The following was published on the Green Shadow Cabinet website.
July 11, 2013
Jack Rasmus, Chairman of the Federal Reserve
Both the U.S. and global economy are at a critical juncture. Six years after the financial crisis that erupted in August 2007 and the collapse of the real economy that followed—except for asset prices (stocks, bonds, derivatives, etc.) and capital incomes (profits, dividends, capital gains, etc.)—in real terms the U.S. economy has experienced six years of the weakest recovery of any recession since 1947. Meanwhile, the remaining global economy has steadily slowed since 2010, commencing in 2012 to drift toward stagnation and a recession once again.
Global Economy Overview
The Eurozone’s 17 economies continue to slide into an even deeper and more widespread recession. The southern periphery—from Greece to the Iberian peninsula— remains mired in a bona fide depression. Italy, Slovenia, Hungary, and the Czech Republic are in deep recession, heading for the same. The core economies of France and the Netherlands have recently entered recession conditions. Meanwhile, the acknowledged engine of the Euro economy, Germany, recorded a stagnant 0.1 percent growth rate in its most recent three-month quarter.
The rest of the European Union economies have begun to topple into recession or are slowing rapidly. The UK recently experienced a triple dip and Denmark and Finland have crossed the recessionary threshold, with Sweden not far behind.
Entering its sixth consecutive quarter of GDP decline, Euro region unemployment is at record levels—the highest in half a century. Business activity and investment plans continue to contract as bank credit dries up. Governments continue to implement austerity programs as the banking system slides toward an inevitable crisis that threatens the entire global economy.
Elsewhere, China’s economic growth is slowing significantly, from its previous 10-12 percent annual rate just a few years ago to an official 7.8 percent today—unofficially more like a 7 percent rate and, according to some independent estimates and sources, a 5.5 percent growth range. The main engine of China’s past economic growth—manufacturing and exports—is driving the slowdown. Also ominous, an increasing proportion of growth is skewed toward real estate and high end housing, which is, in turn, fueling property speculation and price bubbles.
Other BRICS (Brazil-Russia-India-South Africa) economies are slowing even more rapidly, as exports to China and Europe decline. After growing 8-9 percent, Brazil’s economy fell to nearly zero in 2012 and has continued to stagnate in 2013 at less than 0.5 percent; Russia’s previous 5 percent GDP is now hovering around 0.5 percent; while India’s annual growth rate has fallen to the slowest in the past decade.
In the second-tier global economies, the picture is similar. After growing 4 percent in 2012, the Mexican economy appears to have entered recession or, at minimum has stagnated, while throughout Latin America economies are growing at only around 0.5 percent—South Korea teeters on an economic precipice and economies from Turkey to South Africa are slowing rapidly.
Apart from the U.S., the only advanced economy registering reasonable growth in recent months is Japan, at 0.9 percent for the first quarter 2013. Having experienced another recession in 2012, its third triple dip since 2008—capped by a -3.7 percent decline in the Fall of 2012—Japan, in desperation, embarked at the end of 2012 on a radical fiscal-monetary stimulus program. Based on a massive Bank of Japan central bank monetary injection, the Japan experiment initially produced a boom in stock prices—83 percent in just 5 months—and other financial assets, short term. Patterned after the U.S. Federal Reserve’s multi-trillion dollar quantitative easing free money injection, the new Japan policy aims at stimulating the Japanese economy at the expense of other Asian and global economies—which it has begun to do. With little evidence of real economic stimulation, the new Japan central bank and government policies appear to be resulting in more instability in global bond markets and slower real growth of neighbors like South Korea, while intensifying an already spreading global currency war.
This global economy (excluding U.S.) scenario was summed up in a recent Brookings Institute-Financial Times report this past spring. The overall picture is one of the global economy “unable to achieve lift-off and facing the risk of stalling.” In aggregate, the report’s “Tracking Index for the Global Economic Recovery (Tiger),” shows that the advanced economies as a group have been mired in a shallow recession since late 2011 and continue to stagnate, at best, today.
In attempting to address the U.S. and global economic crisis the past six years, governments and economies worldwide have pumped tens of trillions of dollars and other currencies into their banking systems and shifted trillions more to non-bank corporations and investors in the form of tax cuts and other direct subsidies. But little of that has flowed into the real U.S. economy or into U.S. investment that would create good jobs and incomes for the 95 percent majority of households. Much of the money, tax and subsidy injections have been paid out either as dividends or used to buyback stocks from shareholders, diverted to investment in emerging markets, or just plain hoarded as cash on corporate balance sheets or in wealthy individuals’ sheltered offshore accounts.
U.S. multinational corporations alone admit to hoarding $1.9 trillion in their offshore subsidiaries. The S&P 500 largest U.S. corporations hoarded nearly $2 trillion, big banks sit on more than $1 trillion in excess reserves, and currently wealthy U.S. investors have stashed between $7 to $11 trillion in two dozen or so offshore tax havens around the world, from the Cayman Islands in the Caribbean to Switzerland to Vanuatu in the pacific and beyond.
This creation of trillions of dollars of income and wealth—concentrated globally among corporations, investors, and very high net worth individuals (with $25 to $100 million income flow gains per year)—has resulted in the fueling of renewed speculative investing and financial bubbles around the world. Little of which has resulted in real investment, jobs, income growth for the vast majority of households and therefore real economic recovery. The new bubbles include: U.S. stock values, junk bonds (in the U.S., Asia, and Europe); U.S. farmland prices and Real Estate Investment Trusts, emerging markets investment funds (EMFs); Japanese stocks (recently), China real estate and property values, foreign (currency) exchange traded funds (ETFs), and unknown magnitudes of diverse derivatives which are privately traded, opaque, and thus hidden from public disclosure.
The indicators of a growing financial instability include not only the accelerating and multiplying financial asset bubbles worldwide—stocks, bonds, real estate, derivatives, and so on—but the more recent beginning collapse of several classes of financial asset bubbles. World commodity prices from gold to oil to metals have fallen 30-40 percent and continue to do so. More recently, bond prices from U.S. Treasuries to corporate high yield junk bonds to China stocks have begun a decline that could accelerate still further.
Whereas the 2007-08 financial crisis centered on subprime mortgages, the next financial crisis may come from a bond market collapse. If so, the next crisis may prove more severe and difficult. For the real side of the economy today is far weaker than in 2007. And should another financial crisis erupt, most likely centered in Europe or Asia, the consequences will prove far more severe.
U.S. Economy Overview
Despite the continuing fragility of the global financial system, the mainstream view in the U.S. press—and held by many economists today—is that the U.S. economy is in definite recovery mode, about to take off no later than the latter half of 2013. The “U.S. economy is about to take off” view employs one or more of the following arguments:
- housing is clearly recovering with home prices having risen more than 11 percent over the past year
- consumer confidence is at its highest in years
- the federal deficit is falling so Congress won’t cut spending any further and may even reverse the recent sequestration cuts
- the Eurozone crisis has stabilized
- banks are starting to lend to businesses
- the job market is starting to heal
- the slowdown in China will not be allowed to continue by China policymakers.
In assessing the condition of the U.S. economy, it is necessary to consider the condition of the four broad sectors of the economy that typically add up the total economic activity of the U.S.—sometimes called the Gross Domestic Product, or GDP.
The Longer Term Trendline
U.S. GDP has been fluctuating between virtually zero growth and 3 percent. But when special one-time, one-off factors are adjusted for, the average growth rate is actually no more than 1.5 percent on average—or about the same average growth in 2012 and 2011. In other words, the economy has remained stuck in an historical, well-below-average recovery for the past two and a half years. Moreover, when properly further adjusted for actual inflation and for population growth, the U.S. growth rate is averaging well less than 1 percent annually.
For example, in the 3rd quarter, GDP rose by 3.1 percent. But the growth was heavily determined by a one-time major surge in largely defense expenditures. This 3rd quarter 2012 defense spending surge reverted back to its longer-term trend in the 4th quarter 2012. The economy and GDP then quickly collapsed to a meager 0.4 percent GDP rate.
The 4th quarter would have been even lower were it not for a surge in business spending on equipment in anticipation of a possible tax hike with the fiscal cliff negotiations scheduled to conclude on January 1, 2013. But that late spending surge has also proved temporary as well, flattening out and declining in 2013. Another one-off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which accounts for a full 1.5 percent of the total 2.5 percent of the 1st quarter 2013 GDP. And that one-time exceptional event disappeared, too, in the 2nd quarter. Adjusting for these various one-time factors reduces the real GDP rate for 2012 to no more than 1.5 percent, or half the normal for this stage following a recession.
As noted previously, moreover, even that is an overestimation. What’s important is real GDP, not just price increases for goods and services. So adjustment is typically made for inflation. But the official inflation index used to calculate real GDP is called the GDP Deflator, the most conservative measure of inflation; that is, the index that minimizes inflation the most. And by minimizing inflation, the result is to maximize real GDP, making GDP appear larger than it actually is. Finally, when population growth is taken into account and per capita GDP is considered—i.e. the real effect of growth on real people—than the growth rate is adjustable further by another 0.5 percent. We’re now talking about U.S. GDP and economic growth at a sub-par less than 1 percent. That’s economic stagnation and an economy teetering on the edge of another recession.
Perhaps anticipating this possibility, the U.S. Bureau of Economic Analysis is planning this summer to significantly revise the way it does. That revision will increase GDP by as much as $500 billion, according to a report by the global business daily, The Financial Times, this past April 2013. Already a relatively weakly accurate indicator of the performance of the U.S. economy, GDP will likely soon become even more so.
HOUSING AND CONSTRUCTION: Perhaps the most often referred to indicator that the U.S. economy is poised for sustained recovery is residential housing. Home prices are again on the rise, however, that rise is only 10.9 percent over the past year, which compares to a price decline of nearly 40 percent since 2007. What is driving the moderate price rise is also important, for it indicates the weak conditions still underlying the residential housing sector.
Much of the new housing construction, to begin with, represents the construction of apartments. With more than 14 million foreclosures having occurred since 2006 and another 1.1 million in the banks’ pipeline, those who once owned homes need to live somewhere. Investors and builders are therefore rushing to build multi-family dwellings, which is not driving single family home prices. In contrast, much of the single family housing price gains involve sales of existing homes and not the construction and sale of new homes. Existing home sales to that sector have little positive effect on the real economy and GDP, even though they are the primary driver of home prices.
Existing homes sales prices are rising for several reasons: first, a rush by new homebuyers to purchase as mortgage rates appear to have hit bottom and are rising rapidly. In the most recent two weeks in late May, mortgage rates rose from 3.3 percent to 4.2 percent, as the Federal Reserve signaled likely further rate hikes. A second source of the 10.9 percent home price increases has been rising demand for unsold bank housing stock by professional investors who are buying up banks’ foreclosed housing inventory in large blocks of units. This has become a major speculative play for investor groups and other financial asset management groups. The price rises are located mostly in the worst hit regions like California, Arizona and Florida, where the greatest potential price hikes and thus speculative capital gains are possible. In some areas, 40 percent and more of the home buying is by professional investor groups.
The speculative play driving prices works as follows: banks borrow from the Federal Reserve at nearly zero percent, lend the money to the speculators at some higher interest rate, and make a profit while getting the foreclosed assets off their balance sheets. The speculators then purchase the banks’ inventory of foreclosed homes at a nice low price, charge the foreclosed owners rising rents for a couple of years until the home price rises, then flip it for a capital gain. Federal Reserve free money enables it all.
It is further important to note that residential housing is only one part of the larger construction sector. The latter includes government (federal, state and local) construction spending as well as business spending on structures like industrial plants, malls, office buildings, hotels, resorts, etc. Both the business construction and government construction sectors have been declining in activity and price since 2010. Government sector construction spending is now at a 7 year low.
The only sector of construction showing growth, therefore, is residential—and most of that is apartment building and existing home re-sales. Sales of new single family homes has risen, but from a low of 273,000 units in February 2011 to only 417,000 this past March 2013, a gain no doubt, but one which compares to a high of 1.4 million units sold in 2006. With real median family disposable income continuing to fall 1-2 percent per year, there is little meaningful long term demand to fuel recovery in even residential housing.
All this does not represent a sector that has “taken off” in terms of broad and sustained construction activity capable of driving the rest of the economy. On the contrary, it is a recovery that is minimal, remains highly fragile, and could quickly retreat, painting a picture of a stop-go shallow trajectory not dissimilar to the stop-go picture in the U.S. jobs market and other market sectors of the U.S. economy at present.
CONSUMER SPENDING: Consumer spending represents 70 percent of the US economy. Consumer spending by the wealthiest 10 percent households has risen, however, driven by continued stock market gains. But median households’ spending, little influenced by stock gains, has not. Median family consumer spending is driven by gains, or lack thereof, in real disposable income, which is determined in turn mostly by job and wage gains. To the extent jobs have been created since 2008, they have been mostly low pay jobs at $13 per hour or less. Independent studies show 60 percent of the jobs lost since 2008 have been high pay (greater than $18/hour) jobs; whereas 58 percent of the jobs created have been low pay (greater than $13/hr.) jobs. Meanwhile wage increases for those previously employed have also been minimal to nothing, and even negative, as wage and benefit cuts have been typical and widespread since 2008.
As a result of low pay job creation and stagnant or falling wages and benefits, real disposable family income has been steadily declining since 2008 at 1-2 percent per year. That leaves median family consumption dependent upon spending based on credit cards and/or upon withdrawals of savings. Credit card spending has risen and median and below households are once again adding more household debt. Savings rates have also fallen from a 2009 high of 6 percent to today’s 2 percent.
As much as half of all withdrawals from 401k plans today are for paying monthly bills, according to various studies. What that means is consumer spending for the bottom 80 percent or so households rests on a fragile base as well.Only the wealthiest 10 percent households have been spending aggressively, driven by the wealth effect of doubling of stock market investments in the past few years. But should the stock market retreat, even consumption by the wealthiest 10 percent will no doubt take a hit. And as of June 2013 it appears that is about to happen. Other key factors undermining future household consumer spending include:
- continued job reduction in the government sector, especially at the local government level
- continued rapid increases in services like health care, education, as well as local government taxes and fees
- education costs continuing to rise at double digit rates
And most economists underestimate the negative impact on real consumption that will no doubt result from the introduction of Obamacare in 2014 and thereafter. Health insurance premiums have already begun to rise at double digit levels and surveys of insurance companies show they plan to continue such increases in 2014. Health care, education, and other sources of inflation will divert spending to cover the rise in prices for these items, and correspondingly reduce real spending elsewhere, resulting in a further drag on consumption and the economy into 2014. Federal government cuts in cost of living adjustments for Social Security and other Medicare services—should they occur as proposed in Obama’s budget—will reduce consumer household spending even further.
In short, given the above developments, it is difficult to see where the solid foundation exists for consumer household spending to drive the U.S. economy. Nevertheless, the mainstream view still points to surveys showing rising consumer confidence, now at a six year high. But consumer confidence is highly volatile month to month and seldom correlates necessarily with consumer spending. The rise in consumer confidence may instead reflect more positive feelings of job security, or falling gasoline prices, or the seasonal receipt of tax refunds. In fact, core inflation measured by the CPI in the U.S. has continued to decline for months now and is approaching zero percent—i.e. deflationary conditions. Deflation is a strong indicator of a slowing economy. It is also a great danger to recovery. Deflation typically reflects a lack of consumption demand and not rising consumption. Moreover, in the period immediately ahead, deflation not only slows consumer spending but also slows business investment spending—for a double negative impact on the economy.
MANUFACTURING & EXPORTS: If the U.S. consumer is not the likely driving force for a U.S. economic take off later this year, perhaps the foreign consumer is? In other words, perhaps U.S. manufacturing and manufacturing exports can play that role. The Obama administration in late 2010 bet that would prove the case. But it didn’t. Manufacturing was heralded as the sector that would drive the remaining U.S. economy to a sustained recovery. A modest recovery of manufacturing did occur after 2010, driven significantly by U.S. export sales. Some employment in the sector occurred. But with only 12 million out of a total 155 million labor force employed in manufacturing in the U.S., and with manufacturing constituting only 12 percent of total GDP, it was a lie by Obama from the start that manufacturing could lead the U.S. economy onto a sustained growth path.
The moderate previous growth in manufacturing was stimulated largely by U.S. exports in 2011-12, as Federal Reserve monetary injections (QE and zero rates) drove down the value of the U.S. dollar and made it more competitive with foreign currencies. That has now ended, as other sectors of the global economy—notably Japan, in Asia, and Europe—have copied the U.S. monetary policies to drive down their currency values as well—and as the U.S. Fed has signaled a rise in U.S. rates and the dollar. Slowing economies in Europe, Asia and Latin America have also contributed to a slowdown in U.S. exports. As a result, U.S. exports have stagnated over 2012-2013. After growing at a 25 percent rate in 2010, exports have risen a mere 0.8 percent over the past year.
There is therefore no hard evidence that the foreign consumer will drive a U.S. economic recovery in 2013-14, any more than there is evidence the U.S. consumer will.
With the exports rug pulled out from under U.S. manufacturing, that sector has rapidly declined every month since January 2013. In May factory orders also declined for the first time in six months, signaling continued production decline. By early June, the key aggregate indicator for manufacturing, the ISM Index, after falling for six consecutive months, finally crossed into contraction territory with a reading of 49—the lowest reading of the index since June 2009.
With rising U.S. interest rates and a rising dollar, the negative effects on exports and U.S. manufacturing activity will continue to deepen.
THE JOBS MARKET: It is not surprising that the jobs market in the U.S. has continued to bounce along the bottom—neither growing robustly nor producing more unemployment. The US jobs market is one of ‘churning’ in various dimensions.
Never really significant, less than half the manufacturing jobs lost since 2008 have been restored, and even fewer construction industry jobs. Moreover, manufacturing job creation has now come to a virtual halt. There is no net job creation in manufacturing and construction job creation today also remains minimal, as home builders have reduced new home construction in order to reduce supply and thereby raise the price of new homes. Builders would rather produce fewer, higher priced and more expensive homes than build more lower priced homes, which means a lower rate of job creation in home construction than otherwise. Apart from homes, commercial construction remains dead in the water with few net job gains underway.
In contrast to manufacturing and construction, service sector jobs have increased. However, the Obama administration’s much-touted creation of 5 million jobs since 2009 have been largely low-paid, part-time and temporary jobs. Full-time permanent jobs have been increasingly replaced with part time and temp contingent jobs, paying much less with far fewer benefits—reflecting a kind of job market churn. In yet another kind of churn, the 5 million jobs created have been offset by the nearly same number permanently leaving the labor force. And in still another example of churn, the number of jobs created monthly for the past several years has averaged, at best, the number needed to simply absorb new entrants into the labor force. The overall picture is a job market in the U.S. basically marking time, neither collapsing nor growing robustly. The problem with the job market in the U.S. today is therefore not the further loss of jobs; the problem is the lack of significant job creation and jobs with affordable pay and benefits and with normal hours of work.
Exacerbating this weak jobs picture has been the continual loss of jobs in state and local government, mostly teachers, at the rate of 10-20,000 a month since 2011. With the recent sequestered spending cuts implementation, coming soon added to this trend will be thousands of federal government workers losing jobs.
It has been estimated that it would take a monthly rate of new job creation between 300,000 and 400,000 for 6 consecutive months to constitute a true recovery of the jobs market. But the scenario for the coming year will continue to be a jobs market that is neither growing nor declining, but instead marking time and churning.
This sad scenario for the U.S. jobs market is not a predictor of continued lack of real economic recovery and growth in the U.S., but is a clear symptom that such recovery and growth has not really begun at a level to make a difference in the jobs picture.
BUSINESS SPENDING: Business spending includes three key dimensions: spending on new equipment, new buildings and structures, and inventories. As previously noted, business spending on new commercial structures has been flat to declining for years and will continue, longer-term to be the same, although month to month may indicate temporary changes. With regard to business inventory spending, the surge in the 1st quarter of 2013 has reversed in the second. And without a clear, faster growth in overall household consumption spending on goods, business spending on inventories in anticipation of rising consumption will not follow. That leaves business spending on equipment investment, which has flattened out in early 2013, but may rise later in 2013 as the Obama administration and Congress pass ever more generous tax cuts for corporations as part of the anticipated major U.S. tax code overhaul by Congress.
GOVERNMENT SPENDING: A big drag on the U.S. economy has been, and will continue to be, reduction in government spending at all levels—state and local as well as federal. Representing nearly 24 percent of U.S. GDP, continued reduction in government spending will continue to reduce GDP. In 2011 and 2012, government spending cuts reduced U.S. GDP by approximately 0.5 percent percentage points in both years. What was a GDP averaging about 1.7 percent (unadjusted for real inflation and population growth), would have been 2.2 percent for each of those years had government spending just been kept constant and not cut.
State and local government spending has fallen every quarter since October 2009. With the exception of two quarters, federal spending has declined every quarter since October 2010, and at double digit levels since October 2012. With rising costs of pensions, health care and public education at state levels, combined with states’ racing to the bottom to provide ever more business tax cuts, the outlook for continued spending reduction in most states and local government remains highly likely. Similarly, $1 trillion in sequester spending cuts at the federal level appear likely to be retained as time goes by, and another round of deficit cutting before the end of 2013 is no less likely at the federal level. In short, government spending is projected to continue to serve as a significant drag on GDP and economic growth in the U.S. into 2014.
It is difficult to see where all the “take off of the U.S. economy later in 2013” is to come from. A detailed look at the U.S. economy simply does not support that prediction. More likely is an economic scenario for the U.S. of continued sub-par true economic growth fluctuating between zero percent and 1 percent, as has been the case since 2009.
BAD POLICIES AND TAIL RISKS: GDP and economic sector analyses do not constitute the full picture of the possible future trajectory of the U.S. and global economy. For that broader view, both economic policy and unanticipated but likely events are necessary to consider as well.
This stop-go, bouncing along the bottom growth path characterizing the U.S. and global economy today is typical of an epic recession, in contrast to a v-shape recovery typical of normal recessions. The stop-go characteristic of recovery may continue for years. It could also mean a slipping into a double dip contraction along the way. Thus far that has not occurred for the U.S. economy, but double (and triple) dips have been the rule elsewhere in the global economy where the policy responses to the global recession have been weaker than in the U.S. Unlike the insufficient and poorly designed fiscal stimulus of 2009-10 in the U.S., the more fragmented economy of Europe opted for immediate austerity fiscal cutting. It has since relapsed into double dip recessions, and a bona fide depression in its weakest sector of the southern periphery from Portugal to Greece. In the U.S., the Federal Reserve’s central bank immediately bailed out the big financial institutions with a $10 trillion plus free money injection. That prevented a further banking collapse but did not generate a real side economy recovery. That monetary policy (QE+ zero rates) has now turned counter-productive and is slowing the U.S. economy. In contrast, in Europe once again, there is no true central bank. Consequently, banking instability remains more of a problem and the likelihood of a banking crisis erupting there more the case. While the U.S. fiscal and monetary response was insufficient, the European similar response was immediately counter-productive and ineffective. Hence, the Euro economy has fared worse and now is the weak link in the global chain.
Outside the U.S., it appears increasingly that policymakers are attempting to replicate the U.S. policy mix and strategy, even as the latter increasingly reveals its declining impact and limitations. Across the global economy (with perhaps the exception of China), governments are attempting to stimulate their economies with a combination of massive central bank money injections (QEs and zero rates) and some token fiscal stimulus. Perhaps the best example is Japan’s 2013 shift to massive central bank liquidity injections and token $100 billion in fiscal stimulus.
In Europe, a hiatus of sorts in implementation of austerity cuts appears to gain traction. Not an end to austerity, but just a delay. In the meantime, more emphasis on directly attacking workers’ incomes under the codename of labor market reforms is a new policy element added to the old austerity. In addition, a belated attempt to create a true central bank in the Eurozone has been the proclaimed policy objective since the summer of 2012—but has not yet been implemented and will not likely occur until 2014.
This raises the possibility of policy choices becoming an important potential determinant of the global and U.S. economies trajectories in 2013-14, as well as unanticipated tail events as well, that all should be integrated into a prediction for the U.S. and global economies in addition to economic indicators or a more normal economic analysis.
As noted previously, renewed banking instability in Europe and the continuance of deficit cutting in the U.S. both could serve to knock an already fragile U.S. economy off its even slow growth pedestal and into a bona fide double dip recession. Another tail risk is if the Federal Reserve in the U.S. undertakes policies, or even signal policy changes, with regard to QE and zero rates that spook credit markets and result in a faster than anticipated rise in interest rates. That possibility might well result in a sharp contraction in one or more of the bond market bubbles now escalating, in a sharper than expected stock market correction, or some other financial busted market like money market funds, real estate investment trusts, or the like.
Still another policy related “risk factor” globally is the radical shift by Japan toward its own massive QE policy. Already upsetting the economies of its Asian neighbors, the Japan case may also unpredictably destabilize global bond markets as well as significantly intensify an already growing global currency war.
A longer shot tail risk is the case of China. Its banking system appears increasingly sensitive at the local level to speculation in real estate and hot money global inflows. Policymakers attempts to cool off inflation there run the risk of slowing the rest of the economy at a time when global demand for China exports is falling and its currency, the Yuan, is rising relative to other countries. There are limits to how much central government investment projects can offset this, having already since 2008 embarked upon a massive direct government investment policy. In other words, an unexpected crisis in China real estate and local banking might serve to precipitate further global financial instability as well.
Given the above economic data analysis for the U.S. economy, global economic GDP trends, the limits and negative effects of economic policies still being pursued in the U.S. and globally, and the possible unanticipated tail risks this writer has updated previous economic predictions for the U.S. and global economies.
Economic Predictions 2013-2014
1. The U.S. will enter a double dip recession around late 2013 or 2014, with the proviso that either U.S. policymakers will continue deficit cutting or a more severe banking crisis will erupt in Europe.
2. The Fed will begin reducing its $85 billion a month liquidity injection significantly within the next 12 months. Monetary retraction will severely disrupt both stock and bond markets. A major stock market correction will ensue and may have already begun at this writing. The additional financial markets at greatest risk are corporate junk bonds, real estate investment trusts, and money market funds.
3. There will be another round of deficit cutting later in 2013 and it will be associated with a major revision of the U.S. tax code. That tax code change will include a big reduction in corporate tax rates, from the current 35 percent to somewhere around 28 percent, perhaps phased in over time. Multinational corporations will also get a sweet deal on their $1.9 trillion offshore cash hoard, paying less than their legally required 35 percent rate. R&D tax credits and other depreciation acceleration tax cuts will also be part of the deal.
4. In the next round of deficit cutting, Social Security and Medicare spending will be cut a minimum of $700 billion—already proposed in Obama’s 2014 budget—and perhaps much more.
5. The much-touted current housing recovery will stall and single home price increases will slow and perhaps even level off. (More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013.) Institutional speculators will continue to drive the market and once again convert it into a speculators dream, different in form from the subprime fiasco, but similar in content.
6. Manufacturing and U.S. exports will slow still further, drifting in and out of negative growth as the global economy and world trade continue to contract further.
7. There will be no sustained recovery of jobs over the coming year (today’s official jobless rate is total 21 million). High wage jobs will be replaced with low wage, full-time with part-time/temp jobs, current workers with jobs leaving the labor force, and new lower paid entrants taking their jobs.
8. The current negotiations between the Obama administration and Pacific Rim countries to create a Trans Pacific Partnership (TPP)—NAFTA on steroids—will be concluded, but will not pass Senate approval until after 2014, to take effect as late as 2017.
9. With regard to the global economy, the Eurozone sovereign debt crisis will worsen and the banking system grow more unstable. Austerity policy will focus on wages and benefits.
10. More economies in the Eurozone will slip into recession, including Denmark and, perhaps, Sweden. France’s recession will deepen. Germany will block the formation of a bona fide central bank in the Eurozone and the UK will vote to leave the European Union.
11. China’s growth rate will drift lower and it will be forced to devalue its currency, as Japan and other currencies are driven lower at its expense by QE policies. A global currency war, now underway, will intensify.
12. Gobal trade will continue to decline.
13. Japan’s risky experiment with massive QE and modest fiscal stimulus will prove disastrous to the global economy, resulting in still more speculative excess and financial instability. Japan’s stock and asset markets will benefit in the short run, but not the rest of the economy in the long run.
14. Capitalist economies worldwide will converge around QE monetary policies, more modest deficit spending cuts, and a more focused attack on workers wages and social benefits like pensions, healthcare services, and the like—i.e. the U.S. formula. The consequence will be more income inequality worldwide and no noticeable positive impact on economic growth. The next financial crisis may not be a crash of a particular market, but a slow stagnation of markets, followed by general stagnation of the real economy and the possibility of a slow drift into no growth scenarios.
~ Jack Rasmus serves as chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States. This statement also appears in this month’s edition of Z Magazine.