At long last, a
good portion of mainstream economists now concede that a double-dip recession
is in the cards for the United States. To head off the pain, 16 top
economists addressed an open letter to the president urging him to
"stimulate" the economy with a massive new round of government
spending. We feel this is a recipe for driving a recession into a depression.
However, there can be few doubts that such a move is being considered in the
highest policy circles. Flush from victories in financial regulation and
healthcare, the administration may feel the conditions are ripe to push
through another bold initiative.
If so, the United States may find itself in a very diminishing bloc of
nations that fail to appreciate the magnitude of the global debt crisis. Its
policies will become increasingly at odds with the drift of other world
powers. Given American dependence on economic
support from abroad, the risks of such isolation are significant.
On July 20, United Kingdom Prime Minister David Cameron made his first
official visit to the US. At a joint press conference that followed the
private meeting, President Barack Obama and Cameron papered over the
fundamental economic disagreements that separate their governments.
At his core, Obama is in favor of spending his way out of the current
recession. Most of the post-World War II occupants of the White House have
followed the same course. Although the policy is short-sighted, it serves
nevertheless to protect the competitive advantage of keeping the US dollar at
the heart of the international monetary system.
Spending expands global credit and creates the illusion of an invincible
dollar, increasing the system's popularity at home and
abroad. In a self-perpetuating feedback mechanism, the dollar's unique
international position allows it to get away with even more spending.
Many international economists, bankers and politicians now believe the US has
overplayed its hand. At the recent Group of 20 meetings, America was at odds
with the other major powers, which favored major cuts in government spending
even if the result was a deeper short-term recession.
Part of this can be explained by currency movements. The Greek debt crisis
threw doubt on even financially sound nations like Germany and ravaged the
European common currency. Wishing to save the euro from the dustbin of
history, the Germans and their allies within the EU have dug in. The
sentiment even had an effect on the UK elections, which put the Conservatives
into power with a mandate to strengthen the government's balance sheet and
buck up the pound sterling.
On the other hand, Washington's profligacy has done little yet to dent
confidence in the greenback. As a result, the Obama administration senses no
need for caution. This hubris will prove costly.
On paper, the United States appears to be the world's richest economy.
However, she is also the largest debtor. If unfunded obligations are added to
the US$14.1 trillion official Treasury debt, the total would exceed $60
trillion, or 430% of 2009 gross domestic product.
If deficits and the disguised costs of
Obamacare are included, the bill gets even larger. Despite this, the US
government retains its treasured AAA credit rating, at least in the eyes of
disgraced Western ratings agencies. Meanwhile, according to the seemingly
less-biased Dagong International Credit Rating
(DICR) agency of China, the US has been downgraded to AA-. Given its debt
levels, even that rating may be overly generous.
According to the DICR, only Australia, Denmark, Luxembourg, Norway, New
Zealand and Switzerland retain their prized AAA rating. Canada, China,
Germany and the Netherlands have been downgraded to AA+. France, Japan, South
Korea and the UK join the US at the disturbing AA- level. However, if Cameron
delivers on his promised 25% cut in government spending by 2015, the UK may
regain a higher rating.
On the other hand, Obama has bragged that Americans should "make no
mistake, we are headed in the right direction". More disturbingly, his
administration has put forward the absurd notion that government spending
achieves a 3:1 multiplier versus private spending (meaning every dollar of
government spending will "pay for itself" by generating three dollars of
private economic activity). Sensible economists suspect that the reverse is
true: every dollar of government spending sucks between one and three dollars
from the wealth-creating private sector.
It appears that America is now set on the sanguine "progressive"
path of stimulus and inflation. Our rejection of the other great powers'
new-found maturity will push our recession into a depression, reduce our
credit rating, and raise our already vast borrowing costs. Meanwhile, the
rest of the world may not even notice we've fallen. Cool heads should
Senior Market Strategist
Pacific Capital, Inc.
Acacia Street, #200 Newport Beach, CA 92660
888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's just
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John Browne is the
Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a
distinguished former member of Britain's Parliament who served on the Treasury
Select Committee, as Chairman of the Conservative Small Business Committee,
and as a close associate of then-Prime Minister Margaret Thatcher. Among his
many notable assignments, John served as a principal advisor to Mrs.
Thatcher's government on issues related to the Soviet Union, and was the
first to convince Thatcher of the growing stature of then Agriculture
Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher
famously pronounced that Gorbachev was a man the West "could do business
with." A graduate of the Royal Military Academy Sandhurst, Britain's
version of West Point and retired British army major, John served as a pilot,
parachutist, and communications specialist in the elite Grenadiers of the
In addition to careers
in British politics and the military, John has a significant background,
spanning some 37 years, in finance and business. After graduating from the
Harvard Business School, John joined the New York firm of Morgan Stanley
& Co as an investment banker. He has also worked with such firms as
Barclays Bank and Citigroup. During his career he has served on the boards of
numerous banks and international corporations, with a special interest in
venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the
former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.
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