% drop in 1957-58.

The arbiters of recession, the National Bureau of Economic Research (NBER), is slow to define the length of this downturn. It officially defines recession as "a period of falling economic activity spread across the economy, lasting more than a few months, though the textbook definition is two consecutive quarters of negative growth. It says the last time the U.S. was in recession was an eight month stretch between March and November 2001. 

NBER also says there have been just three double-dip recessions out of the 33 recessions it has registered since 1854, in 1913, 1920, and 1981. It defines a double-dip as an economic downturn that occurs less than 12 months after the end of a prior recession.

The International Monetary Fund has already defined a worldwide recession as a slowdown in global economic growth of 3% or less. Since 1985 the world has seen that four times, 19901993, 1998, 20012002 and now. U.S. recessions coincide, or can even trigger,  global downturns.

This all must be taken into context. The broad zoom perspective is the U.S.s slower growth comes off a larger baseit is always difficult to post higher GDP numbers off a larger base, especially for the worlds biggest economy at more than $14 trillion.

The U.S. grew rapidly since the early 80s. From 1980 to 2008 the US grew as fast as Japan, and faster than Europe. 

However, a mixture of massive government defense spending, an artificial dotcom, housing and credit boom, and illusory monetary and fiscal stimulus both added to growth and federal tax revenues, growth that was built on artificial starch.

The U.S. is again on a path of trying to buy its way to economic growth, as measures such as President Barack Obamas $800 billion stimulus package and unemployment benefits expire just in time for the Presidents re-election chances.

The President added the equivalent of France and Italy to the U.S. deficit on his watch via not just stimulus, but also mortgage modification programs, cash for clunkers, and growth in Medicaid

On President George W. Bushs watch, the government increased the federal deficit more, by 85%, or $4.9 trillion. That was over eight years. President Obama increased it by $3.8 trillion in less than three-years time.

And now the President and Congress want U.S. taxpayers to pay for the interest costs on that spending to avoid a downgrade, as the jobless rate continues to grow. Including interest owed on all government borrowings, including for Social Security, youll see the cost is about $400 bililon, or about the size of Belgium.

Meanwhile, the Government Accountability said earlier this year that there is more than $200 billion in duplicative waste in government. And thats just duplicative. Federal analysis shows more than $60 billion in Medicare waste. Theres more than $1.5 trillion in government real estate around the country. On and on.

But instead, theres a knee-jerk reaction to hit you in your wallets with more taxes, notably on the job creators in this country, the small businessman.

And so we hear more talk in Washington of a balanced approach, of shared sacrifice, of revenue raisers, all code words for massive, job-killing tax increases.

The rhetoric around "fairness" and a balanced approach to the debt-ceiling debate is directed at getting the so-called rich to pay more in taxes.

After all, those who make more have the ability to give back more. But that argument misses a key point: 47% of U.S taxpayers do not pay income taxes, and a very small percentage pays the overwhelming bulk of taxes now.

The top 1% of earners pays 38% of personal income tax, according to the National Taxpayers Union. The top 5% pay 58.7%. The bottom half of this country pays 2.7%.

If this is about fair share, does that mean lower-income earners need to pay more? And, can the wealthy bear any more of the tax burden in this country without wiping out wealth altogether? 

A better mixture of private investment nurtured by lower tax and regulatory policies is what is needed now. 

Instead, the Administration has terrified businesses by trying to burnish its legacy by reforming three massive sectors of the U.S. economy all at once, health reform, finance and energy. 

Yes put back up the guard rails on Wall Street, with players more crooked than a bag of corkscrews. 

But watch all the banana peels the government has thrown in the way of companies in the form of new rules.

And keep in mind that virtually no one in Congress has read these reform bills in full. Keep in mind Democrat Nancy Pelosis comment about healh reform, We have to pass the bill so that you can find out what is in it.

Keep in mind the Pelosi-like statement Democrat Sen Chris Dodd made about the financial reform bill, no one will know until this is actually in place how it works.

Dodd Frank is a 2,319 page bill versus the 2,409 page health reform bill. Sarbanes Oxley, an earlier finance reform bill, had 16 formal rulemakings. Dodd-Frank has more than 380 new rulemakings and counting, 84 of which will be written by new agencies, which now number 13. The government is leaving companies feeling like theyre standing, stranded, in traffic.

No economy survives on central planning. Greece didnt. Egypt didn't. The Soviet Union didn't. China wont, it is believed to have untold trillions, yes trillions, in rotten debt in its banking system.

So, besides economic demand problems, are you surprised an estimated $1.1 trillion sits parked on S&P 500 corporate balance sheets? That number comes from Bank of America-Merrill Lynch chief U.S. equity strategist David Bianco.

Meanwhile, economists argue that we are putting the lessons of the Great Depression in reverse. Tax hikes and drastic spending cuts are not the way to go.

Today's report on gross domestic product indicates that the U.S. economy has grown at a disastrously slow 0.9% rate for the entire first half of 2011, said Economic Policy Institute economist Josh Bivens in a statement. Washington's rush to fiscal austerity will make the problems of slow growth and joblessness even worse.

However, GDP lately has been helped by powerful growth in U.S. corporate profits. U.S. companies reported a solid second quarter in corporate profits. But this is also a profit margin story. The profit growth was done with 7.9 million less people who lost their jobs since the recession began. That reduced overhead naturally produces a lot of cash for companies.

Yes we see companies deploying cash for mergers and acquisitions, stock buybacks, and dividends, not jobs, causing a lot of hair-tearing in D.C. 

However, corporate profit growth, which is the driver of the business cycle, slowed from the prior quarter to 16% from 26%. There may be a deceleration here consistent with a cyclical slowdown.

All that's due to no demand. And scary new government policies. The jobless rate is now 9.2%, almost double the 4.9% rate reported in April 2008. When theres scary government policies and no demand companies dont produce, they dont hire. 

There is still a lot of muscle memory from the 2008 recession, says economist Lakshman Achuthan, co-founder of the Economic Cycle Resarch Institute, who says there's now talk of a double dip scare. 

Frank E. Nothaft, chief economist of Freddie Mac, wonders if the U.S. economy is in a soft patch or double dip, but then says it is unlikely.

Bill Watkins, executive director of the Center for Economic Research and Forecasting, fears a double dip, too, if the government blows past the debt ceiling deadline and doesnt pay its bills.

Talk is of more stimulus from the Federal Reserve, which already has a balance sheet at more than $2.5 trillion. Talk is the Fed would have to print $850 billion to fill the holes in the U.S. economy. That, as its being asked to backfill holes in Europes banking system via dollar swaps, already having conducted swaps in the hundreds of billions of dollars.

Hovering over all this is the D.C. debt fights, dysfunction in high definition. Its been well known that the management of fiscal policy by the White House and the U.S. Congress since the Reagan era has not been so state of the art.

And now Standard & Poors John Chambers, head of its sovereign ratings division, warns the acrimonious fighting over the debt ceiling is the main reason why his credit ratings agency put the U.S. on a fast-track for a possible downgrade to its Triple-A. S&P has kept that top notch rating for the U.S. since 1941, Moodys Investors Service since 1917. 

Republicans see little political incentive to raise the debt ceiling, even though they raised it 7 times under President George W. Bush. Back then Senator Barack Obama, Sen. Harry Reid, and Rep. Nancy Pelosi fought a debt ceiling hike as disastrous for our children, though they want one now.

However, for now the markets may care more about deflation and a global and U.S. economic downturn more than default. 

The 10-year Treasury note yields broke down below 3% to 2.8%, still around historic lows. Even the 60 to 70 basis point hike JPMorgan Chase warned in the note due to a downgrade doesnt mean much, as the U.S. could still borrow at teaser rates.

Default is another story, meaning, missing one payment on one Treasury bill, note or bond, which would be sheer chaos. The same 60 basis points rise in Treasury yields that JPMorgan is talking about occurred in 1979, when the U.S went into technical default after it failed to redeem $122 million of Treasury bills after a debt ceiling fight under Democrat president Jimmy Carter, and after a computer glitch. Yields then stuck adhesively high for some time after.

A default would spike yields higher at multiples of that rise, but no one can really say by how much. 

Still, the decades-long downward trajectory in Treasury note and bond yields is continues unabated.
The dollar, too, is down by more than 50% versus a basket of currencies since 2001, and its now veering toward its record low hit in the summer of 2008. Its breakdown versus the Swiss franc and Japans yen mirrors the crumbling in White House-Congressional talks. 

Gold is breaking above $1,600, still below its inflation adjusted $2,470 level struck in 1980. Measured in the Swiss franc, gold is overvalued by about two-thirds, 60%, says the Economist Magazine. Never buy on the end of the world. You cannot, after all, take it with you, it warns tongue-in-cheek. Meaning, you cant take with you unrealized gains. Investors who are sitting on such gains on their gold positions would do well to remember this before the current bubble deflates, it advises.

And again that might be because the story is not inflation, but deflation.

Japan presents an important analogy to the U.S.s fiscal predicament. Japans Diet, its parliament, is notoriously, neurotically dysfunctional, government. The infighting has made Japan the worst borrower in the world, with high debt, deficits and weak productive capacity. Japans domestic savers own more than 90% of Japans debt. 

The U.S. government owns about two-thirds of the U.S. debt via intra-governmental holdings in Social Security and other federal programs.

However, the Japanese yen is still chugging along. Japans bond yields have stayed pancaked since its fiscal collapse in the early 90s, in fact, at 2.11% on average since 1987.

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