Federal Reserve Chairman Ben Bernanke recently cautioned Congress that the economic recovery remains “unusually uncertain.” But he also did not offer any practical recommendations to sustain continuing growth. Critics and analysts at financial think-tanks point out that what really matters most is debt as a percentage of Gross Domestic Product, the total market values of goods and services produced by workers and capital within a nation's borders during a given period (usually 1 year).
Since the United States can’t lower interest rates any further,
the next logical option is for the Fed to start buying Treasury bonds. Some financial experts believe this action might lead our country to the brink of a financial meltdown.Exceeding the 90 percent debt/GDP threshold is a recipe for disaster, and it may be impossible to recover from this, according to economists Carmen Reinhart and Kenneth Rogoff.
While Bernanke said the Fed has options necessary to produce more growth, even with interest rates unable to go lower, he would not elaborate. Meanwhile, stock market and real estate prices continue to vacillate and hit lower-lows.
“We have not come to the point where we can tell you precisely what the leading options are,’’ Bernanke told Congress.
“Clearly each of the options has potential drawbacks.” He added, “They’re not going to be the conventional options. We need to look at them carefully to make sure we’re comfortable with any next steps we may take.”Last month, we cut both our third-quarter 2010 and full-year 2011 GDP estimates to 1.7 percent. During this period, the consensus for GDP growth estimates was around 3 percent.
Now we’re starting to see big brokerage analysts and the Fed lower their estimates,
but even that doesn’t seem to be enough. The Fed’s estimates for 2011 had to be reduced. So how long will this persist and where does that take America?To put the scenario into context, economic growth is slowing worldwide – both domestically and in China, the most populated place on the planet. This will keep the U.S. dollar weak and equities depressed.
We at WMB believe there will be a continued downward trend to our GDP as long as debt-financed-deficit spending continues and is the prescribed solution for Congress and our central bankers.
Wall Street’s downturn last week is probably because the Fed leaked word that the second round of “quantitative easing,” known as QE2, is coming.
The first round in 2008 to prop up the ailing housing market and pay down credit facilities for big banks wasn’t enough to turn the economy around. What Do The Numbers Mean?
With a record high of nearly 41 million Americans on food stamps and 45% of the unemployed seeking work for six months or more, what else can be done if the second round of deficit spending doesn’t work?
Before the Fed begins to throw even more money at the floundering economy, there are some economic indicators that should be considered and will not be helped by more deficit spending:
• The U.S. dollar has been down for nine consecutive weeks; down 9 percent since last June.
• T-bill yield are at record lows; two-year yields are shrinking to 0.49 percent.
• The yield spread (the difference between 10-year and two-year T-bills (which shows a long-term confidence when it’s high) continues to collapse.
• The S&P 500 is down below its 200-day moving average (an indicator of a market or stock) of 1115.
• U.S. volatility is spiking from its recent stability.
• Japan’s markets are down significantly; down 11.9 percent for the year to date.
Though many analysts try to quantify our economic
situation empirically, it may be much easier to summarize it through the words of French political thinker and historian Alexis de Tocqueville, 1835 author of Democracy in America.He wrote: “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers.
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