Is The US Heading To Another Recession?

by Don Azarias
December 1, 2012
According to the Reuters News, two of the nation’s premier economists are concerned and pessimistic that the White House and Capitol Hill will be able to strike a deal to rein in America’s soaring national debt and make a compromise to extend the Bush tax cuts. Consequently, both are predicting that the United States is heading for another recession in 2013.
Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation, and Stephen Roach, a veteran economist at Yale University’s School of Management, also said the Federal Reserve was creating another catastrophic financial bubble with attempts to stimulate the economy through its policy known as quantitative easing.
Bair, who stepped down as head of the FDIC in July 2011, said the Federal Reserve’s policy of pumping money into the economy, combined with an unprecedented period of historically low interest rates, was creating “the mother of all bond bubbles.” Bair said she believed the United States was heading for a financial crash on the scale seen when the housing market collapsed six years ago, but this time because of investors who were looking for higher and riskier returns in other asset classes. “It’s not hard to figure this out. It’s lack of leadership that doesn’t get us here. I just don’t see that sort of leadership anymore,” Bair said.
Meanwhile Roach called the Federal Reserve policy of low interest rates and quantitative easing a “ticking time bomb that keeps on ticking.” Roach had this to say: “I am not optimistic we will get a grand deal that will really solve our long-term problems.”
The two leading economists spoke as congressional leaders in Washington met with President Barack Obama to try to find common ground on taxes and spending that will allow them to head off a looming “fiscal cliff” that could push the U.S. economy back into recession.
About $600 billion worth of tax increases and spending cuts begin to kick in on January 1, 2013, unless Congress can find a way to replace them with less severe deficit-reducing measures before then.
Bair and Roach both said they believed Congress will find some way to “kick the can down the road” on the question of the fiscal cliff. Neither believes Washington will pass the fundamental structural reforms necessary to deal with America’s long-term debt crisis.
For the readers’ information, the United States has been running annual deficits of over $1 trillion for several years. National debt now tops $16 trillion.
A series of panels and commissions last year recommended a mix of revenue increases and spending cuts as a way to pay down the debt which were largely ignored by Obama. And the latest efforts by Obama and John Boehner, the Republican House Speaker, to reach a “grand bargain” on debt reduction collapsed acrimoniously last year. Political observers, however, are counting on bipartisan efforts on Capitol Hill between Democrats and Republicans to work things out in order to avoid the impending fiscal cliff.
According to the Economic Cycle Research Institute (ECRI), leading economic indicators are showing signs that the U.S. economy is slumping. ECRI claims that the U.S. economy is tipping into a new recession. Lakshman Achuthan, ECRI’s co-founder had this to say: “You have wildfire among the leading indicators across the board. Non-financial services plunging, manufacturing plunging, exports plunging. That is such a deadly combination.”
For the readers information, ECRI is an independent institute dedicated to economic cycle research, with a mission to advance the tradition of business cycle research established at the National Bureau of Economic Research (NBER).
In a previous article I wrote, I made reference to the NBER as an American private nonprofit research organization “committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.” The NBER is well known for providing start and end dates for recessions in the United States. The NBER is the largest economics research organization in the United States. Many of the American winners of the Nobel Prize in Economics were NBER Research Associates.
I personally have reservations about the credibility and integrity of those mainstream economists’ predictions, as they had been wrong in most of their calls during the Great Recession. However, I still haven’t lost faith in their ability to make accurate economic predictions the same way most of us put our trust in weather forecasters when it comes to making weather predictions.
We may recall that the Federal Reserve’s efforts to support the economy, including holding its benchmark rate at virtually zero since December 2008 and expanding its balance sheet to a record $2.88 trillion have done little to reduce unemployment that has hovered around 9 percent since April 2009 or to revive the housing market.
According to the Commerce Department’s most recent report, the U.S. economy grew at a 1.3 percent pace in the second quarter after a 0.4 percent expansion in the first three months of the year. It earlier estimated that gross domestic product grew 1 percent from April through June. Purchases of new houses fell in August to a six-month low as the biggest drop in prices in two years failed to lure buyers away from even less expensive distressed properties. Sales dropped 2.3 percent to a 295,000 annual pace.
Furthermore, the European debt crisis also remains problematic affecting not only the United States’ but also the global economy with the European Union undergoing its second recession since 2009. European shares fell 0.4 percent, pressured by weakness in banks. Meanwhile, a flare-up in violence in the Middle East added to fluctuations in securities markets with U.S. stocks ending flat as investors try to exercise prudence in the face of a brewing partisan battle in Capitol Hill over pending tax and spending changes come 2013.
For now, let’s just hope and pray that those Washington, D.C.’s politicians will come to an agreement in order to avert the much dreaded “fiscal cliff” which, as most economists are predicting, would trigger an economic crisis that could be equal or worse than the Great Recession. Let’s also hope that those economists are wrong………………….again.