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The economic ignorance of the Teapublican faction of the Republican party in the US House and Senate is perhaps exceeded only by the similar ignorance of its economic advisers.

Appearing in the public press in recent days is the latest ‘brilliant’ Teapublican view that a default by the US government on paying interest on its debt would not have a negative impact on the US or global economy.

Both the US and global economies are already slowing noticeably, with the Federal Reserve in the US continuing to downgrade and lower its estimates of future US growth, and the IMF doing the same for growth rates in China and the rest of the world. The Teapublicans claim a US debt default would not impact these already negative trends.

While it is true that the US government will not completely run out of money with which to pay its debts on October 17, 2013, as Treasury Secretary, Jack Lew, has publicly stated, it is equally true that it will definitely do so sometime between October 24 and early November. Thereafter, some funds will continue to come into the government, but not nearly enough to pay all its bills. That will force the Obama administration to choose between what it will pay: either bondholders who own US debt or grandma and grandpa on social security. Teapublicans no doubt want to force Obama to make that ‘Hobsons’ Choice’ (i.e. damned if you do and damned if you don’t). Teapublicans will argue he should pay the bondholders first, and forego paying social security. It’s their way to start cutting social security before they even negotiate an official reduction in it with Obama.

To quote one Teapartyer’s statement today, Republican Representative, Joe Barton, of Texas: “We have more than enough cash flow to pay interest on the public debt, so there is no way we’re gong to default on the public debt unless the president of the United States intentionally does so”.

Such statements by lesser known Teapublicans were followed up today in the business press with an article by Teapublican notable, Paul Ryan. Ryan made it clear that the focus of the debt ceiling discussion was to provoke further concessions by Obama on Social Security-Medicare cuts. US House radicals thus are attempting to put Obama in a negotiating box: either he agree to cut Obamacare or to cut Social Security-Medicare.
What the Teapublican faction in all their economic ignorance don’t understand, however, is that the psychological effects of a default—or even a near default—on the US and global economy will prove significant. One does not have to wait for a complete default for that to happen.

What then are some of the possible impacts?

First is the prospect of rising interest rates. Interest rates have already begun to rise, starting on a base that has already risen since the US Federal Reserve’s bungled attempt to signal over the past summer its intent to begin reducing (tapering) its Quantitative Easing (QE) $85 billion a month liquidity injections. That Fed ‘faux pas’ has already driven up long term rates by more than 1%, thereby causing an abrupt halt to a very timid US housing recovery earlier this year. In the past month banks and mortgage servicing companies have already announced thousands of layoffs in their mortgage departments, signaling the virtual end of that housing recovery. Further interest rate hikes, short and long term, on top of the Fed’s recent bungling—which will now certainly occur as the default approaches—will all but ensure the end of any housing recovery in the US.

Short term rate increases will most likely accelerate further throughout the month of October. That includes, in particular, Treasury bill rates which will in turn impact other rates. ‘Other rates’ include the critically important ‘Repo Market’ rates. Destabilizing the repo market is a dangerous game. It is likely the locus for the next financial crash, the analog to the subprime market that was the center of the last financial crash. Teapublicans are thus playing a dangerous game, one that may well in a worst case scenario precipitate another financial instability event on the scale of 2008.

Rising interest rates also mean the end of the latest stock price and junk bond booms. In itself, that doesn’t affect average folks much. But the psychological impact of a rapid decline in asset prices can, and does, spill over to consumer and business spending. That leads to layoffs, in a US job market that is, at best, producing only part time, temp, and low paid jobs as it is.

Rising rates and an even weaker job market in November-December will translate into slowing consumption, which is already showing signs of weakness in August-September. Retail sales in general will weaken still further as a consequence of the debt ceiling default, as will an already ‘long in the tooth’ auto sales cycle.

The negative impact of debt default on consumption is already becoming evident in recent weeks. A Gallup Poll in recent days showed consumer confidence dropping precipitously. While some argue confidence surveys are typically volatile and unreliable as indicators of consumer spending, that is not as true for abrupt and significant movements in confidence indicators. That may now be happening, as the public begins to focus on the dual crises events.

The recent Gallup poll in question fell to -35 from a prior -15. This compares to -56 during the August 2011 worst period of that prior debt ceiling debacle. During the worst period of October 2008 the index was -66. Already falling significantly early in the current crisis, one can estimate where the -35 current poll will be by October 17-24 should the crisis not be resolved by then. We will almost certainly be in the August 2011 territory, when the third quarter US GDP nearly went negative (and did so if the GDP deflator was substituted with the CPI index for that quarter).

Globally, the approaching debt ceiling crisis has already provoked widespread public responses by foreign governments, warning a potential default by the US would have dire consequences for US debt holdings and future purchases. China, Japan, and the IMF have all raised warnings in recent days. If default occurs, then US bond rates will rise even further and faster than at present, raising a real question whether they will continue to purchase US Treasury debt when the price of their holdings are declining significantly in the wake of a default.

There are also important implications of a default (or even near default) for the Eurozone’s own current economic recovery and its still very fragile banking system.

Yet another negative impact globally will be a decline in Euro exports. A default situation would result in the US currency losing value, causing a further rise in the already fast appreciating Euro currency. That trend would challenge German and Euro export growth and therefore that region’s tepid 0.3% last quarter’s recovery.

Another problem potentially to grow worse is the Euro banking system. The Eurozone’s version of QE-the LTRO liquidity injection policy of the past year amounting to more than $1.5 trillion-will soon need another LTRO II injection by the European Central Bank in a matter of months. In addition, more than $1 trillion of the LTRO I will need to be refinanced soon. Nearly all the major banks in Italy, for example, have yet to repay anything of their share of the LTRO $1.5 trillion and will need further liquidity in coming months. Rising interest rates from a debt default in the US will spill over to Europe, thus raising the costs of LTRO II, as well as the financing of much of LTRO I. That will cause further fragility in the Euro banking system and economic recovery there, especially for the highly fragile Italian banks.

For Japan, its recent export gains would also slow, at a time when it has decided to raise taxes while suspending structural economic reforms.
Currency volatility in emerging markets would also intensify from a debt default in the US, likely causing a retreat once again in real growth in those markets, just a few months after their recent ‘stop-go’ provoked by US Fed QE policy uncertainties this past summer.

Throughout the past 18 months, this writer has forewarned that a fragile US economic and global recovery-not nearly as robust as some maintain-is susceptible to a ‘double dip’ recession in 2013-14 should one or more of the following negative ‘tail events’ occur: first, a renewed banking crisis in the Eurozone or elsewhere; second, significant further deficit cutting in the US; and thirdly a continued drift upward in US long term interest rates as a consequence of QE tapering or other events. While it appears the Euro banking crisis has temporarily stabilized—except for Italian banks perhaps—the deficit cutting and interest rate trajectory in the US are very real and serious trends that may yet precipitate a descent into a double dip condition in the US economy.

And if the Teapublican faction in the US House of Representatives managers to prevent a resolution of the debt ceiling issue into the latter part of October, then the economic consequences for both the US and global economies will be severe, and may even prove sufficient to precipitate a double dip recession in the US.

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I WOULD LIKE TO EXTEND ONCE AGAIN AN INVITATION TO READERS OF THIS BLOG TO JOIN ME ON TWITTER AT: @drjackrasmus.

THIS BLOG PROVIDES INTERMEDIATE ANALYSES. MY TWITTER ACCOUNT OFFERS BREAKING NEWS AND COMMENTARY.

A sample of my recent ‘tweets’ on the economy over the past three weeks, August 20 to Sept. 7,are as follows:

• Dr. Jack Rasmus ‏@drjackrasmus 1m

Is Eurozone Econ Recovery underway? Don’t bet on it. Today’s Industrial Production rept. shows -1.5% decline for July vs. forecast of+ 0.1%

• Dr. Jack Rasmus ‏@drjackrasmus 3h

Latest IRS data study shows Top 1% accrued 95% of all income gains, 2009-2012. Remaining 99% declined 0.4%. Median and below, big declines.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Read my piece tomorrow (9-7) on the Znet blog: “Larry Summers-Next Fed Chairman?” And why there’ll be no ‘Summers Effect’ as Fed chair.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Obama should have been a union rep. Then he’d know “never take a strike vote unless you know they’ll vote yes” (Syria=big egg on his face)

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Check out my blog piece, ‘Federal Reserve Policy-Past Failures and Future ‘Tail Risks’, at http://jackrasmus.com .

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Will Fed now back off from QE 9-18? No. A very slow, token reduction in the $85B/mo. money injection-watch for $75B or a reverse repo deal.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Another stagnant US jobs report + only 100,000 jobs in July. US barely creating (low pay) jobs for new entrants. And as jobs ‘churn’, wages burn

• Dr. Jack Rasmus ‏@drjackrasmus 5 Sep

Frontpage mainstream press (NY Times, Journal, CNN) articles today featuring Larry Summers. Is Summers’ Fed Chair announcement imminent?

• Dr. Jack Rasmus ‏@drjackrasmus 4 Sep

Money flooding out of Asia, Brazil, Turkey,etc. back to US, EU. Export gains US/EU at expense of Emerging Mkts. No net gain for world econ.

• Dr. Jack Rasmus ‏@drjackrasmus 4 Sep

G20 meets in St. Petersburg Thurs. #1 issue? Not Syria. But emerging markets crisis: capital flight, currency freefall, commodity deflation

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

Will the Fed ‘taper’ after 9-17? Will Summers get appointed next Fed chair? Will Obama send missiles into Syria? Do bears live in the woods?

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

US consumer spending last month=0.0%, adjusted for inflation (Consumption=70% US economy). Banks lower 3Q13 GDP estimates to 1.5%. Recovery?

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

Why did Obama & Repubs agree Jan. 1 to extend $4 trillion of the $4.6T Bush tax cuts?So corps could give $821 bil. to stockholders this year

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

India economy ’emerging’ as weakest of emerging markets. Watch for 2% GDP or less in 2014. Currency (Rupee) to fall to record lows

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

Emerging mkts quadruple crisis: rising US rates, capital flight to safe havens in west, commodities deflation, and soon to rise oil prices.

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

Re. growing assault on democratic rights in the USA, see my blog http://jackrasmus.com article ‘North Carolina’s ‘Moral Mondays’ movement’

• Dr. Jack Rasmus ‏@drjackrasmus 27 Aug

Watch for coming ‘tail events’ causing market declines: Fed taper, debt ceiling fight, & emerging mkts capital flight–converging late Sept

• Dr. Jack Rasmus ‏@drjackrasmus 26 Aug

So bus.spending biggest fall since 2008, consumer-retail sales flattening, and home sales in freefall. OK, so where’s the recovery (again)?

• Dr. Jack Rasmus ‏@drjackrasmus 26 Aug

Data today show bus.investment fell in July almost twice as fast as consensus. Durable goods orders and shipments largest since 2008.

• Dr. Jack Rasmus ‏@drjackrasmus 23 Aug

consumer spending decelerating & flatlining-as predicted in my ‘The Stop-Go US economy’, see my blog, http://jackrasmus.com , article

• Dr. Jack Rasmus ‏@drjackrasmus 23 Aug

New home sales July freefall. My prediction rising rates (due to taper talk) will stop H-recovery sooner rather than later, now coming true

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

The global economy, including USA, is slowly slipping into a stagnant growth scenario. The process is slow, long-term, erratic, but steady.

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

Has the Eurozone/UK ‘recovered’? No, just following the trajectory of Epic Recession: short shallow recoveries followed by repeated relapses

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

The locus of global economic instability is now shifting from Europe to Asia, esp. India, as China slows & Japan’s boom proves short-lived.

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Annually for the past three years this writer has made leading edge predictions about the trajectory of the US and global economies for the 12-18 months to come. The last previous set of predictions appeared in the January 2012 issue of ‘Z’ magazine. Eighteen months later, it appears most have materialized. The following briefly summarizes those prior predictions, and makes further predictions for the next 18 months, through December 2014:

I. Review of January 2012 Predictions

1. The forecast that the US would enter a double dip recession around late 2013 or 2014 is yet to be determined. However, the US and global economies both appear to be slowing significantly (see my blog piece ‘US GDP Longer Term Trend Analysis’), while China, the BRICS, and in particular Europe all are slowing even faster. Japan has engaged in a desperate and risky monetary stimulus that will fail in the longer term. Simultaneously, financial instability worldwide grows as asset bubbles peak and begin to deflate.

2. It was also predicted in the January 2012 issue that the US Federal Reserve would introduce a third version of its QE program. That prediction was realized, with the Fed introducing an open ended $85 billion a month liquidity injection.

3. A third previous prediction in January 2018 was that deficit cutting would begin again in ‘great earnest’ immediately following the November 2012 elections. That of course also happened, with fiscal cliff, sequestration, and all the rest.

4. In 2012 it was predicted Social security and Medicare spending would be cut a minimum $700 billion, based on what Obama had proposed in the summer of 2011, but backloaded into later years of the coming decade. That is yet to be determined, but appears likely as Obama’s 2012 budget again called for $700 billion in such cuts.

5. Two predictions in January 2012 did not prove accurate: that home prices would continue to fall and foreclosures rise. Single family home prices began to rise slowly in late 2012, albeit only one fourth of the original decline. More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013

6. In the January 2012 predictions, it was forecast that US manufacturing and exports would slow in late 2012, which did, and the minimal job growth in manufacturing would level off and decline, which also has occurred.

7. Prior predictions forecast that jobs recovery would undergo a series of ‘false starts’ determined by seasonal and other statistical factors. The result would be little net reduction in total unemployment. This proved partially true: some jobs were created, but more workers than expected left the labor force entirely. The previous prediction of 24 million jobless compares to today’s official 21 million jobless. But the numbers are largely the same if one considers the 4-5 million ‘jobless’ who left the labor force altogether. As a related new prediction: There will be still be no sustained recovery of jobs over the coming year. Jobs will continue to ‘churn’, with high wage replaced with low wage, full time with part time/temp, current workers with jobs leaving the labor force and new entrants and lower pay taking their jobs, etc.

8. Past predictions were more accurate with regard to the global economy. It was predicted the Eurozone sovereign debt crisis would stabilize, then worsen again. The temporary stabilization occurred in the late summer of 2012. The worsening once again is pending. It was also predicted two or more Euro banks would fail. More than that failed in the periphery of the Eurozone alone, with others in Belgium, Netherlands and elsewhere.

9. It was predicted both France and Germany would enter recession in 2012 and the UK experience a double dip—all of which occurred.

10. It was predicted that global trade would slow and begin to contract in 2012—a prediction that also proved correct.
The following constitute this writer’s predictions for the US and global economies in the coming 18 months. (For a more detailed explanation of why these predictions, see the July issue of ‘Z’ magazine, and this writers article “Predicting the US and Global Economy”. This article will be posted on the writer’s website, http://www.kyklosproductions.com/articles, in late July. See also the writer’s weekly radio show on the Progressive Radio Network, ‘Alternative Visions’, archived on Wednesday, June 12, 2013, for an audio explanation of the bases for the predictions).

Economic Predictions: 2013-2014

1. The U.S. will enter a double dip recession around late 2013 or 2014, providing both of the following occur: that either U.S. policymakers continue deficit cutting and a more severe banking crisis erupts in Europe. Either event may be sufficient to precipitate recession. Both most certainly will.

2. The Fed will begin reducing its $85 billion a month liquidity injection significantly within the next 12 months. Monetary retraction will severely disrupt both stock and bond markets. A major stock market correction will ensue and may have already begun at this writing. The additional financial markets at greatest risk are corporate junk bonds, real estate investment trusts, and money market funds.

3. There will be yet another round of deficit cutting later in 2013 and it will be associated with a major revision of the U.S. tax code. That tax code change will include a big reduction in corporate tax rates, from the current 35 percent to somewhere around 28 percent, perhaps phased in over time. Multinational corporations will also get a sweet deal on their $1.9 trillion offshore cash hoard, paying less in the end than their legally required 35 percent rate. R&D tax credits and other depreciation acceleration tax cuts will also occur as part of the deal.

4. In the next round of deficit cutting, Social security and Medicare spending will be cut a minimum of $700 billion—already proposed in Obama’s 2014 budget—and perhaps much more.

5. The much-touted current housing recovery will stall and single home price increases will slow and perhaps even level off. (More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013.) Housing will bounce along the bottom much like other sectors of the economy. Institutional speculators will continue to drive the market and once again convert it into a speculators dream, different in form from the subprime fiasco but similar in content.

6. Manufacturing and U.S. exports will slow still further, drifting in and out of negative growth as the global economy and world trade continues to contract further.

7. There will be still be no sustained recovery of jobs over the coming year (today’s official jobless is 21 million). High wage jobs will be replaced with low wage, full-time with part-time/temp, current workers with jobs leaving the labor force, and new lower paid entrants taking their jobs.

8. The current negotiations between the Obama administration and Pacific Rim countries to create a Trans Pacific Partnership (TPP)—NAFTA on steroids—will be concluded, but will not pass Senate approval until after 2014, or take effect until 2017.

9. With regard to the global economy, the Eurozone sovereign debt crisis will again worsen and the banking system grow more unstable. Austerity policy will focus more on direct attack on wages and benefits.

10. More economies in the Eurozone will slip into recession, including Denmark and perhaps Sweden. France’s recession will deepen. Germany will block the formation of a bona fide central bank in the Eurozone and the UK will vote to leave the European Union.

11. China growth rate will continue to drift lower and it will be forced to devalue its currency, the Yuan, as Japan and other currencies are driven lower at its expense by QE policies. A global currency war, now underway, will intensify.

12. Gobal trade will continue to decline.

13. Japan’s risky experiment with massive QE and modest fiscal stimulus will prove disastrous to the global economy, resulting in still more speculative excess and financial instability. Japan’s stock and asset markets will benefit in the short run, but not the rest of the economy in the longer run.

14. Capitalist economies worldwide will converge around QE monetary policies, more modest deficit spending cuts, and a more focused attack directly on workers wages and especially social benefits like pensions, healthcare services and the like—i.e. the U.S. formula. The consequence will be more income inequality worldwide and no noticeable positive impact on economic growth. The next financial crisis event may not come in the form of a crash of a particular market, but in the form of a grinding slow stagnation of markets in general. With general stagnation of the real economy, a slow drift into no growth scenarios is a distinct possibility.

Jack Rasmus
June 15, 2013

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, Pluto Books, 2012, and host of the weekly radio show, Alternative Visions, on the Progressive Radio Network. His website is http://www.kyklosproductions.com; his blog: jackrasmus.com; and twitter handle #drjackrasmus.

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The following is the Introduction to the full length article, US GDP and the GLOBAL ECONOMIC SLOWDOWN, that can be accessed and read in full on my website, http://www.kyklosproductions.com, accessible from the toolbar on the right side of this blog site.

INTRODUCTION:

Economic data reported in recent weeks show the global economy is slowing rapidly across all segments. Nearly the entire European Union, including its core economies of Germany, France, and the United Kingdom are all now clearly mired in recession. The Euro southern periphery is in a bona fide depression. Japan has entered its third recession since 2008. China, India, and Brazilian growth rates have fallen by half. And the US in the fourth quarter 2012 has come to a virtual economic standstill, the second time in two years in which a quarterly GDP recorded virtually no growth.

One consequence of the now clearly emerging new crisis is the global economy finds itself on a ‘tipping point’ and on the verge of a renewed ‘currency war’ that was temporary averted in 2010-11. Competitive currency devaluations are a sure sign of a qualitatively deteriorated economic state of affairs. During the global depression of the 1930s ‘devaluation by fiat’ played a key role in deepening and ensuring the duration of the depression. In 2010-11 the then incipient drift toward currency war took the form of driving down wages to gain a cost advantage for export sales. Today the driver is global quantitative easing, QE, policies that have been implemented and are intensifying by central banks around the world, from the US Federal Reserve, the Bank of England, the European Central Bank, Bank of China, and most recently, the Bank of Japan.

Capitalist policy makers globally have bought into the false idea that monetary policy—i.e. injecting massive amounts of liquidity into their respective banking systems—will stimulate recovery. Historically this has never worked, and it has not been working as well since 2008. Injecting money into banks, shadow banks, and speculators have resulted only in creating incipient bubbles in the stock markets, junk bond markets, and other financial securities. The real economies have benefited little if any from this form of stimulus.

Believing QE is the answer to recovery, the same policy makers have opted for a severe contractionary fiscal policy in the form of ‘austerity’ programs—massive cuts in public spending, mass layoffs and privatization in the public sector, and tax hikes on the middle class to offset the anticipated inflationary effects of the QE and money stimulus—inflation which has not appeared as deflationary forces continue to grow as the real economies of their countries continue to slow and stagnate. The dual strategy of capitalists politicians across the globe—of QE and money injections into the banks and financial system combined with austerity for the rest—has clearly failed and will continue to fail even more visibly.

Meantime, the global economy continues inexorably to slow, drifting toward the ‘double dip’ recession this writer has predicted on various occasions in the recent past, in my 2010 and 2012 published books (Epic Recession: Prelude to Global Depression, 2010, and Obama’s Economy: Recovery for the Few, 2012) and numerous articles in ‘Z’ magazine and elsewhere.

The locus of the debate on the near-term economic future in the US economy is now concentrated on whether the recent 4th quarter US GDP , which fell to -0.1%, is just an aberration and will be reversed in the first half of 2013 or whether it is a harbinger of a further slowdown. This writer’s view is that it is the latter, as has been predicted in a series of analyses of US GDP over the past five quarters, from the last quarter of 2011 through the last quarter of 2012’s recent GDP data.

Data now coming in for the US show that consumer spending on the holidays was noticeably weak except for auto sales driven by discounts. It is now weaker in 2013, as payroll taxes have risen, health insurance companies are gouging households with premium increases of 10-20%, gasoline prices are rising rapidly once more, and real disposable household income for 80% of families continues to decline. On the business spending side, business inventory accumulation is slowing rapidly, small business confidence is falling, forecasts of business operating revenue show a major slowing, productivity is collapsing, and export sales will decline as the currency war drives up the value of the US dollar in global markets. The remaining ‘engine’ of GDP, government spending, is also in reverse as the debates on ‘fiscal cliff: Parts 2 and 3’ and federal spending cuts continue and the states and cities continue to reduce spending and raise taxes. Nevertheless, polyannish mainstream economists continue to predict a rapid recovery from the 4th quarter GDP collapse into 2013—as they have erroneously for four years now.

What follows is this writer’s analyses of the details of GDP results for the past 15 months, that were published on his blog, jackrasmus.com, and other public blogs. The reports are in reverse chronological order, with the latest 4th Quarter 2012 US GDP first, followed by consecutive past quarters, concluding with the analysis of the 4th quarter 2011 GDP.

(go to the website, http://www.kyklosproductions.com, and click on the ‘articles’ tab on the top toolbar of the website.)

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