There are at least four economic issues which deserve our close attention these next several months.
Each and all are substantial matters which could very well tip our already teetering economy into recession sometime soon.
My best guesstimate, however, is that we'll avoid recession and continue to muddle through in a high unemployment, weak growth economic environment. As the economists might put it, while not reaching "escape" velocity, we'll remain mired at "stall speed" for some considerable time yet. And that's about the best we can hope for, bad as it is.
In any event, Four Risks That Could Derail Recovery provides us with an an important checklist to monitor going forward:
"Some possible nightmares that could derail the global economy or
financial markets are already known (we’re talking about you, euro
zone), and some are not so evident (could deflation flare up even with
the Federal Reserve’s growing balance sheet?).
First, U.S. households haven’t deleveraged as much as people think.
True, credit-card and mortgage-debt levels have fallen (in part because
of defaults) but data show subprime auto loans and student loans have
mushroomed. That means the economy is still in a weak post-credit-crisis
recovery, and consumer spending will be held back for more years to
Second, Washington leaders lack the leadership and compromise to deal with the deficit and debt. “Politicians know what to do,” said one participant. “They just don’t know how to do it and get re-elected.”
Another big worry: boomers have not saved enough for retirement
and younger generations (facing student debt and low-paying jobs) will
not have the income to buy the houses and financial assets the boomers
expected to sell for daily spending in retirement. This demographic
tension will heighten the future battle over entitlement benefits while
financial markets will be inhospitable to higher federal deficits.
Finally, don’t ignore the possibility of a deflationary spiral.
The conventional wisdom is that the Fed’s huge balance sheet will push
on price pressures at some point. But other forces are working in the
opposite direction: further write-downs of European sovereign debt as
well as possible write-downs of U.S. consumer debt, the competitive
devaluation of currencies and an aging population could combine to exert
deflationary pressures in the economy.
These risks aren’t done deals. But in an economy struggling to grow
2%, any negative shock, no matter how small, raises the possibility of a
growth stall or even a recession. Either trend in growth will simply
exacerbate the nightmare scenarios that keep economy-watchers up at
1- The process of deleveraging is continuing unabated among households and countries as well. Paying down the accumulated debt of several decades will be a lengthy and painful process but is an absolute prerequisite in order to regain our individual and national economic health. With respect to economic growth, what this all means is 'slow going' but not 'no going.'
2- After the U.S. elections, our feckless politicians will do what they have to do to keep things from unraveling. Lots of what happens won't be popular but it will be necessary. We the People will be largely supportive of the forward steps taken. They will include a decent plan for increased government revenues, reduced government spending and lightening over time the far too burdensome obligations to fund currently promised entitlements benefits which would otherwise be placed on future generations of taxpayers.
3- See the comments about entitlements in #2 above.
4- We will continue to have deflationary pressures in the U.S. and world economy. They won't get out of hand, however, and lower costs will lead to lower prices and greater consumer spending. This in turn will increase economic growth and help to reduce unemployment. I also anticipate a stronger dollar.
We have serious and well entrenched worldwide economic and political issues that must be addressed.
In the U.S., I'm confident that we will address them; the only question being when.
As Winston Churchill so eloquently put it long ago, "The Americans will always do the right thing ... after they've exhausted all the alternatives."
In my view, that time is coming soon --- as early as 2013.
As for the rest of the world, if Europe somehow guts up to its overwhelming financial issues and the Chinese economy stays out of the ditch, things could begin to recover worldwide soon after 2013.
While that would indeed be a nice surprise, let's not bet on it.
Let's do bet on America though. Churchill was right about us. We're always a good bet.