6 Reasons Why the Economy is Going Down

6 Reasons Why the Economy is Going Down

August 20, 2010

Activist Post - ... The Wizards in Washington entreat us to pay no attention to the man behind the curtain, hoping to distract the American consumer from the mounting evidence that the so-called recovery in the U.S. of Oz is faltering. Rather than let the market liquidate malinvestment and mismanagement, government intervention to prop up failed companies, bankrupt states, busted banks, and toxic business models (like condo flipping) is only dissipating vast sums of borrowed money to no useful end.

The second dip in the U.S. economy is coming, if not upon us, and that will exacerbate the rest of the world’s problems. The evidence in favor of this is so abundant, no black swans need appear on the scene to drive the point home.

The next leg of this “W” shaped recession we’ve been warning about for some time is already baked in the cake. Here’s why:

Top Six Reasons Why the Economy Is Going Down

1. A “jobless recovery” in the U.S. is not a recovery. You can bail out the largest and most mismanaged companies and change the rules to allow banks to forgo reporting their mistakes, making national economic statistics look better. But that doesn’t change the reality that millions of people are out of work – since the crash, over six million more in the U.S. alone – and unable to find jobs.

2. Nor does it make it any less alarming that the rate of bank failures is well ahead of last year’s record (140), with 86 shuttered as of mid-June. Nor does it have the slightest effect on a myriad other harsh realities that politicians, as a group, are unable to face.

3. The EU’s massive rescue package has not, and will not, avert trouble in the eurozone. To the contrary, the situation continues to deteriorate, pressuring the euro ever lower and taking it to levels not seen since early 2006. In today’s global economy, what’s bad for Europe is bad for Asia and the U.S. Ominously, the Baltic Dry Index, a barometer of international trade that staged a feeble recovery following the 2008 crash, is falling sharply again. With all due disrespect for the man, Alan Greenspan considered this his “must watch” leading indicator, and it has proved a good predictor of where the global economy is headed. That would be south.

4. Just as Greece exposed the extent of Europe’s problems with the PIIGS (and they thought the “Mexican Swine Flu” was a problem!), California seems poised to upset the whole U.S. applecart if it doesn’t get bailed out. It would be hard to maintain the illusion of recovery if the most populous state in the U.S. – with a GDP greater than Russia – implodes into a black hole. Illinois, New Jersey, and at least 43 others are just behind, hat in hand.

5. From Obama’s attempted ban on drilling for oil in the Gulf of Mexico, to the new financial regulations Congress has passed, to America’s flirtation with socialized medicine, it is clear that the U.S. has entered a new era of Big Government. Big Government, Big Debt, Big Deficits, Big Military… and surely soon: Big Taxes. One does not have to be an anarcho-libertarian to see this as a Big Problem delivering huge, negative unintended consequences.

6. The real estate markets are still an unfolding disaster. May sales of new homes fell by 30% to a record low (seasonally adjusted 300,000 units vs. 800,000 “normal” sales) and dropped another 2.6% in June. Housing starts are down similarly, and previously more rosy stats have been revised downwards. A recent report from Florida tells us that 81% of all loans in the state are “underwater,” and that nearly 40% of all Florida borrowers owe more than 150% of the value of their homes – just another hay bale in the wind. And the commercial real estate debacle we have been warning of has yet to hit the fan.

I could go on, but I’m sure you get the point that what’s already visibly ahead is Trouble with a capital “T” – never mind the possible black swans that may soon arrive. That said, while the global economy doesn’t need any black swans to tip it over the edge, the fact is that there are plenty of them out there, circling lower like buzzards. The BP oil spill disaster was one -- a major disaster to those affected directly, but barely more than a hatchling black swan, on the global scale of things.

Full-grown black swans could range from no-holds-barred war in the Middle East, to a spectacularly stupid new regulation in the EU or U.S., to an exceptionally long and harsh winter. Events that would be unfortunate difficulties to a robust economy can be fatal blows to one as rickety as the world’s today.

Which will it be? I don’t know – I’m not a fortune-teller – but I don’t need to know. All I need to know is that they are out there, like sparks swirling around a powder keg – and this one has a lit fuse anyway ...