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Despite what U.S. Federal Reserve Chairman Ben S. Bernanke said in his speech at the International Monetary Conference yesterday (Tuesday), it looks very much like we're headed for a double-dip recession.
Indeed, the economic reports of the last week or so demonstrate that the U.S. job machine was never really jump-started after the Great Recession of 2008-09.
The upshot: The U.S. economic recovery is stalling, and we're almost certainly looking at a double-dip downturn.
Recessions are always painful – and double-dip recessions are even more so.
And this second "dip" may be more of the same – a bloody economic downturn that leads into a feeble recovery with unemployment spiking to even higher levels than we're currently seeing.
But there's a slight chance that this double-dip recession could prove quite productive for the U.S economy.
Let me explain.
Anatomy of a Double-Dip Recession
That a "recession" of any kind could be productive might seem contradictory, but it's actually quite logical. That's not to say that we're ignoring the very real human toll – not at all.
But recessions can and do serve a productive purpose: An economic downturn can clean out the bad investments and misallocation of capital that tend to proliferate during boom periods, eradicating the "overhang" of surplus capacity across industries and set the stage for a more-vigorous – and ultimately healthy – recovery.
That opportunity for a healthy economic cleansing of precisely that type is especially apparent today. After the largesse of recent years – the subprime mortgage crisis, credit default swaps, mortgage-backed securities and the creation of far too much liquidity thanks to bailouts and easy monetary policy – there is a great mess that still needs to be cleaned up.
If we end up with a double-dip recession, the type of downturn – productive or unproductive – will depend upon the fiscal and monetary policies chosen. Unfortunately, if you're a wagering person, I'd have to say that the odds favor the wrong choices being made – resulting in an "unproductive" dip.
The Gloomy Scenario Bernanke Won't Acknowledge
The economy only added 54,000 new jobs in May – the lowest amount in eight months and only about a third of what was expected. That's pretty definitive proof that Washington's fiscal and monetary stimulus have not worked. (Not surprisingly, in his speech to the group of international bankers in Atlanta yesterday, Bernanke not only refused to acknowledge the likelihood of a double-dip recession – he even insisted that job growth will accelerate in the year's second half.)
Washington's fiscal stimulus – including the government dumping nearly $1 trillion into such unproductive pursuits as "new energy" projects and state employee labor union contracts – has generated massive budget deficits and given banks no incentive to play its key job-creation role by lending to small businesses.
Instead, the stimulus has provided temporary jobs with the government – and those jobs are now disappearing as Washington's money runs out.
Monetary stimulus has been more damaging. It has caused a worldwide commodities and energy bubble – which is single-handedly damaging the U.S. economy by making it more and more expensive for consumers to fill up their tanks. It is also likely to have contributed to the growing job-market malaise – and with good reason: Economic theory suggests that when capital is very cheap, businesses will use more capital at the expense of labor, reducing the demand for workers.
It is not surprising that the combination of extreme monetary and fiscal policies has now produced a downturn: The true costs of those policies was predestined to appear long after their benefits had disappeared.
But what happens now depends on how the authorities react to evidence of further economic weakness.
Why Pain Now is Better Than Pain Later
In the more likely scenario, the calls for another round of public spending "stimulus" will become deafening. Expect the same emotional call for a third round of Fed purchases of government bonds – aimed at holding down interest rates – to be created after the current round ends on June 30.
With this third round of quantitative easing – known as "QE3" – there may be a short-term boost to the economy. But the benefits will be very limited – and will be quickly overwhelmed by spiraling inflation as energy, commodities and other goods rise in price.
These price spikes will quickly suppress consumer spending, which accounts for about 70% of this country's economic output. That drop in spending will produce a further relapse in the U.S. economy – probably accompanied by a bursting of the bubble in commodities, energy, U.S. Treasury bonds and the stock markets.
Once that happens – Fed Chairman Bernanke's latest comments to the contrary – a double-dip recession is pretty much fait accompli. Rapid inflation will erode U.S. living standards, while low interest rates will cause the nation's already-pitiful savings rate to drop even more and capital to flee to Asia.
A recovery will eventually come, but that recovery will be one with much-lower living standards, and wage rates that are much more in line with those of emerging Asia.
Alternatively, it is possible that the politicians will come to an agreement about major spending cuts, while the Fed makes a frontal assault on the commodities/energy bubble by raising interest rates.
In the short run, this scenario will be much more painful, with a much higher human toll: The stock market will crash and a surge in real interest rates combined with the plunge in asset prices will prompt bankruptcies to spike.
However, the higher interest rates will raise domestic savings rates as well as the demand for labor. So when the recovery does come, it will be much healthier – marked by declining inflation, the elimination of the U.S. balance-of-payments deficit, and an unemployment decline as rapid as the one we saw back in 1983 (when job creation averaged 350,000 per month for the first two years of recovery).
With a rise in interest rates and a decline in public spending, a "double-dip recession" will be productive, returning the economy to a more-balanced track and wiping out much of the false investment of the successive bubbles. Unfortunately, given our current slate of policymakers, we are much more likely to get an unproductive double-dip, in which the economy's real problems are not addressed and unemployment fails to decline.
For investors, it is difficult to hedge against two such disparate potential scenarios as the "good" double-dip versus the "bad" double-dip. But here's the thing: T-bond yields have declined even further during the last month – even though inflation has increased. That means the market is betting on further Treasury bond purchases by the Bernanke-led Fed.
Since both "double-dip" scenarios include higher Treasury bond rates in the intermediate term – the one because of inflation and the other because of explicit rises in interest rates – taking a bearish position in U.S. Treasuries appears to be an excellent bet. To do so, you might consider the ProShares UltraShort Lehman 20+ Year Treasury Fund (NYSE: TBT), an exchange-traded fund (ETF) that takes a leveraged short position in long-term Treasury bond futures.
Andrew Grove, employee No. 1 and the former longtime chairman of Intel Corp. (NYSE: INTC), once used the term "inflection point" to describe "a time in the life of a business when its fundamentals are about to change."
What's true of an individual business is also true for the entire global economy. And the global economy stands at such an inflection point.
Perhaps that doesn't surprise you.
But this will.
You see, there are seven "inflection-point catalysts" at work right now.
And they are going to turn the global markets… upside down.
To have so many forces all pulling in one direction at one time is a real rarity. But it's happening now.
Investors who see and understand the forces at work have a chance to make, well, buckets of money (pardon our crassness). But what really concerns us is that investors who don't stand the chance of being slaughtered by global market forces that they may not even know exist.
As today's story by Martin Hutchinson demonstrates, Money Morning was created to serve, and to protect – to help our readers identify the best profit opportunities, while avoiding the buzzsaw-like risks that abound in our increasingly complex global financial markets. For that reason, we want to share our secret with you – in a free report called "Lambs to the Slaughter: What to do as These Seven Inflection Points Turn the Markets Upside Down." Just click here to get it – and then take the time to read it.
What you don't know can hurt you.]
News and Related Story Links:
- MSNBC.com:
May employment report shows pace of job growth weakening. - Money Morning Special Report:
Credit Default Swaps: A $50 Trillion Problem - Investopedia:
Double-Dip Recession. - MarketWatch.com:
Bernanke Sees Job-Growth Pickup in Year's Second Half. - Investopedia:
Real Interest Rates. - MarketWatch.com:
Text of U.S. Federal Reserve Chairman Ben S. Bernanke's Speech at the International Monetary Conference.
All immigrants get out of the USA before getting worse just to safeguard yourself and save your savings for your own good.You cannot expect anything to turn around.JUST IGNORE USA.
One months data is not enough to come to any conclusions especially after the disaster in Japan put a crimp on supplies. Commodity prices fluctuate based upon supply and demand and not just the value of the U.S. dollar. We heard the same story about double dip fears 1 year ago but they did not materialize. Gurus have been advising the purchase of TBT for the past 2 years claiming interest rates are going to rise but other than a spurt higher here and there TBT has essentially gone nowhere.
I think calling the recovery a failure based on one job report is jumping the gun. This figure is only one of many that needs to be looked at before the call is made. Are we headed for a double dip recession? of course we are, the real question is how severe will it be.
I live in Perth Western Australia and would like to know what effects the US economic situation will have on our economy and what I should do to hedge myself and my family against any potential losses.
This is really frightening, especially for us retired seniors who are dependent on Social Security benefits and have no other income. I lost my entire life's savings due to a clever scam and now must make due with the meager Soc. Sec. without the cost of living increase desperately needed. The government leaders are giving themselves increases galore on top of their elaborate saleries they already have, they don't give a hoot what the rest of the people have to endure as prices and everything is getting higher and more and more costly.
They are giving away our Soc. Sec. to illegal 'border jumpers' and running this country of ours into bankrupsy and total ruin with their idiotic decisions!!!
G. Dulias
would gold and silver be good during these times–if the double-dip happens?
A double-dip recession? Really? I'm not buying it! Two or more consecutive quarters of negative growth is not in the cards — In fact, by the end of 2011, the US economy will be tracking along at a 3% rate of real GDP growth. I'd bet on it!
The longer Ben Bernanke drags his feet, the worse main street sees itself on long run.
I think the President had something to say to Ben bernanke .That he changed his story today .to make things look better for the .for the country.which it is getting worse.
The president is just campaining he has been doing for two years.
Back in 1983 we had one of the best leaders this country has ever had. Those type of people in our politics just don't exist today. Unfortunately, this country has been on the wrong road for some time and our leaders will continue to take us on down this road. V. Thomas.
You can count on Bernanke choosing the wrong policy as he has always done in the past. However, he is probably getting his marching orders from Treasury Sec. Geithner.
how do you clean out a quadrillion worth of derivitives?
Dr. Bernanke, the Fed chairman, received his Ph.D in economics from the Massachusetts Institute of Technology, has never held a real job and knows nothing about the real world. Is he a complete putz, a pathological liar or what?
“Since universities develop one’s entire abilities, especially the idiocy, the educated idiots are most dangerous… God bless and help America, the country of best brightest politicians (i.e. masterly liars), incompetents, useful idiots, and great opportunities, especially for fraud! Welcome to Amerikaka,Comrades! Amen!.. (In case that Russian, Yiddish or German languages are not your forte, kaka and kaker mean feces and its appropriate derivative.)” S.I. Fishgal (“Kosher Hooks”)
You say there WILL, Markman says there WON'T. Somebody's going to get scratched from my reading list.
OH NOES! THE INVISIBLE BOND VIGILANTES ARE COMING! RUN FOR THE HILLS!
One wonders if these wanna-be Mellons will realize that liquidating the real economy to goose their portfolio is bad before or after the mob with the pitchforks and torches kicks down the gate to their gated community…
The status of the USA is so down and people in living in USA still did not get the idea to be safe and keep on false dreaming that the life conditions will turn around.Still people are not in the reality.The conditions is too low and from now if the GDP grows around 6% the conditions will be same and the life conditions will be too tough because from the past ten years the total loss been in the country is enormous and to cover all the loss is not at all possible.The life standard in US is very high and everybody agreed that the US will not be pre 9/11 no matter what they do.By complaining there is no financial regulation everybody cheated in business in all possible manner for continuous 10 years and this is too much to bear.After all this debacle if anybody in US is thinking that one day will come and everything will be fine they are dreaming. It is too late to change anything in US considering the living standard if very high.We cannot afford to make mistake of any sort.It is like be in the rules and regulation or get out.I think get out is better is the best choice as present situation.Sorry folks you cannot make it.
If you think a recession is coming you are right. If you think we are in for fantastic times you are also correct. Because both will happen at some stage. Getting the timing right is the problem.
I think that this line of reasoning ultra conservative–but sustained–in the most cruel fallacy I've read joins the policy carried out by the FED to make further adjustment of the American population. Clear that prior to this already had been redeployed income towards the more wealthy holders of shares and securities that are shedding of them and will buy very depreciated real assets when interest rates go up. It is as the State of things prior to Roosevelt but much more profound. We must climb the boats to save us from the sinking of the ship.
Don't forget that what you think will happen is what will happen. Don't you know that your thoughts, your perception of what is, creates your world. Bottom line is be positive about finances, positive about the government, and stop blaming everyone else including politicians for the state of your finances. You alone are responsible for where you are in your life.
Right timing is always a problem in USA because the people in USA are not in reality.They only talk, talk…..talk and there is no end to it without any result and people do lot of fraud, everybody in USA talk in one manner and do some other manner and that means the talking does not turn in to practical way.Such a high industrialized nation turning to this ruining way is very shame.This is not the way in USA in this 21st century.They are failures.It is too late to correct anything in USA.So all immigrants to get out of the USA is the best choice just to safeguard all your hard earned savings before.If anybody among immigrant continue to stay in USA most probably they will loose every thing they have now.
We heard the same thing last year and the economy recovered. It's way too early to come to any conclusions. There could be an economic upside surprise the last half of this year.
Even from now if US GDP grows to 6% they are failures in all matters.This is should not be for US in this 21st century.No matter what they do they cannot bring the country to pre 9/11.
The only day they can say they are doing well is on the day that the countries deficit is reduced to zero and repay all dues to IMF and clear all the debt.They refer to US.They could not handle the finance what else they can do, Nothing!!!!! They can just do bankrupt.Americans are enjoying the others (IMF) money and they have to be told just earn it.Then Americans will understand the what "economy means".High school drop outs, what else they can do other than the turning to richest beggars.
The discussion appears to be on whether or not the vested class are going to make more or less.
Speaking as one who has no vested interest – literally – there is no sign of either a recession or a recovery down here.
All the people with money I know – and that includes some very wealthy people – are making money hand over fist fast enough to make a drug dealer blush.
Meanwhile – there are no jobs for marginal workers who are not illegal – and good workers are getting half the pay.
So, you can enjoy other people's cake – times are good while you have the nation's credit card backing you – but real bill-payers are getting old and they are not going to pay the bill (not affirmatively anyway – they may pay when their retirement or entitlements evaporate) – they just don't have it in 'em.
Just sayin…
Sorry but its al beyond my understanding.My only question is this right time to switch my job?please please i need ur suggestions….