So finally after weeks of debate and "suspense" the congress critters passed the national debt ceiling bill! Woohoo! This 2.1 trillion dollar credit limit increase will last us until January 2013 where it will be raised again however that time I expect them to raise it without making too much noise about it as all the commotion is bad for business. The market does not like this deficit "cutting" at all and has thrown a hissy fit after the fact by dropping a good 2.5% today. You see the problem with the new budget is that federal government spending will actually fall year over year as opposed to a growth rate of say 3 percent. With the government spending less year over year and the private sector economy at stall speed (simply look at the recent numbers which are absolutely rotten) a recession is practically guaranteed by the end of 2011 or early 2012. Timing this business is impossible but the general trend can be spotted.
In fact the recent revisions show that GDP has yet to recover to its highest point which was reached in late 2007 so technically we are still in recession. Now when GDP falls again without reaching its old high this is a depression. Absent government borrowing equating to 12% of GDP and the economy would be in even worse shape. But now the administration and the congress have run out of juice by racking up the national debt from 9 trillion in 2008 to 14.6 trillion reaching 16.5 by January 2013. 5 trillion in borrowing power certainly staved off a massive deflationary shit short but only for some time. With fiscal stimulus out of bullets the powers that be will turn to the federal reserve with it's magical "monetary stimulus" and you better believe because the fed will turn on the monetary spigot, unleashing the world with trillions of magical fiat digital dollars, keeping the wicked default monster fed for a time. Gold is pricing all this in and continues to make new highs as it touched $1,650 today. Silver will rocket to unbelievable levels by the time this monetary paradigm withers and dies.
So what does it mean that we will have a new recession in the coming months? Well basically it means that more jobs will be lost equating to less tax revenue leading to more public sector layoffs and broken pension promises. The unemployed will continue to suffer as competition for jobs will become even worse than it is now. Recent graduates will default on student loans in huge numbers as the economy is now losing jobs month over month (adjust the gov propaganda NFP numbers) whereas 150k net jobs are required simply to absorb recent labor market entrants. And then there is the 12 million that got laid off or lost their small business in the past 3 years. Our 70% consumer consumption driven economy will continue to re-balance itself until we become more productive again. It's simply not possible to have trade and federal deficits running over $2 trillion per year and have a healthy economy. Now that the ordinary household can no longer borrow to the hilt, deleveraging is the cure.
Will this new recession be worse than the 2008 crash? Probably not as the banks are more secure (fake accounting rules and stuffed with cash thanks to the fed) and many industries have been smashed from before. Auto sales have stabilized at 11 to 12 million annualized and home construction remains in the doldrums. Losses will come in local and state government, insurance, finance jobs, basically government related jobs. The real issue with the new recession will be its impact on PROJECTED NUMBERS BASED ON EXPONENTIAL GROWTH. YOU SEE THIS NEW RECESSION WAS NOT SUPPOSED TO HAPPEN! In fact the gov and the fed were forecasting 3 to 4% growth for 2011 and 2012. With bad GDP comes less revenue which furthers our descent into fiscal hell for the national balance sheet. This is by far the biggest risk but I don't see this blowing for some time (I'm playing with the numbers for now).
Less less less for everyone is what this recession will mean for millions of people. Many will keep their jobs, some will lose them and possibly join the sad world of un or underemployment. To date I have yet to come across a recent grad that is angry about being unemployed and in massive student loan debt. On the internet people talk tough but yet I have met such a person in real life. Most people I spoke to simply sound defeated or apathetic about their situation. It truly is incredible how docile Americans have become. My belief is that many here still hold faith in the system and believe that either they are losers or the ship will turn around and pick them up for the ride. This debt ceiling debate taught me tons about my fellow citizens. I'm friends with many smart and educated people (the two are not synonymous) and yet the only thing they could do is whine why the debt ceiling wasn't being raised. So sad that such smart people simply cannot think for themselves on the most important issues. I foresee a populace in willing bondage in the future. I love you big brother.
Til next time