Guest Post: We Cannot Afford A Double Dip
Submitted by Alex Daley of Casey Research
We Cannot Afford A Double Dip
Talk of a double-dip recession is seemingly increasing these days.
Home sales have dropped like a brick since the end of the special tax
breaks for buyers. Weekly job reports are showing much larger rises in
unemployment claims than previously expected by whoever it is that
decides what exactly is expected – 427,000 new filings in just the last
The problem this time around, however, is not just the economy itself.
The problem is that our supposed saviors are all out of tools to help
the economy climb out of the deep, dark hole we now find it in. The
tool belt of any monetary regime is limited to begin with. Nothing more
than loosening up the debt purse strings with unrestrained interest
rate policy and some additional lending from the central coffers to add
to liquidity. These tools are the economic equivalent of performing
reconstructive dentistry with a sledgehammer and monkey wrench,
effective but not exactly precise.
And as Goldman Sachs recently pointed out to a number of its clients,
the world’s leading developed nations have all but exhausted the few
tools available to them:
Interest rates in the top 10 economic nations are hovering just
above zero, and it’s not like they can go any lower than that, as much
as banks would welcome having to pay back less than they borrow.
And government net lending has increased so dramatically that
government debt is spiraling from out-of-control to just plain
ridiculous. All at a time when revenues are dropping from the slowdown
and creditors, having been burned a little by Greece and afraid of
what’s to come with Spain, Italy, Ireland, California, New York, and
others, are starting to raise red flags to the borrow-and-spend
policies of our collective governing bodies.
For the first time in a long time, developed governments in Europe and
the U.S. face the specter of sub-AAA credit ratings and rapidly rising
costs of borrowing more (ratings that, frankly, had they been put in
place by the inept agencies years ago when they were initially deserved
may have had repercussions that would have helped us avoid many of
today’s problems). Between rising borrowing costs, the already hefty
budgetary burden of paying prior debt interest, and the ever-expanding
rolls of government employees, legislators can hardly keep up on the
bills these days, let alone inject any more into the economy.
The irony, of course, is that by unloading a full clip from the assault
rifle when trying to “save” the economy, the governments of the OECD
nations have actually created a catch-22 situation. One wherein they
not only have no tools left to manipulate the markets against a further
slowdown, but also where they have created monetary policy so extreme
that undoing it would be more disastrous than the fallout would have
been had they not stepped in in the first place.
Austerity budgets from Greece and Spain have included massive layoffs
of government rank and file, severe wage cuts, or both, potentially
reducing tax revenues and consumer spending. California is following
suit with its proposed 23,000 teacher layoffs, which are arriving on
the back of 30,000 previous layoffs just last year. New Jersey is
furloughing tens of thousands of state workers and capping raises. NY
is furloughing 100,000 more and needs to cut $9.2 billion from the
As the walking bankrupt states and cities continue their budget
slashing – down from criminally high levels such as Miami, where the
average city worker nets $76,000/year compared to the $29,000 average
for private citizens of the metropolis – it will only exacerbate the
returning slowdown. Fewer households with cash to spend in the private
sector. Rising mortgage defaults and foreclosures as the workers face
the grim reality that a state paycheck doesn’t come with a 30-year
guarantee these days. Declining tax revenues at all levels. And more
people on the already busting-at-the-seams federal unemployment files,
which remain at all-time highs.
Speaking of the U.S. federal government, their guaranties of Fannie and
Freddie Mac loans are now estimated to cost anywhere from $250 billion
to $1 trillion to taxpayers in the end, far above the net cost of any
of the other bailout measures and potentially more than is possible to
pay. The price tag is so steep, many conservatives are starting to call
for repealing the institutions’ charters altogether and letting the
private market have at them. The U.S. federal government is simply
buried over its head in obligations.
The government is all tapped out. And yet the economy continues to slow.
If you are among the camp who wished the government would have never
stepped in to begin with and called out the seemingly obvious truth
that they could only worsen the situation by flailing so wildly to
contain it – the double dip is coming, and you are about to be proven
right and get your wish at the same time.
It’s the price we are all about to pay for letting our politicians get
away with budgetary murder year after year, including letting them try
to “save” us the last time around.