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President Barack Obama talks with speechwriter Laura Dean aboard Air Force One during a flight from Seattle en route to New Orleans, July 25, 2012.
Dr Peter Morici: The coming US economic collapse;
The US economy is teetering on the brink of another recession. The bad news is
that if it goes down again, there won’t be much we can do to save ourselves.
Like a weary heavyweight, if the economy hits the mat again, it’s down for good.
The expansion has been terribly disappointing—growth is hardly 2% and jobs
creation barely keeps unemployment steady at 8.2%.
Manufacturing and exports powered the recovery but are now weakening. Consumer
spending and existing home sales are flagging, because policymakers failed to
aid underwater homeowners as generously as the banks.
President Obama is doubling down on slow growth policies—new restrictions on
offshore oil and CO2 emissions, and pushing forward with financial regulations
that haven’t stopped Wall Street banks from trading recklessly and rigging
markets as indicated by the Libor scandal.
Governor Romney has reverted to shop-worn Republican prescriptions—tax cuts,
free trade and deregulation.
With the federal government spending 50% more than it takes in, no sane
economist could endorse big rate cuts, beyond renewing the Bush tax cuts.
China, by manipulating its currency and shutting out western products, helped
cause the Great Recession and is now constraining recovery in the United States
and Europe. More free trade agreements won’t fix that.
Dodd-Frank may be bureaucratic and ineffective but no sane person could claim
banks can regulate themselves—smarter solutions, like breaking up unmanageable
and unsuperviserable institutions, is needed.
Many analysts ask if another big innovation—like the automobile or computer-- is
coming and could save the economy. The problems are many new products are
creating more jobs in Asia than in the West, and many technology companies are
consolidating or facing extinction—consider the smart phone, Hewlett Packard and
A lot of US innovation is starting to look more like French art than American
commerce. Icons like Yahoo, Facebook and Twitter have made great contributions
to the economy and culture but simply don’t have business models that generate
enough revenue and sustainable jobs growth.
Google has succeeded by cannibalizing newspapers—the net effect has been to
destroy more—and branching into software and media—which merely displaces
Meanwhile, the profitable core of finance—investment banking—is shrinking.
Burdensome regulations are a problem, but many clients—ranging from
municipalities to wealth managers to foreign governments burnt by Wall Street
schemes and securities—are now less interested in what the likes of Goldman
Sachs and JP Morgan have to sell.
To save European governments, several trillion dollars in sovereign debt must be
written down. Beyond lacking a plan to equitably distribute the loss, Germany
and other stronger states have not come to terms with the fact that market
reforms are not enough. They cannot continue to pursue export-oriented growth
strategies and trade surpluses if southern Europe is to create jobs and grow
without running up trillions in new debt.
China holds the West and its own future hostage—export-driven growth runs to
ground when customers can no longer finance their purchases and trade deficits.
Borrowing and printing money in the United States and Europe on the scale
necessary to keep the Middle Kingdom producing and exporting is no loner
China must slow down because it is too late to reorient its economy toward
domestic consumption without wrenching dislocations.
When the United States entered the recent crisis, its budget deficit was $161bn. Now it $1.3tn, and the Federal Reserve is already maintaining
rock bottom interest rates.
Even if Congress and the President manage to extend the Bush tax cuts, any
hiccup in Europe or China could easily throw the US economy into a
recession—and the world’s biggest economy could hit the skids on its own.
Capital markets simply won’t be able to absorb a $2.5 to $3tn federal
deficit to further stimulate the US economy, without sucking badly needed
capital out of struggling European and developing country economies. The Fed
could only print money to finance it and set off hyperinflation, but it can’t
really lower interest rates much further.
Having failed to adequately address what caused the Great Recession—China’s
trade surplus and the imbalance in demand between the Middle Kingdom and the
United States, the cowboy culture on Wall Street and the plight of underwater
homeowners—not much can be done, having squandered the grace created by stimulus
spending and easy money. Get ready for a bad ride.
Professor, Robert H. Smith School of Business, University of Maryland,