Some economists are predicting a normal recovery. Some are predicting a jobless recovery. I predict that there will be no recovery at all, other than a very temporary one caused by a blip in government spending.
Let me explain why in terms of the four factors that economists use to divide up the total spending in an economy (i.e., the "aggregate demand"). In order for a recovery to occur, the sum of these factors has to rise. Here's why I don't expect that sum to rise:
- 1. Consumption. Wages and salaries won't be increasing, and people are too deeply in debt to spend more money without more income.
- 2. Investment. None of the following types of business investment are likely to increase:
- a. Manufacturing investment won't increase because China, following a mercantilist policy, will keep the dollar pegged to a rate where they can prevent investments in American manufacturing from becoming profitable, and President Obama will continue to do nothing about this problem.
- b. Construction investment won't increase because of over-construction during the house price bubble and because house prices still have a way to fall.
- c. Retail investment won't increase because consumption won't be increasing.
- d. Energy investment in nuclear or fossil fuel energy sources won't increase because they will be discouraged by the Obama administration and the Democratic Congress.
- 3. Government Purchases. Although government purchases and subsidies of unprofitable energy production will stay strong, the government can't increase its already huge deficit spending much more.
- 4. Trade Surplus. An improving trade surplus (i.e. more exports or less imports) would help. But I expect the trade surplus to go the opposite way because many countries, including China, will manipulate their exchange rates to prevent American exports from increasing more than American imports, and President Obama will continue to do nothing about the problem.
I am not saying that there will never be a recovery, just that there won't be a recovery until our trade problem is solved. This prediction is not original with me. Economist John Maynard Keynes made the same prediction when he wrote in his magnum opus (The General Theory of Employment Interest and Money):
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Keynes's solution was for a trade deficit country to subsidize exports and restrict imports in order to balance trade. But President Obama's economic advisors are all unilateral-free-traders, so they won't do anything to solve the problem. And the Democratic Congress is much too subservient to the Democratic administration to do anything on its own.
A currency crash could also provide a solution. After a dollar crash, Americans would have a much lower standard of living, but the American economy would grow rapidly, led by foreign and domestic business investments in America's manufacturing sector. The main task of the President would be to get the government out of the way of the recovery.
Thus, due to the incompetence of his economic advisors, President Obama's term will either be marked by recession and stagnation or by a dollar crash. In either case, he will be a one-term president.
