Late Year Recovery Seems Unlikely

Economists expect a late year economic recovery, but their conviction appears failing.

Forecasters predict more than 630,000 jobs will be lost in April—an annual pace exceeding 7.5 million. Meltdowns at GM and Chrysler portend more hemorrhaging and depression-like conditions in the Midwest.

Team Obama is quick to claim employment is a lagging indicator, but the economy started bleeding jobs in December 2007, three quarters before GDP began contracting.

This is no Eisenhower recession, caused by too much inventory. Rather, this meltdown was caused by structural imbalances in the global economy that no stimulus spending can fix.

Timothy Geithner inspires like Mickey Rooney in “Boys Town.” He mouths platitudes of his elders but offers no insights into the unique character of the slump.

He talks endlessly about stronger international cooperation and the need for a “balanced” economic recovery. He reminds us that the Bush prosperity relied too much on debt, but never explains why the U.S. economy needs either gargantuan budget deficits or massive consumer borrowing to have enough demand to keep Americans working.

Dysfunctions on Wall Street notwithstanding, China and several other developing countries produce far more than they consume and enjoy huge trade surpluses, thanks to artificially undervalued currencies, export subsidies and import restrictions. Those require the Americans to consume far more than they produce and for the United States to amass huge trade deficits and foreign debt, or global demand falls short of supply and unemployment skyrockets.

Once Americans were no longer able to live beyond their means, the global economy collapsed, and Obama has volunteered the federal government as the borrower of last resort.

Now China complains Washington borrows too much. That’s like a drug pusher complaining about client addiction. Yet, Obama appeases Beijing by offering to share stewardship of the global economy with this renegade mercantilist.

China’s purchases of U.S. Treasuries and threat to quit buying are the elephant in the room. But those purchases are made necessary only by China’s huge hoard of dollars that is contrived by Beijing’s massive sale of yuan for dollars on foreign exchange markets to keep its yuan cheap, exports flowing, and jobs moving from Indiana to Shanghai.

The Peoples Bank buys U.S. Treasuries because it does not have any better use for the dollars it obtains manipulating the yuan to boost exports. If it quit using those dollars to buy Treasuries, it would simply have to put those in the vault and remove them from circulation. The Federal Reserve would have to replace those dollars in circulation by purchasing the very same Treasury securities Beijing now buys.

The Fed would collect the interest instead of the Peoples Bank. That’s not so bad.

To dig out of the Great Recession Washington needs to challenge China on trade and currency manipulation, but Obama and Geithner must recognize that Beijing only has the leverage Washington gives it.

Fixing the trade with China would do more to boost demand for U.S. growth and employment better than any stimulus spending could ever deliver.

Comments

[Jasper M:]

When I am feeling especially charitable, I entertain the notion that Giethner is treating the economy according to the philosophy a 19th century physician -
95% of the time, the patient will get better, no matter what you do.
2% of the time, the patient will die, no matter what you do.
You only make a difference in the remaining 3%. So try the things that are thought to work, and try to look authoritative while you are doing it.

Apr 27 02:53 AM

[Steven Hansen:]

"You only make a difference in the remaining 3%. So try the things that are thought to work, and try to look authoritative while you are doing it." - Jasper M

i agree with this sentiment, however much of what Geithner and Bernanke are doing (or advocating) are distorting the future economic conditions. it is one thing to play around with fixes, it is another to mortgage the future.

"To dig out of the Great Recession Washington needs to challenge China on trade and currency manipulation, but Obama and Geithner must recognize that Beijing only has the leverage Washington gives it. "

i agree with this statement but wonder if China has any other course on currency manipulation if the US is using quantitative easing (a fancy word for currency manipulation).

Apr 27 03:46 AM

[User 353732:]

America became a great nation by appealing to hopes and dreams and by leading and innovating in every aspect of human endeavor, even when leading was costly and thankless and innovating risky. We applauded success and understood that commercial, technological and individual failure was the normal price of being free, prosperous and safe. We really did , once, understand where growth came from. We sought to inspire other nations not to continually berate then for work and thrift for producing instead of consuming.
In 2009 , it seems to me, many of the most influential people in our polity and culture daily appeal to fear and envy, to distrust and dislike of the "foreigner" who is stealing our job, our market share , our place in the world .
America ,as victim, relying on the kindness of strangers is not, in my view anyway, the model for renewal and recovery. Growth and resurgence require confidence and optimism. Victims posses neither.
I fear one of these days the Chinese(and Russians, Taiwnaese, South Koreans , Indians and even the Germans) are going to stare right back at us and say "let he who is without sin, cast the first stone".

Apr 27 06:39 AM

[CautiousInv...:]

I think patience is the order of the day as there are still many unknowns, particularly regarding the time required to recover from a financial crisis and the interrelated issue of health of the global economy.

Studies of previous financial crises document the extensive loss of wealth through erosion of equity and home values. There is also much lost through contraction in manufacturing and the attendant losses in employment. Employment recovery takes place over four or more years.

To the extent a sustainable recovery in the US economy hinges upon a global recovery, there is much room for doubt. Japan just announced its growth would contract 3.5% this year after contracting at a 14% annualized rate in the first quarter.

Just months ago, Japan though growth this year would be flat after exports declined less in March than they did in February and overall confidence was on the increase. Second derivatives are not enough and green shoots can quickly disappear.

Apr 27 07:05 AM

[atlasman:]

You mean the pro-growth policies of the Obama administration are not going to pull us out of this recession this year? I thought higher taxes, cap and tax via EPA, nationalized health care, and the other great liberal ideas would save the day.

Apr 27 07:42 AM

[ArkansasAngie:]

China isn't going to change its monetary any time soon. We won't challenge them to either.

Change? Nah ... status quo under new management with their own bonus plan.

Apr 27 08:11 AM

[Allan Frain:]

"To dig out of the Great Recession Washington needs to challenge China on trade and currency manipulation, but Obama and Geithner must recognize that Beijing only has the leverage Washington gives it."

China's position as creditor gives it leverage. Obama and Geithner can bluff all they want.

Apr 27 01:51 PM

[djc:]

What will be the driver to deliver us from the high unemployment ?

High tech jobs and many others go overseas as companies try to maintain margins with shrinking revenue.

Once 'the big suck' ends, where are the jobs ?

Auto manufacturers will be a skeleton of their former selves.

If there are no jobs, how is the current glut of real estate sopped up ? Whos gonna buy the houses ? Migrants from south of the border who no longer have their construction gig ? I suppose they will all become internet entrepeneurs and nurses, or mash corn into fuel eh ?

Whos gonna support all those new strip malls ? They are still building them here (atlanta), with NO TENNANTS.

Without the jobs, and with markedly lower corporate revenues, where do the municipal, state and federal tax revenues come from ? How do we support our burgeonning social 'net' with decreasing revenues ? Ahh and then theres the new-new social spending (which was supposed to be the stimulus).

We are being propped up. Trillions of dollars being thrown around, and it begets a lil 25% market rally from the pure slop of nice new dollar bills -- and people cheer and say its all over. I wish that were so, but I just dont see how it can be over.

I see this market recovery as one that hinges on a hope that we will be very very lucky to realize anytime within the next 10 years.

I see reality being much much higher taxes, and maybe interest rates if the government ever stops manipulating the market. I see more giveaways at first for our social safety net, and then a collapse of services as we simply wont be able to pay for them anymore -- either that or tax rates that go to the moon, destroying whats left of our economic vibrance.

Im actually an optimist -- but to date, I have heard no one explain how we get out of this spiral. Moreover, our elected morons are spending us into oblivion at the same time, mostly on the pet programs that have been on the shelf for the last 8 (or more) years.

Somebody tell me Im wrong -- I welcome it. If you do, though, please back it up with the answer to the spiral, rather than some ra-ra cetin-esque crap so I might be able to believe it.

Apr 27 04:19 PM

[Old Trader:]

Another option for those useless dollars China is sitting on would be to add to their holdings of gold, which appears to be the case, or to spend them on buying various hard commodity/energy producing assets, which they ARE doing, all over the world.

Apr 27 09:26 PM

[Ricard:]

"He talks endlessly about stronger international cooperation and the need for a “balanced” economic recovery. He reminds us that the Bush prosperity relied too much on debt, but never explains why the U.S. economy needs either gargantuan budget deficits or massive consumer borrowing to have enough demand to keep Americans working."

This is the key paragraph in this essay, IMHO. This needs to be explained before any confidence in a recovery can take form. Without an explanation, the administration will be seen as firing blanks.



However, I take issue with the paragraph immediately following:

"Dysfunctions on Wall Street notwithstanding, China and several other developing countries produce far more than they consume and enjoy huge trade surpluses, thanks to artificially undervalued currencies, export subsidies and import restrictions. Those require the Americans to consume far more than they produce and for the United States to amass huge trade deficits and foreign debt, or global demand falls short of supply and unemployment skyrockets."

This, IMHO is not at all accurate, and resembles a child in a sandbox blathering "It's HIS fault!!" The US has its fair share of export subsidies (for instance, agriculture, which out of all things penalizes impoverished countries, the populations of which are dying of hunger - their agribusinesses cannot compete against ours despite their advantages in labor costs) and import restrictions (closely tied to the former point). To blame someone else for your own actions is absolutely asinine. No one forced us to over-consume.

The fact is, we need to find our competitive edge again. We need to tighten our size 40+ belts, and become more productive. Only then will we regain our standing in the economies of the world.



One superb point balanced by one POS point. B+ (I like to think positive, and your first point is spot-on)

Apr 28 02:31 AM

[Ricard:]

One slight edit:

"The fact is, we need to find our competitive edge again. We need to tighten our size 40+ belts, and become more productive..." RELATIVE TO WHAT WE CONSUME. This is called savings, and we need to start doing it again.

Apr 28 02:36 AM

[Ricard:]

BTW, one more point:

What are WE doing by printing trillions of dollars?

We are undervaluing our currency. Big time.

I call BS on anyone blaming China for doing the same. Their currency is being manipulated by us, not the other way around.

Apr 28 02:42 AM