August 16th, 2011
The Raw Story
By: Agence France-Presse
The threat of a new recession is rising in the United States, economists say, as they slash their growth forecasts for the second half of the year.
Slowing global expansion, the plunge in US stock markets after Standard & Poor’s cut the country’s credit rating, and political pressure on the government to cut spending rather than stimulate growth are all putting the brakes on the world’s largest economy, they say.
Mostly negative data — though with a few bright spots — has reinforced feelings that the recovery from the 2008-2009 recession is in trouble.
And the Federal Reserve’s own warning last week of increased “downside risks” to growth in the second half has added to the gloomy picture.
Mark Zandi, the top economist for Moody’s Analytics, said Monday they had cut their growth outlook for the second half to 2.0 percent, from a 3.5 percent forecast just last month.
“The near-term economic outlook is significantly weaker than it was just a month ago,” he said in a new report.
“The odds of a renewed recession over the next 12 months are one in three, and rising with each 100-point drop in the Dow.”
Goldman Sachs said the economy appeared to be moving at less than “stall speed” after, at best, a mere 0.8 percent growth in the first half.
“With growth clearly below trend, the unemployment rate has crept up slightly, suggesting the possibility of a self-reinforcing deterioration in the economy,” Goldman said — also predicting a 33 percent chance for a recession.
A raft of poor economics statistics — on second quarter growth, layoffs and job creation, industrial production, consumer spending, and consumer and business sentiment — underpin the lower projections.
On Friday, a University of Michigan survey showed consumer sentiment at its lowest level since May 1980.
And on Monday, the Fed’s New York manufacturing survey for August also took a sharp downward turn.
The Fed gave no sense of optimism last week when it announced it would keep interest rates at ultra-low levels for two more years because of the weak economy.
After a one-day meeting, the US central bank’s policy board forecast growth at a “somewhat slower pace” over the coming quarters than it had estimated in June.
“Downside risks to the economic outlook have increased,” it added.
Also darkening the picture is the context, points out Goldman: the ongoing debt troubles in Europe, that are beginning to affect US financial institutions, and the expectation that Republicans will force more fiscal tightening domestically in the wake of the August 2 debt ceiling deal.
One key will be whether the government can push through any short-term stimulus measures, such as extending unemployment benefits or the payroll tax cut about to expire at year-end.
But S&P’s downgrade “has if anything increased the likelihood of fiscal restraint,” Goldman said.
The Fed hinted it was reviewing its tools to support growth, but nothing concrete has emerged and economists are skeptical it could add much of a short-term charge.
Aside from Europe, two other variables are important — first, the direction of unemployment, which if it worsens will slow consumer spending; and secondly, the markets.
Zandi says that if stock markets continue to fall, it will drag down wealth, confidence and spending.
“Since equity prices peaked in late April, well over $3 trillion in wealth has evaporated. Since every $1 decline in stock wealth is estimated to reduce consumer spending by three cents, the loss to date means spending will take a $100 billion hit over the coming year,” he said.
Not all are as pessimistic. Jeffrey Rosen at Briefing.com has grabbed onto positive retail sales data for July released last week as a rosier sign for the rest of the year.
With falling prices for fuel and food commodities, he said, inflation will ease and consumer spending will get a boost in coming months, Rosen predicted.
Briefing, an economics consultancy, boosted its forecast for the third quarter to 2.2 percent from 2.0 percent.
But Rosen warned that the US will find it hard to get growth back to more than 2.4 percent until consumers cut more of their debt — a process which he said could take another decade or more.
August 12th, 2011
When Standard & Poor’s reduced the nation’s credit rating from AAA to AA-plus, the United States suffered the first downgrade to its credit rating ever. S&P took this action despite the plan Congress passed this past week to raise the debt limit.
The downgrade, S&P said, “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”
It’s those medium- and long-term debt problems that also worry economics professor Laurence J. Kotlikoff, who served as a senior economist on President Reagan’s Council of Economic Advisers. He says the national debt, which the U.S. Treasury has accounted at about $14 trillion, is just the tip of the iceberg.
“We have all these unofficial debts that are massive compared to the official debt,” Kotlikoff tells David Greene, guest host of weekends on All Things Considered. “We’re focused just on the official debt, so we’re trying to balance the wrong books.”
Kotlikoff explains that America’s “unofficial” payment obligations — like Social Security, Medicare and Medicaid benefits — jack up the debt figure substantially.
“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap,” he says. “That’s our true indebtedness.”
We don’t hear more about this enormous number, Kotlikoff says, because politicians have chosen their language carefully to keep most of the problem off the books.
“Why are these guys thinking about balancing the budget?” he says. “They should try and think about our long-term fiscal problems.”
According to Kotlikoff, one of the biggest fiscal problems Congress should focus on is America’s obligation to make Social Security payments to future generations of the elderly.
“We’ve got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 — you’re talking about more than $3 trillion a year just to give to a portion of the population,” he says. “That’s an enormous bill that’s overhanging our heads, and Congress isn’t focused on it.”
“We’ve consistently done too little too late, looked too short-term, said the future would take care of itself, we’ll deal with that tomorrow,” he says. “Well, guess what? You can’t keep putting off these problems.”
To eliminate the fiscal gap, Kotlikoff says, the U.S. would have to have tax increases and spending reductions far beyond what’s being negotiated right now in Washington.
“What you have to do is either immediately and permanently raise taxes by about two-thirds, or immediately and permanently cut every dollar of spending by 40 percent forever. The [Congressional Budget Office's] numbers say we have an absolutely enormous problem facing us.”
August 11th, 2011
The Economic Collapse
How far does the stock market have to go down before we officially call it a crash? The Dow is now down more than 2,000 points in just the last 14 trading days. So can we now call this “The Stock Market Crash of 2011″? Today the Dow was down 519 points. Yesterday, an announcement by the Federal Reserve indicating that the Fed would keep interest rates near zero until mid-2013 helped the Dow surge more than 400 points, but all of those gains were wiped out today. It turns out that the Federal Reserve was only able to stabilize the financial markets for a single day. Fears about the European sovereign debt crisis and the crumbling U.S. economy continue to dominate the marketplace. With each passing day, things are looking more and more like 2008 all over again. So what is going to happen if “The Stock Market Crash of 2011″ pushes the U.S. economy into “The Recession of 2012″?
Just like in 2008, bank stocks are being hit the hardest. That was true once again today. Bank of America was down more than 10 percent, Citigroup was down more than 10 percent, Morgan Stanley was down more than 9 percent and JPMorgan Chase was down more than 5 percent.
Bank of America stock is down almost 50 percent so far this year. Overall, the S&P financial sector is down more than 23 percent in 2011 so far.
How soon will it be before we start hearing of the need for more bailouts? After all, the “too big to fail” banks are even bigger now than they were in 2008.
All of this panic is causing the price of gold to reach unprecedented heights. Today, gold was over $1800 at one point. If the current panic continues for an extended period of time, there is no telling how high the price of gold may go.
In the United States, much of the focus has been on the fact that the U.S. government has lost its AAA credit rating, but the truth is that the European sovereign debt crisis is probably the biggest cause of the instability in world financial markets right now.
The European Central Bank has decided to start purchasing Italian and Spanish debt, and there have been rumors that French debt could be hit with a downgrade. Europe is a total financial basket case right now and unless dramatic action is taken things are going to get progressively worse.
Of course the U.S. is also certainly contributing greatly to this crisis. The federal government is on track to have a budget deficit that is over a trillion dollars for the third year in a row. The U.S national debt is a horrific nightmare, but our politicians keep putting off budget cuts.
The debt ceiling deal that was just reached basically does next to nothing to cut the budget before the next election. Unless the “Super Congress” does something dramatic, the only “budget cuts” we will see before the 2012 election will be 25 billion dollars in “savings” from spending increases that will be cancelled.
The modest spending cuts scheduled to go into effect beginning in 2013 will probably never materialize. Whenever the time comes to actually significantly cut the budget, our politicians always want to put it off for another time.
But in the end, debt is always going to have its day. Our politicians can try to kick the can down the road all they want, but eventually a day of reckoning is going to come.
In fact, if the U.S. and Europe had not piled up so much debt, we would not be facing all of the problems we are dealing with now.
Things could have been so much different.
But here we are.
The truth is that this debt crisis is just beginning. There is no magic potion that is going to make all of this debt suddenly disappear.
Most Americans have no idea how much financial pain is coming. We have been living way beyond our means for decades, and now we are going to start paying for it.
Now that long-term U.S. government debt has been downgraded, huge numbers of other securities are also going to be affected. In fact, according to a recent Bloomberg article, S&P has already been very busy slashing the ratings on hordes of municipal bonds….
June 10th, 2011
A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.
“In our opinion, the United States has already been defaulting,” Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.
Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies — eroding the wealth of creditors including China, Guan said.
Guan did not immediately respond to AFP requests for comment.
The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond $14.29 trillion — but Republicans are refusing to support such a move until a deficit cutting deal is reached.
Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.
A downgrade could sharply raise US borrowing costs, worsening the country’s already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments.
China is by far the top holder of US debt and has in the past raised worries that the massive US stimulus effort launched to revive the economy would lead to mushrooming debt that erodes the value of the dollar and its Treasury holdings.
Beijing cut its holdings of US Treasury securities for the fifth month in a row to $1.145 trillion in March, down $9.2 billion from February and 2.6 percent less than October’s peak of $1.175 trillion, US data showed last month.
Foreign ministry spokesman Hong Lei on Thursday urged the United States to adopt “effective measures to improve its fiscal situation”.
Dagong has made a name for itself by hitting out at its three Western rivals, saying they caused the financial crisis by failing to properly disclose risk.
The Chinese agency, which is trying to build an international profile, has given the United States and several other nations lower marks than they received from the the big three.
April 9, 2010
Major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky, the Wall Street Journal said, citing data from the Federal Reserve Bank of New York.
The paper said on Friday 18 banks, including Goldman Sachs [GS 178.75 -0.75 (-0.42%) ], Morgan Stanley, J.P. Morgan Chase, Bank of America, and Citigroup, understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each period.
The banks had increased their debt in the middle of successive quarters, it said.
Excessive leverage by the banks was one of the causes that led to the global financial crisis in 2008.
Due to the credit crisis, banks have become more sensitive about showing high levels of debt and risk, worried their stocks and credit ratings could be punished, the Journal said.
Federal Reserve Bank of New York could not be immediately reached for comment by Reuters.