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2 VIEWPOINTS on Double-Dipping,..

Here Comes the 'Double-Dip Recession'
Jeff Nielson
January 12, 2010

Well, the clock has struck midnight. Cinderella's fancy clothes have changed into rags, and her stately carriage is now just a pumpkin. Much like this fantasy-heroine suffered a rude awakening, so too, are many Americans suddenly seeing their own (economic) fantasy evaporate before their eyes as 2010 begins.

A plethora of news items, both new and recent, completely shatter any pretense that the U.S. economy is “growing”. The latest, bomb-shell headlines are that U.S. residential rental vacancies are at their highest level in 30 years. Simultaneously, U.S. shopping mall vacancies just set an all-time record. Meanwhile, foreclosures/defaults in both markets continue along near/at all-time record highs – and there are over 20 million empty homes in the U.S.

With respect to the residential market, there are only two, possible explanations for these catastrophic numbers. Either the supply has been built-up to such grossly excessive levels that there simply aren't nearly enough people to occupy these residences (ever) or their wealth/income levels have collapsed to a point where much of the U.S. population simply can no longer afford shelter.

For the housing market itself, it is totally irrelevant which of these scenarios represents the current U.S. market (personally, I see this as a 50/50 proposition). The U.S. has the largest excess supply of housing of any economy in history. This is purely cause-and-effect.

To begin with, the U.S. tax deduction for mortgage interest is (to the best of my knowledge) unique among major, industrialized economies. Like every tax-loophole, this distorts economic activity – through causing excessive levels of home-ownership, relative to the size of the population and/or the level of wealth of the American people.

Many Americans may bristle at me describing U.S. home-ownership as “excessive”. This is not social commentary, but purely economic analysis. Regular readers will know that I am a true egalitarian. However, we must never allow our views on social justice to cloud our analysis of economic reality. And the “reality” is that this massive, housing tax-loophole is one of the prime culprits for the current, catastrophic over-supply of housing in the U.S..

To be sure, there are many other contributing factors. Excessively low U.S. interest rates, the abolition of lending standards, and the abolition of regulation were also horrible mistakes. However, since all three of those previous mistakes were undertaken through orders from Wall Street, the real cause of the current, U.S. housing catastrophe was Wall Street's scheme to fleece the world out of trillions of dollars through marketing “toxic” mortgage products, and Ponzi-scheme derivatives – based upon the U.S. housing bubble.

While it was inevitable that such a premeditated hijacking of the U.S. economy would end in disaster, it is the mortgage-interest deduction which has magnified the amplitude of this disaster, considerably. Yes, encouraging high levels of home-ownership is a lofty ideal. However, as Americans (and the rest of the world) can now see, there is nothing desirable about having tens of millions of grossly, over-leveraged homeowners.

Indeed, one must assume that Wall Street chose the U.S. housing sector as the vehicle for its scheme not only to make out like bandits while they were pumping-up this bubble, but because they will net an even greater long-term haul through throwing tens of millions of American families onto the streets, and confiscating their homes. If the mortgage-interest deduction had not created so many over-leveraged homeowners (even before the housing sector became so extremely over-valued), Wall Street may have very well simply relied upon creating another equities-bubble to further its evil schemes.

A lesson to be learned (assuming anyone in the U.S. government is trying to learn from these mistakes) is that if you choose to distort your economy by channeling vast amounts of wealth into a particular sector (via an enormous tax-loophole) that such a sector must be much more vigorously regulated than other sectors of the economy – precisely to prevent an “economic distortion” from becoming an “economic bubble”. We can now all see where the combination of a huge distortion, and no regulation leads.

Be that as it may, the U.S. housing catastrophe is only one component of the U.S. economic meltdown. The combination of an entire sector of over-leveraged, corporate property-owners, decades of “extend and pretend” debt roll-overs, and the “death” of the U.S. consumer combine to make the U.S. commercial real-estate market at least as much of a nightmare as U.S. residential real estate. And standing behind the largest collapse of residential and commercial real estate in history are U.S. banks.

While the mark-to-fantasy accounting rules enacted in the U.S. last year have allowed U.S. financial institutions (and all U.S. corporations) to hide most losses on their books forever (unless/until assets are sold), Wall Street spent all of 2009 making “trading profits” in their own, rigged-casino (i.e. U.S. equity markets), and none of their time making loans to people and businesses in the United States.

As other writers have already observed, all that Wall Street “banks” really are today are grossly over-leveraged “hedge funds”, which are hiding trillions of dollars of real estate and other loan-losses on their books. They are “banks” in name only. Events in the U.S. mortgage market in 2009 confirm this.

Nearly 100% of new, mortgage debt in the U.S. last year was either originated or “guaranteed” by the U.S. government (see "The U.S. Government's Zero Down-payment Mortgages"). With respect to the “guaranteed” mortgages, all that U.S. “banks” did in 2009 was to insert themselves as “middlemen” in many of these mortgage contracts – taking a cut of profit for themselves, while assuming zero risk.

When you combine this with the fact that the U.S. government continues to “lend” unlimited amounts of money to the Wall Street bankers at 0% interest (i.e. “free money), and with every penny of those loans subsidized by U.S. taxpayers, it becomes totally impossible for the Wall Street oligarchs to justify their continued existence.

Large U.S. banks are essentially unwilling to supply any of their own money to the U.S. economy. There is obviously no possible benefit to the U.S. economy to “lend” these banksters (subsidized) money at 0%, so they can take a cut of the interest on new mortgages for themselves – while assuming zero risk. All that does is make mortgages inevitably more expensive for Americans because there are two bankers squeezing money out of them in these mortgages: the Wall Street middle-men and the U.S. government.

Similarly, the U.S. government (and the U.S. economy) would be in far better shape today if it had used part of the $10 trillion in loans/hand-outs/guarantees to the Wall Street oligarchs to create a new, nationalized commercial lender – much like it has nationalized the entire, U.S. mortgage market. For only a tiny fraction of that capital, the U.S. could have a vibrant, commercial lending sector. Instead, elements of the U.S. economy which would have otherwise been healthy enough to survive this economic cataclysm are being strangled to death through under-capitalization.

This brings me to the U.S. employment market. I was rabidly denouncing the ever more-fraudulent, monthly jobs reports from the U.S. Bureau of Labor Statistics throughout 2009, and increasingly other writers and economists are doing the same. There is no great “mystery” here.

For the last, several economic cycles, each time the U.S. weekly, payroll lay-offs begins to exceed the 300,000/week level (translating to between 1.25 and 1.5 million lay-offs per month) the U.S. economy has started to lose jobs on a net basis. The same pattern held true at the beginning of the current collapse.

It is the simplest of arithmetic, and the simplest of economics to point out that as lay-offs continue to go higher that new hiring continues to go lower – in other words, the numbers always move in opposite directions. Thus, at the beginning of this economic collapse, the U.S. economy was still producing about 1.25 million new positions each month (to partially offset lay-offs).

However, as U.S. lay-offs went to 400,000/week, and then 500,000/week, and then 600,000/week (peaking at roughly 3 million lay-offs per month), what the monthly jobs reports from the BLS have been pretending was that instead of hiring decreasing as lay-offs increase that U.S. hiring was increasing almost as fast as the lay-offs increased.

Keep in mind that when the U.S. lay-offs were at 3 million/month, the BLS was engaging in the ludicrous farce that net monthly job-losses never exceeded 700,000 jobs. In other words, when lay-offs increased to 3 million/month, supposedly hiring increased (by 1 million jobs per month) to a level of 2.3 million jobs (3 million minus 700,000).

This isn't even theoretically possible. In the real world, when U.S. lay-offs hit 3 million/month, then (at best) there might have been ½ million new positions created – leaving a net, monthly job-loss of at least 2.5 million jobs. This is why early last year I estimated that the U.S. economy would lose roughly 20 million (net) jobs in 2009. I saw nothing in U.S. economic activity last year to cause me to revise that opinion.

I would suggest to readers that the latest jobs report from the BLS is a glaring, warning-siren that the U.S. government is about to at least partially abandon this economic charade. Remember that for well over a year now, the BLS monthly jobs numbers have not even been slightly constrained by facts. The numbers are total fabrications – with the only constraint being the level of gullibility in the market (and telling people what they want to hear).

This brings us to last Friday's very strange report. Clearly, what the market (and investors) wanted to hear from the BLS was that the U.S. jobs market was “continuing to improve”. What they got was the opposite news. The November number was “revised” to yield a positive number – while the December report was worse than November and “worse than expectations”.

Two observations here. First, the U.S. propaganda-machine has taken their “beat expectations” game to absurd, new extremes. Economic statistics are tortured every month to yield numbers which (at about a 10-to-1 margin “beat expectations”). Where these conjured numbers have represented extreme deviations from reality, the technique has been to quietly revise numbers lower in following reports – generally through hiding these negative revisions with another “beat expectations” headline number.

The BLS (and thus the U.S. government) chose to engage in the opposite tactic with this report. It allowed the media to focus on that positive revision for November by choosing not to distract people with a “happy-days-are-here-again” number for December.

Let me be crystal-clear on one point: there is no possible way that net, job-losses could have ended in November. Apart from the multitude of reasons mentioned earlier in this piece, another recent commentary focused on another dismal U.S. economic report which conclusively proves that the U.S. economy was still losing large numbers of jobs in November: construction spending plummeted 13% year-over-year.

It was the Obama regime, itself, which told people that all the “infrastructure projects” which were (supposedly) part of its “stimulus plan” would not begin to ramp-up until late in 2009 and early-2010. Thus, for actual construction spending to be 13% lower than the catastrophic number for November of 2008 (the heart of the global panic) this is conclusive. There are no “infrastructure projects” in the U.S. (apart from private prisons) and there are no “stimulus” jobs.

When we combine the facts with the choice by the U.S. government to manufacture a December jobs report which shows employment trending in the wrong direction, this would seem to me to be a guarantee that the U.S. government is about to abandon its “U.S. economy is growing” propaganda – and embrace the “double-dip recession”.

While it is always possible that this is merely a Wall Street tactic – to whip-saw investors through manufacturing a big sell-off (after luring all investors back onto the “long” side), my own interpretation is that the U.S. government is now seeing such horrific weakness in the U.S. economy that it has decided that any further pretense of “growth” and “recovery” would be so obviously implausible that even the gullible, market-sheep could no longer be duped.

Either interpretation would/will lead to the same result: a massive sell-off in U.S. equity markets. Those “investors” who have made profits over the last ten months in the banksters' rigged casinos should consider themselves extremely fortunate – and take their money off the table while they still have it. This is as close as you will get to “advance warning” from the U.S. government. The sell-off, itself will undoubtedly begin before the next, catastrophic economic report comes out.

The wait won't be very long. There never was a “U.S. economic recovery”. However, the coming collapse in this so-called “double-dip” will be very, very real.

http://seekingalpha.com/article/182072-here-comes-the-double-dip-recession?source=hp_wc

AND

Double-Dip Unlikely but Fiscal Policy Is a Disaster
Harlan Levy
January 07, 2010


Mickey D. Levy is Bank of America’s chief economist and an adviser to several Federal Reserve banks.


H.L.: What’s your prediction for the U.S. economy in 2010?

M.L.: I expect the U.S. economy to continue to recover with healthy growth. The probability of a double-dip recession is very low. Consumer spending should grow only modestly, certainly slower than prior economic rebounds. However, businesses have slashed inventories, capital spending, and employment, and in 2010 they will be increasing production and employment. Housing will continue to rebound, and exports will be a major source of strength, reflecting a global economic rebound and the lag impact of the weaker dollar.

H.L.: Will the dollar continue to weaken?

M.L.: I don’t profess to be a foreign exchange expert, however, the Federal Reserve is expected to extend their low interest-rate policy even after other central banks start raising rates. U.S. fiscal policy is a disaster, and global portfolio managers know it. These factors suggest that the dollar will fall further as a natural adjustment to the high U.S. trade and current account deficits.

H.L.: What do you mean when you say fiscal policy is a disaster?

M.L.: Deficit spending is so large it is unsustainable. My concern is not the current budget deficits but the fact that they are expected to persist even when the economy gets back to potential and full employment.

I would note that official long-run projections assume the unemployment rate will get down to below 5 percent.

Current government policies point toward high unemployment for a long time to come, which will perpetuate poor budget outcomes.

It’s not just the sustained high budget deficits and dramatic increases in government debt: It’s what we’re deficit- spending for. Most of the deficit spending is for income support and does not add to productive capacity. That translates into slower longer-run growth — that means slower growth and lower standards of living — and higher costs of financing government debt for future generations.

Actions speak louder than words, and the current thrust of fiscal policies is downright scary. I’m optimistic about the economy for 2010, but we and future generations are going to pay the price for the financial crisis and the government responses to it.

H.L.: What do you think will happen when the federal stimulus money stops flowing?

M.L.: Rather than be concerned about when the fiscal stimulus stops flowing, I’m looking forward to it. The private sector has gone through painful adjustments — for example, the sharp declines in housing prices and activity and the huge inventory liquidation and job losses — and has not begun to grow.

The government’s capital infusions and the Federal Reserve’s liquidity provisions into the financial system have helped to stabilize financial markets, and the Fed’s purchases of mortgages have contributed to lower mortgage rates. These have helped repair household balance sheets.

I am concerned about whether the Fed will be able to gracefully exit from its quantitative easing and low interest rate policies without upsetting the economy. However, independent of the significant positive impact of the Fed’s policies, I am much more skeptical about the efficacy of the lasting stimulative impacts of the government’s fiscal policies. Therefore, I project sustained economic expansion, even when the government’s fiscal stimulus package funs its course.

H.L.: How long do you think job losses will continue?

M.L.: I expect employment will begin to grow in early 2010. Businesses responded very aggressively to the decline in product demand due to the financial shock in 2008. A total of 6.5 million jobs were cut, and the unemployment rate soared. That was associated with unprecedented inventory reduction, cuts in capital spending, and a sharp fall-off in exports. Now, product demand has begun to rebound gradually.

I expect only a small portion of those jobs will be rehired in 2010, but the job numbers will turn positive nonetheless. On top of this, nearly 1.4 million government jobs will be added for the 2010 census, and if history is any guideline, not all of those jobs will be temporary.

H.L.: With the jobless rate still high, do you see consumer spending staying weak?

M.L.: At the initial stages of prior economic recoveries, consumer spending bounces even before employment rises. Ion response to the increase in product demand, businesses hire and the increase in income supports sustained consumer spending. I expect that trend will unfold in 2010. However, consumers are continuing to deleverage, and the unemployment rate will remain very, very high, and this will constrain the growth in consumer spending relative to prior economic recoveries.

H.L.: The stock market’s surge since March has been way ahead of the economy’s recovery. Do you expect a stock market correction soon and then a resumption of the market’s rise?

M.L.: I am not a stock market strategist but would like to make a simple observation: Even though the stock market has enjoyed a dramatic rebound, it’s still remains below its level just prior to the collapse of Lehman Brothers and the financial crisis of fall 2008. Back then, the economy was already in recession, and profits were falling, and analysts were revising down their profit expectations.

Presently, the economy is rebounding. Profits are rising rapidly, benefiting from businesses’ aggressive constraints on operating costs, and the Fed signals it will keep rates low for an extended period. So why shouldn’t the stock market get back at least to its pre-crisis level? I’ll leave the timing and short-term price swings to the stock market strategists.

H.L.: Do you think there will be effective new regulation of derivatives and the other unregulated financial instruments that played a role in the financial meltdown?

M.L.: Yes. Some of the derivative products will be traded through newly established exchanges with tighter regulations that avoid future problems, but the broader issue is whether the new regulatory apparatus will address the true causes of the financial crisis, and this is a complex issue.

http://seekingalpha.com/article/181381-mickey-levy-double-dip-unlikely-but-fiscal-policy-is-a-disaster?source=hp_wc