When you are meeting your biggest creditors, you better strike a disciplined tone, thus Obama warns on US public debt pile:
US President Barack Obama warned that the US economy could head into a “double-dip recession” unless urgent steps were taken to rein in mounting public debt.
The US president’s remarks – in an interview with Fox News in Beijing on Wednesday, towards the end of his eight-day tour of Asia – marked his strongest language yet on the necessity of putting public finances back on a sound footing.
“It is important though to recognise if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession,” said Mr Obama.
A 10.6 per cent plunge in housing starts in October – led by collapse in the apartment business – highlighted the dilemma facing him as he seeks to tackle the deficit without undermining a fragile economy.
“It’s about as hard of a play as there is,” Mr Obama said, adding that his team was trying to set up a “pathway long term for deficit reduction” without pulling a lot of money out of the economy in the short term via tax rises or spending cuts.
The mood in the US has already swung in favour of deficit reduction, with Republicans attacking Democrats’ plans for more spending to support jobs.
Washington-based analysts said the president was probably trying to prepare public opinion for a tough budget in February – while leaving open some space for measures to reduce unemployment, now at 10.2 per cent.
It is obvious that the public has had it with excessive spending and deficits. That didn’t seem to worry the President much so far. But the Chinese government must have clearly made him understand that they have had enough as well.
The government is beginning to hit a wall. There is not a whole lot further it can go in the short term at this point. This is not to say that they will suddenly embrace true fiscal responsibility and start paying down the public debt. That will most likely continue to pile up for many years to come, just as it did in Japan. But they need to get the ongoing shortfalls of revenue vs. spending under control, hit the breaks, slow down the additions to the debt.
The worst of all is that all the recent spending sprees have made things a lot worse, artificially created demands for goods that we simply didn’t need any more of, propped up prices that needed to continue to fall, revitalized irresponsible habits that needed to end.
It is a truth that they won’t be able to get around, as I pointed out before:
The key thing to keep in mind in all of this: The recent rally, green shoots, and recovery hopes have been created and/or fueled by massive government expenses, and by a believe in the omnipotence of our leaders in Washington.
But government spending sprees, too, will have to come to an end sooner or later. On top of that, all that the recent government programs have accomplished is to get marginal individuals back to the same flawed habits, such as owning unaffordable homes, buying too many cars, etc.
The interest that the government has to pay on its debts when it runs up sky high deficits, and the taxes it will have to raise in order to make those payments, will be hanging over the recovery like a Damocles Sword. The Federal Reserve, too, will be faced with a similar situation. Let’s assume, for the sake of the argument, that lending activity on homes, cars, etc. were to pick up again. What will the Fed do then? Cut interest rates? Add more bank reserves? Surely not, quite the opposite.
Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.
At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.
Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.
What is the Fed doing?
Is there much more it can do at this point? Have you heard them announce any more of their great new lending facilities in recent months?
Most notably, the Fed has begun to repay the Treasury’s investment made at the end of last year, the so called Supplementary Financing Account. It had been hovering at around $200 billion for the previous 8 months. It has now dropped to $19 billion as per the latest weekly reports. It may be completely dissolved by the end of this month. This, to me, is one of the biggest signs that even the Fed itself has begun to wind down stimuli and is trying to get its books in order, if such a thing is even possible…
Here is Meredith Whitney’s take on the coming double dip recession:
What about private lending?
Well, forget about that one. Loans and credit are drying up at an unprecedented pace, and have just turned negative for the first time in AT LEAST 35 years:
Total US Credit and Loans have now contracted by $979 billion since their peak in October 2008:
The annual growth rate has turned negative for the first time since beginning of the the weekly recordings, and and as far as I could find now posts the biggest annual decline since the great depression:
Keep in mind that all this has happened in spite of an environment of renewed optimism and confidence that the economy will bounce back hard.
The biggest surprises and catastrophes always occur when public opinion is completely out of whack with reality. Now is such a situation. How much longer it will last no one knows. But rest assured that a double dip is on the horizon…
… and that horizon is fast approaching.