Saturday, June 11, 2011

Double Dip -- A Real Possibility

Could the economy be headed for a second recession? Two months ago, the possibility of a second leg down seemed unlikely. Now, I'm not so sure. Amity Schlaes "The Forgotten Man" chronicles the double and triple dips of the 1930s Great Depression in the US. There are startling parallels between the depression era and our current malaise. And some storms clouds of the modern era were not present in those bygone days.

The main parallels are: 1) massive government intervention in the economy; 2) a mountain of new regulations on private sector economic activity and fear of new and unknown regulations yet to be announced; 3) fear of major new tax increases on wealth holders (I.e. "tax the rich"). These concerns prevented any sustained economic recovery in the twelve year span from 1929 until 1941, at which time many of these burdens were eased to allow for a major wartime production effort.

History may be about to repeat itself.

The problems in housing, where government action has been pernicious, suggest the long awaited bottom in the housing market is going to continue to be awaited. Jamie Dimon of J P Morgan spoke eloquently this week, in his exchange with Fed Chairman Bernanke, of the inhibiting influence of Dodd-Frank and other Obama-driven legislation that takes a sledgehammer to the commercial and mortgage lending capabilities of the country. Obama and his Congressional and labor union allies seem to want to push US tax rates to unprecedented levels. Meanwhile successful businesses are reviled and ordinary business mistakes are viewed as criminal activities by the White House.

So, why should businesses expand and hire employees given this backdrop?

Adding to all of this is the collapse of the Great European Experiment. Europe decided decades ago that their citizens could have it all-- light work loads, lavish health and old age benefits, employment without fear of termination! What a brave new world this was! Europe was all the rage. This worked as long as bondholders would provide the funding for this silly and foolish experiment. Guess what? The party is over. Europe is now front page news every day as European countries scramble to find new benefactors willing to bankroll their life of leisure. So this tragi-comedy is playing out alongside the other headwinds that face the world economy.

Finally, the Chinese economic engine is suddenly sputtering.

While nothing is ever certain about the economy, it now seems at least 50-50 that the US economy is headed for a second recession.

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