September 28, 2010 Patrick Oliver-Kelley

The Slow Slog Continues.

The US economy is growing, painfully slowly. Estimates for GDP growth range around 1.5-2% versus previous estimates of 2-2.5%. Home and automobile sales remain below pre-crisis levels.  Recently, housing starts showed the first sign of life in a long time. Unemployment hovers around 10% and will remain high. The debt crisis in Europe muddles along. The US government seems to have no evident plan.

When everyone tries to pay down debt at the same time, depression and deflation result. If we pay down debt like Japan did in the 1990s, we will be at it until 2014, before we can expect monetary expansion. Bad debt has not yet been fully recognized on holders’ books. This debt needs to be flushed out, or crammed down. Until that is done, the economy and its employees are tied in place.  They cannot go where the few available jobs, are.

There is no silver bullet but indulging in the ‘Blame Game’ is a worthless exercise. Some drastic plan is needed and the President’s policies are too cautious. Anxiety about public debt makes business and consumers tighten their purse strings, the opposite of what is needed. The US Government must allow a surge in deficit spending, even though our problems were brought on by past excesses. The Fed should take additional measures and continue buying government securities, especially if the recovery slows and unemployment does not decline.

The US rebuilt stocks quicker and earlier, than did Europe, whose business cycle appears to be two quarters behind that of the US.

In Europe, the Swiss Franc seems to have become the Deutschmark of old, and Germany and UK have taken a grip on public finance. The premium demanded by investors for Euro paper issued by Portugal, Ireland and Greece is not showing signs of encouragement. That crisis is far from being over.

Germany’s reputation for quality engineering and manufacturing push its economy to the head of the class. Its trade with China is surging. The ECB seems willing to maintain its special facilities for longer though Europeans do not want to borrow. This makes monetary policy unresponsive. Central Bankers cannot ward off deflation. Politicians must do more.

Buckle up, worse case, we return to old fashioned values. An awkward period lies ahead.

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