The Phantom Recovery

http://www.financialsense.com/fsu/editorials/schiff/2010/0607.html

by Peter Schiff, Euro Pacific Capital | June 7, 2010

In recent months, GDP numbers have rebounded – primarily as a result of record low interest rates reliquifying the credit market and government stimulus jolting consumer spending. Although the “positive growth” has delighted Obama’s economic brain trust, it has done little to boost the fortunes of Main Street. As I have said many times, GDP largely measures spending, and spending is not growth.  
 
Last Friday we received the latest indication that the real economy is not recovering in the slightest. The Labor Department reported that non-farm payrolls increased by 431,000 jobs in May. In a press statement, the President himself crowed at the news, noting that the official employment rate fell to 9.7% from 9.9%. However, just inches below the headline, red flags were everywhere. Only 41,000 of those jobs were generated in the private sector – far below the median forecast of 180,000. Even more troubling was the fact that the Census Bureau alone accounted for 411,000 new jobs, which were almost exclusively temporary positions.
 
Rather than a recovery, the jobs data seems to indicate that we are still mired in the first economic depression since the 1930s. Back in 1931, two full years after the Crash of 1929, there were still very few people who thought that the recession then underway would one day be called the Great Depression. (See my commentary from March 1st “Don’t Bet on a Recovery)
 
Increased spending, financed by unprecedented borrowing, will prove to be just as temporary as a US census job (unless, in the name of stimulus, Obama decides to make “people counting” a permanent function of the US government.). When the bills come due, the next leg down will be even more severe than the last. 
 
The swelling ranks of the government payroll, and the shrinking number of private taxpayers footing the bill, will guarantee larger deficits and a weaker economy for years to come. In addition, the artificial spending has prevented a much-needed restructuring from taking place, leaving our economy far less efficient than before the crisis began. In other words, we have dug ourselves into a much deeper hole while failing utterly to build any means to climb out.
 
One reason that we have thus far been spared the full wrath of Washington’s poor decisions is that we are still benefiting from problems abroad, particularly in the eurozone. As sovereign debt issues have temporarily caused a flight to the dollar, our economy has benefited from lower interest rates and restrained consumer prices. 
 
However, EU member-states have shown some willingness to confront their problems by cutting government spending – correctly ignoring US government suggestions that they do the opposite.
 
Just today, newly elected UK Prime Minister David Cameron prepared his constituents for austerity. Citing a budget deficit that is currently running at 11 percent of GDP, Cameron indicated that government spending would have to fall in order to maintain solvency and a high standard of living.
 
Cameron went on to say, “Greece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided.” This type of realistic sentiment is completely absent in our current leadership in Washington, even though the US deficit is 9.9 percent of GDP and mounting. Meanwhile, the tough decisions being made by European governments will start to rebuild investor confidence in the euro.
 
Once the euro finally stabilizes against the dollar, I expect commodity prices to resume their rise, especially oil. Normally, the uncertainty created by the disastrous oil spill in the gulf, and the resulting moratorium on deep-water drilling, would have sent crude oil prices skyrocketing. However, fears of a global slowdown, euro weakness, and general risk aversion have held prices in check. As Asia continues its growth and Europe regains its footing, I expect a delayed surge in oil prices, which will put yet another obstacle on the road to US recovery.
 
Our last remaining leg of support has been the activity of Asian central banks, who have continued in their herculean efforts to prop up the dollar and bail out Americans with low interest rates and cheap imports. However, when sovereign credit risk eventually rears its head in America, look for Asian policymakers to finally wise up. Once that prop is removed, there will be no questions about the gravity of our situation – and little dispute that it amounts to a depression.
 
The real danger will be if we follow our own foolish advice that Europe appears to have rejected. Treasury Secretary Timothy Geithner has bluntly suggested that European governments should print and spend money in order to keep their economies out of recession. In reality, cutting government spending is a far better stimulus. Maintaining lavish budgets through the use of the printing press will only result in disaster. Not only will such action fail to avert a double-dip recession, but it will practically ensure an inflationary depression.
 
As I have said before, we can’t simultaneously grow the economy and grow government. The latest jobs report shows that we are just growing government. If that trend doesn’t soon reverse, investors will start betting on the collapse of the dollarzone.

I wear many hats but history, economics and political observance have always been a passion. I am a graduate of the University of Cincinnati College of Business with a degree in Information Systems and Digital Business with a minor in European History. I work for a small mom-and-pop IT consulting and software design company. We deal in servicing mostly government funded non-profit mental and behavioral health care agencies in the state of Ohio. In this I deal with Medicaid and Medicare funds and have a little insight on the boondoggles of government there. Thankfully the undemanding nature of my daily profession gives me ample time to read and stay aware of our current state of affairs which I find stranger than fiction in many instances. In addition to being in the IT field, I have also been self employed with a small contracting company so I might know a thing or two about the plight of small business that employs 71% of the American workforce. I however don't draw my knowledge from my day jobs, which I have had a few; I draw it from an intense obsession with facts and observation about the world in which I live. I do have formal education in things such as history, economics and finance particularly as it pertains to global issues, but I have come to find much of what I thought I knew from the formalities of a state university I had to unlearn through much time and independent research. I hope you enjoy what I bring you which is not often heard in the mainstream news outlets. I would like to think my own personal editorializing is not only edifying but thought provoking while not at all obnoxious. That last one may be a hard to achieve.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>