Jack Rasmus

COMMENTARY:

While everyone is focusing on the August 2 debt ceiling default deadline looming behind the current deficit cutting debates in Congress, the real blow to awareness how weak the US economy is today may come with the date of August 6 quickly to follow. That’s when the July jobs report is released. July and certainly August reports will reveal the depth of the deteriorating jobs crisis that this writer has been predicting since last January. While the August 2 deadline will certainly impact economic consciousness in a negative way, and already has begun to do so, the August 6 jobs report may just push it over the cliff. Businesses and consumers are already contracting spending and future plans for investment and consumption in the US in anticipation of August 2. But August 6 may have any even greater impact. The US economy has been weakening all year. The deficit cutting debates have added to the decline. The actual cuts forthcoming after the psychological impact of the deficit debates will exacerbate that decline still further. Meanwhile, manufacturing is stagnating as the global economy slows and housing construction remains in depression levels with no sign of any recovery whatsoever. If the deficit cutting is the body blow, ‘left hook’ to the economy, the ‘right cross’ of the jobs markets accelerating decline may just send the economy to the mat.

‘Deficit Debates vs. Jobs Report: ‘Left Hook’ and ‘Right Cross’ to the US Economy’ by Jack Rasmus, July 27, 2011

Why should the Teapublicans agree to Obama and Democrats (aka Timidcrats) offers to settle the debt ceiling issue? Any seasoned negotiator can see that by refusing to agree to all Democrat proposals since last spring Teapublicans have been able to get Obama and the Democrats to offer even more in spending cuts. They have succeeded as well in getting the Democrats to drop all demands for raising taxes on the rich and corporations. So why should they change that strategy?

Here’s a brief history of the past three months of the deficit reduction charade:

Last spring, Obama and the Democrats caved in on retroactive cuts in the 2011 budget. Boehner wanted $39 billion and he got $38. In June, in back door negotiations with Vice-President Biden, the Republicans demanded no tax increases in any package. Biden agreed to $2 trillion in spending cuts with no tax hikes at that point. After that, you could forget any tax hike idea. Republicans knew that the Democrats would drop it in the end.

Obama then jumped into negotiations in July, trying to resurrect the idea of some tax revenue and trying to extend the time limits past the 2012 election period. He upped the ante, trying to entice the Republicans with massive spending cuts and token tax hikes in exchange for taking the deficit cutting subject off the table until after the election. Obama’s July cuts amounted to 87% in a $4 trillion package with doubtful measures about closing tax loopholes for the remaining 13%.

But Boehner still refused and walked out. After all, the walking out tactic worked the month before with Biden. It would work again.

At this point, just a few weeks ago, the Gang of Six jumped in, proposing a package much like Obama’s. The President quickly endorsed it as a way to resurrect his original proposal. The Republicans refused again. Why should they. They already walked out on a similar deal. And Obama offered more.

And so Harry Reid, the lead Democrat in the Senate, has proposed $2.2 trillion in spending cuts, again with no tax hikes, not even loophole closings this time. Of course, the Reid proposal includes $1 trillion in cuts in war spending, which the latest Boehner-Teapublican proposal has adamantly ruled out. In their latest ‘cut, cap and balance’ proposal, Boehner and Teapublicans specifically exclude any cuts in war or Pentagon spending from their deficit spending cuts.

Boehner’s most recent proposal of Monday, July 26, amounted to only $850 billion in spending cuts, according to the analysis of the Congressional Budget Office, while Reid’s was $2.2 trillion. That provided the opening for Teapublicans to demand Boehner up his proposed cuts. Boehner will now demand even more spending cuts.

The Republicans have won the debate over whether tax hikes will be in any spending package. Obama, Reid, and the Democrats have totally caved in on that issue at this point. The debate is now just over how much spending cuts, whether defense will be included or not, and how much will Social Security, Medicare, and Medicaid be cut.

But what do the Teapublicans and Obama really want?

The primary objective in these negotiations for Obama is now clearly his demand that these negotiations conclude further deficit cutting until after the 2012 elections. Obama is willing to cut social programs by massive amounts in order to gain what he perceives is a necessary election campaign period advantage of no more debates or cuts until December 2012.

Conversely, what the Teapublicans want is more. More spending cuts, now that they’ve won the tax hike issue. And no agreement to stop further demands for spending cuts until after the elections. They want to come back to the trough and demand additional spending cuts before the 2012 elections in three more bites: a demand for more cuts as the 2012 budget is concluded October 1; another reopener for cuts in February, and a third go at it in September 2012 as the 2013 budget is being debated by October 1, 2012.

So this is now largely about election year maneuvering. Either way, however, it will mean disastrous consequences for the US economy. The debates on deficit cutting are already producing a serious contraction in consumer and business spending. If business has been hoarding $2 trillion and not spending on investing in the US–which has in fact been the case over the past year–they will now hoard even more. Ditto for banks refusing to lend to small business for investing. And that’s just the impact on the real economy from the debates, not the actual cuts in government spending which, when enacted, will result in even deeper impacts on the economy.

These economic effects, moreover, come at a time when the US economy has been heading toward a double dip anyway due to causes independent of the deficit cutting debates. The jobs markets are entering a triple dip. Housing is declining again. Manufacturing has leveled off. Foreign demand for US goods is rapidly declining, as China, India, Europe periphery slow or sink into renewed recession. State and local governments accelerate their cuts in spending and raise fees. And the American consumer–70% of the economy–faces declining real income as prices for gasoline, food, healthcare, education all continue to escalate.

Everyone is focused on the deficit debate issue as the August 2 default deadline approaches. But that is the wrong date. August 2 will not result in a default, which technically means either the interest or principle on a loan is renegotiated. The US will not technically default. There may be some short delay in payments, but not a true default. That does not mean, however, the stock and bond markets will react negatively. They will. We are about to witness a major contraction of the stock markets and decline in the value of US bonds. That will contribute as well to an economic slowdown and double dip.

But readers should watch what will happen on Friday, August 6, when the jobs numbers for July come out.

The US economy is like a punched-out fighter in the 8th round. He’s been knocked down early in the bout (2008), sent to his knees again (summer 2010), and now the Teapublicans have dealt a left hook to the body (as Obama and Timidcrats dropped their guard) with the debt ceiling debates. But the knock out blow may prove to be the coming right-cross with the August and September jobs reports. The now staggering US economy will drop to its knees yet again, a third time. That’s called a double dip recession.

Jack Rasmus, July 27, 2011