Aftershock Economy Possible with Recession and Debt Spiral
Better days may be ahead but only if we address our debt spiral ASAP. But before I get there, here is some gloom and doom.
The US economy is close to recession given decelerating GDP growth at 1.5% Q2. Watch out if Q3 or Q4 becomes negative. Why? Our total debt of $15.6 trillion is now 103% of our GDP and may accelerate significantly with a recession. Our total debt has been growing at a pace of 8% a year for 4 years while our GDP growth has been approx 2% the past 3 years after contracting almost 5% during the 2008-09 recession. Who will continue financing our exploding debt during a recession in this context? Would you be willing to lend someone money if that someone had to borrow money from someone else while increasing total debt well beyond his annual income? Of course not. China, Japan, and Saudi Arabia are 3 of our largest creditors. If one stops financing our debt the US dollar will collapse and a Weidemer like economic catastrophe may very well result.
Need more context? Follow Europe especially Spain and Italy as per analysis of Egan-Jones a credit ratings firm with a stellar history — first to signal doom for Enron, WorldCom, Lehman. Per Egan-Jones, both countries are in a recession and debt spiral. They predict both countries economies will contract at least by 4% a year through 2014. Then Spain’s debt will reach 146% of GDP, up from 84% at end of 2011. Italy’s debt will reach 165% of GDP, up from 132% at end of 2011.
Egan-Jones rated Spain government bonds as Junk in April and last month did same for Italy. Both countries find it increasingly difficult to borrow now in private markets. Spain’s 10 note is now 7.5%. Both countries are on verge of bankruptcy. Per Egan-Jones, the only viable path is major debt restructuring. Otherwise the combination of increasing debt due to socialist and welfare policies and economic contraction will accelerate decline of tax revenues to the government. This is the debt spiral creditors fear. They will find other more stable prospects to invest their capital.
With a recession the US will be in this debt spiral. This may be the event that triggers a creditor rejection of increasing US debt. the US dollar will then be in a freefall. If this happens hope that our creditors will act extremely quickly (within few days, if not hours) and not be too harsh in imposing terms on our nations government finances. They will be in the drivers seat. They will have a long term interest in getting the US back on track. However severe cutbacks in entitlements will be very likely.
It is outrageous that our government refuses to act to prevent this great possibility. As Congressman Paul Ryan has stated for 2 years this is the most predictable economic catastrophe in US history.
So what can we do?
Address the debt ASAP. Eliminating HUD and the Education Dept saves $155 billion per year. HUD was major factor as a root cause of the 2008-09 recession: mandating Freddie Mac and Fannie Mae spend 55% Of their capital to finance sub prime loans. Education is a local responsibility. A federal Education dept therefore only wastes money.
Develop our newly found expansive hordes of natural gas and oil. Per Investors Business Daily we have the potential to add 2% to 3% to our GDP. This can single handidly stop the debt spiral.
Pass the Fair Tax so that success (income) is not taxed but encouraged. The Fair Tax eliminates the IRS or $430 billion in tax compliance costs. Use that to pay down debt. Technology exists now where an IRS is not necessary; it is out of date. Please read my numerous posts on the Fair Tax in my blog.
The above are just 3 fundamental measures we can take. There are many others. An excellent source is a new book “the 4% solution”.
Next post may explain how Obama policies significantly exacerbated our economic plight. I will also outline prospects of a Romney presidency.