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Posts Tagged ‘Wall Street & Markets’

Nine Reasons Why This Economy Feels So Bad

Posted by Ram Kumar Shrestha on August 8, 2012

The recent slump has been unusually painful, and the feeble recovery has been disappointing. But today’s economy seems even worse than it actually is.
 
Man holding empty wallet

H. ARMSTRONG ROBERTS / RETROFILE / GETTY IMAGES

Recent U.S. economic troubles are often referred to as the Great Recession, implicitly equating them with conditions during the Great Depression. Yet by many measures the economic deterioration of the past few years is not as serious as in some earlier downturns. The drop in GDP from peak to trough for the 2007-09 recession was indeed severe, 4.7% compared with 3.2% for the 1973-75 recession. Still, it doesn’t begin to compare with the 26% decline of the early 1930s, the 18% of the 1937-38 recession or even the 12% of the often-overlooked 1945 slump. And peak unemployment was higher not only during the Great Depression, but also during the recession of the early 1980s.

Moreover, if you look beyond the national averages, several past recessions have been more destructive in certain specific regions. Rust Belt manufacturing was badly battered in the 1970s – indeed, Detroit and the U.S. auto industry have never fully recovered. And the Oil & Gas business, especially in Texas, needed a long time to bounce back from the 1980s. All things considered, the recent recession may have been worse than average, but it was hardly unprecedented – and nowhere near comparable to what happened in the 1930s. So why do today’s economic troubles seem even worse than they are? Here are nine reasons:

The recovery has been hugely disappointing. Compared with today’s feeble gains, the rebounds that followed the deep recessions of 1973-75 and the early 1980s were robust. Within 18 months, real GDP growth touched 9% and remained well above average for several years. By contrast, the current recovery has failed to get much beyond 4% at best and has averaged less than  2.25% over the three years since the official end of the recession. Read the rest of this entry »

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Does the World Believe America Will Pay Its Debts?

Posted by Ram Kumar Shrestha on April 7, 2012

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If you spend any time reading about economics on the internet, you’re aware of the many virtual pamphleteers who loudly portend the impending downfall of the American government and global financial system in general. It’s become somewhat fashionable to proclaim America a banana republic, arguing that she is financing her debt with central bank purchases of government bonds, a strategy that is unsustainable and often ends in a blaze of hyperinflation and economic collapse.

No serious observer really believes that the U.S. faces this fate in the near term. Perhaps much of this hyperbolic rhetoric is merely an effort to get the U.S. to reign in its debt – something, long term, it certainly needs to do. But a strand of this thinking has made its way into the mainstream and is distorting the debate about the federal government’s attempts to steer the economy out of a recession.

(SPECIAL: Turning Point for the Global Recession?)

Lawrence Goodman opined in the Wall Street Journal last week that, “Demand for U.S. Debt Is Not Limitless.”  In the piece, Goodman takes aim at those who have argued that demand for U.S. debt is strong, and that regardless of what the rating agencies say, the marketplace believes the U.S. will pay its bills. In particular, he highlights the “stunning” fact that in 2011 the Fed purchased 61% of the debt issued by the Treasury, up from negligible amounts prior to the 2008 financial crisis. This, he added, “not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.” Read the rest of this entry »

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Why Portugal May Be the Next Greece

Posted by Ram Kumar Shrestha on March 28, 2012

The worst is over for the euro zone, the experts say. But Greece isn’t really fixed and Portugal could become a second big problem before year-end
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GETTY IMAGES

When Greece celebrated its Independence Day on Sunday, there were scattered protests over the harsh austerity program aimed at stabilizing the country’s finances. The government reportedly removed low-hanging fruit from bitter-orange trees along the parade route, so it couldn’t be thrown by protesters. But, basically, the most recent bailout appears to be successful. As a result, worries about the European financial crisis have diminished somewhat. Indeed, European Central Bank president Mario Draghi has said that the worst is over for the euro-currency zone.

Such optimism may be premature, however. Not only does Greece remain a long-term financial concern, but in addition Portugal is on track to become a second big problem.

The dangers Greece still poses are clear. Higher taxes and government-spending cuts may reduce new borrowing, but such austerity policies also undermine a country’s ability to pay the interest on its existing debt. Unless accompanied by progrowth policies, austerity can become the financial equivalent of a medieval doctor trying to cure patients by bleeding them. In addition, the bailout plan for Greece consisted of marking down the value of much of the country’s debt held by banks and other private lenders. That means entities such as the European Central Bank now hold most of Greece’s remaining debt. And so, in the event of a default, important international institutions would suffer the greatest damage.

(MORE: Is Germany’s Euro-Crisis Strategy Actually Working?)

The net result has been to postpone the Greek financial crisis for months or even a couple of years, while raising the stakes if things go wrong. That could be seen as a considerable achievement, if you believe Greece is a unique case and that the problem has been successfully contained. The trouble is that other countries — and especially Portugal — seem to be heading down the same path. Here’s why forecasters are worried: Read the rest of this entry »

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