Zero growth, mass unemployment, devastating monetary tightening
Monday, Jul 5th, 2010
Following Nobel Laureate Paul Krugman’s declaration last week that the U.S. is in entering a third period of great depression, more and more economists are following suit, comparing the scale of the crisis to that of the early 1930s.
“The economy is still in the gravitational pull of the Great Recession,” Robert Reich, former US labour secretary noted this weekend. “All the booster rockets for getting us beyond it are failing.”
The government jobs report issued Friday shows businesses have all but stopped hiring. Almost 8 million jobs have been lost to the downturn so far, perhaps forever.
The figures show that even if that pace of hiring were to double immediately, it would take until 2013 to recapture the lost jobs – and that simply isn’t going to happen.
Unemployment is hitting 9.5% nationally, and “real” unemployment, including the millions who have dropped out of the job market altogether, is higher than at any level since the Second World War.
Daryl Guppy, CEO at Guppytraders.com, notes that The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression.
“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment,” Guppy said.
The London Telegraph’s Ambrose Evans-Pritchard notes that “this really is starting to feel like 1932”.
“Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.” Evans-Pritchard adds.
“If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.” he writes, noting, however, that last week the Bank for International Settlements called for combined fiscal and monetary tightening, indicating that it is eyeing long term debt-deflation and mass unemployment.
“Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate.” Evans-Pritchard writes. “If even the BIS has lost the plot, God help us.”
A report last week by respected economic analysts Lombard Street Research also criticised plans for massive monetary tightening following the G20 summit.
“The chief effect of budget tightening will be to hammer global demand, causing a fresh recession, collapsing tax revenues, increased relief spending, and an increase in the recessionary, cyclical element of the budget deficit, to offset the cuts in the policy deficit.” Charles Dumas of Lombard stated.
“Because the private surplus will not be much reduced, neither will the public deficit be.”
Andrew Roberts, credit chief at RBS also issued a stark warning:
“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he said, predicting that the Federal Reserve will soon be forced into “monster” quantitative easing.
Howard Davidowitz, chairman of investment firm Davidowitz & Associates, describes the U.S. economy as “a complete disaster”, and doesn’t mince words when it comes to identifying who is to blame.
Davidowitz notes that President Obama’s spending, including the health-care bill, has created gigantic deficits that will take the U.S. years to recover from. “He is Mr. Mass Destruction,” Davidowitz says of Obama. “I mean he is a human destroyer. This guy has spent his way into oblivion and we don’t have a budget. He is surrounded by a bunch of complete incompetents, led by himself.”
Davidowitz describes Obama’s teleprompter sales pitches as “one big bag of empty words”:
This article was posted: Monday, July 5, 2010 at 9:57 am