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August 28, 2009

Obama's $9.05 Trillion Deficit Actually Depends on Stunning Growth to Stay at that "Low" Level

Peak growth in the last expansion? 3.6%.

Obama's glide path to fiscal responsibility -- where we merely run nearly a trillion dollars in deficits every single year -- relies upon the assumption we'll rocket to 3.8% growth by 2011 and then in excess of 4% growth for three years running, 2012-2014.

And based on those rosy projections, we'll merely run a $905 billion deficit every year. If it's lower than that -- which, of course, it will be -- then the deficits will be... who knows. It's not real money anymore anyway. It's just ZimbabweBucks.

What is the likelihood of such a rare rocket-like recovery? Not terribly good.

Claims of imminent recovery are based primarily on France and Germany barely ending contraction (i.e., they squeaked like 0.1 -0.2% growth, if you can call it that).

They are likely to contract again -- the dreaded double-dip. (And two dips might not be the end of it.)

The European Central Bank said private sector loans fell by €38bn (£33bn) from a month earlier. Lending to non-financial corporations has shrunk by €116bn (to €4,759bn) since February, although it is still up 1.6pc from a year ago due to lag effects.

"The credit squeeze continues," said Carsten Brzeski from ING. "Today's monetary numbers illustrate how fragile the ongoing recovery still is."

M3 money supply growth has slowed to a record low of 3pc. Monetarists watch the M3 figures closely as a early warning gauge for the economy a year or so later.

The ominous figures help explain why several ECB governors have stepped forward in recent days to cool euphoria....

"The rebound in Germany and France is not sustainable. The state has stepped in to compensate for the private sector. As long as economic growth relies on the state, you cannot talk about durable recovery," he said.

How long until we experience a vigorous recovery? A long time.

An end to technical recession in France, Germany, and Japan because Q2 ( and undoubtedly Q3 to come) ekes out a rise from a collapsed base does not mean anything – except that zero interest rates worldwide, and a massive fiscal stimulus that is pushing public debts towards 100pc across the OECD states (and cannot easily be repeated once the first sugar rush subsides), has mercifully prevented the Great Contraction from turning into an immediate catastrophe.

As the Bank of England’s Governor Mervyn King puts it: “It’s the level, stupid”. The level of economic activity is years away from full recovery.

The Bundesbank’s Axel Weber says it will take until 2013 for Germany to get back to where it was. He also warns, by the way, that there will be a second wave of the credit crisis as Germany’s home-grown troubles come to the fore. Round one was imported havoc from the US: round two will be rising defaults at home and a credit squeeze as ratings downgrades force banks to set aside fresh capital.

And that second wave of wipe-outs will happen here, as well.

Maybe a thousand banks will go under next year.

Thanks to consolidation and one bruised bank buying other bruised banks, the banks which were previously too big to fail are now even bigger.

And the FDIC is taking a hit -- 20% so far. And that's just with 81 bank closings this year. Sure, we can keep writing the FDIC fresh new checks... but that's all we seem to be able to do. At some point our checks become devalued.

Current real unemployed rate? The head of the Atlanta Federal Reserve floated the number 16%. US News & World Report guesses it's higher than that.

So if you care not just about people who meet the official definition of "unemployed" but also about people who are dropping out of the labor force, 2009 seems to be trailing 1982 in terms of the health of the labor market. Williams says that when he takes into consideration people who haven't looked for work in more than a year because they can't find jobs, the real unemployment rate today goes all the way up to 20.6 percent by his calculations. "It won't take much to get it to the worst since the Great Depression," he says.

Now, given all that, and with the polar opposite of pro-growth policies in place, and with future growth already hobbled by crushing future obligations which will only get larger -- how can Obama's hack Orzag "project" growth rates better than Clinton's historically-rare super-expansion?



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posted by Ace at 03:12 PM

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