Monday, 16 January 2012

America's economy :Time for a double dip ?

DR Balraj bishnoi
 The American leaders at last ended a ludicrously irresponsible bout of fiscal brinkmanship, removing the threat of global financial Armageddon by agreeing to raise the federal debt ceiling. Yet far from heaving a sigh of relief, investors are nervous. Stockmarkets around the world have tumbled. The debt deal was signed, the S&P 500 index saw its biggest one-day fall in over a year, and yields on ten-year Treasury bonds dropped to 2.6%, their lowest level in 2011.
It is not all to do with America: the euro zone is a mess and manufacturing everywhere seems to be slowing. But America’s prospects have suddenly darkened. Statistical revisions and some grim new figures have revealed a weaker-than-assumed recovery that has all but ground to a halt. Once stalled, an economy can easily tip back into recession, particularly if it is hit by a new shock—as America’s is about to be, thanks to a hefty dose of fiscal tightening made worse by the debt deal. The odds of a double dip over the coming year are uncomfortably high, perhaps as high as 50%. Recovery from a balance-sheet recession was always bound to be sluggish. its woes need not fell the world economy, thanks to the strength of emerging markets . But the thoughtlessness of the debt deal—notably its failure to tackle any of the real sources of America’s fiscal problems, such as entitlement spending—raises a bigger worry. Can the country’s politicians, so starkly polarised and so willing to gamble with the economy, be trusted not to turn what was always an inevitable period of hardship into longer-term stagnation?
Begin with the state of the recovery. America’s government statisticians published revisions to the past few years of GDP statistics. They showed that the 2008 recession was deeper than first thought, and the subsequent recovery flatter. Output has not yet regained its pre-recession peak. And the feeble recovery is petering out. Over the past year output has grown by a mere 1.6%, well below what most economists consider to be the economy’s underlying growth rate, and a pace that has in the past almost always been followed by recession. Over the past six months the United States has eked out annualised growth of merely 0.8%. Even observers who, like us, had expected America to bounce along near the bottom for a while had not expected growth to be this low.                                                                                        Temporary factors have played some role for these circumstances like soaring oil prices crimped consumer spending. The Japanese earthquake disturbed supply chains. In some industries, notably car production, a rebound is plainly under way. But the overall economy is now so weak that it would take a lot to get growth up to a reasonable rate. And there are some signs that the temporary shocks may have left a more lasting dent on the psyche of firms and shoppers. That is why the newest figures are so disconcerting. Consumer spending fell  consumer confidence slumped along with manufacturer orders slowdown previosly. These are early, incomplete, snapshots, but the chances of a double dip today in 2012 seems relatively less.If such circumstances occur then American politicians will be blamed for this and prescription for a weak economy is a large slug of austerity.
                                    Most importantly it is thankfull to the expiry of a payroll-tax credit and extended jobless benefits , USA is on course for a fiscal contraction of some 2% of GDP at present & the biggest of any large economy and enough to drag a weak economy into recession.The debt deal, which implies only modest new spending cuts in the short term, is not directly responsible for this. But Congress could, and should, have stopped this potentially ruinous trajectory. There was a deal to be had: keep up spending in the short term, with a stress on much-needed infrastructure investment, as well as extending the temporary tax cuts, in exchange for a big medium-term reduction in the deficit, centred on entitlements and tax reform. Congress did precisely the opposite, failing to support the economy now and failing to find enough cuts over the next decade to stabilise America’s debt. Any hard decisions have been given to a commission that condemns workers and firms to more crippling uncertainty about how the country’s fiscal mess will be tackled. if taxes had to rise eventually than how.... but no idea.
Needfully ? used default successfully as a political strategy.The refusal to compromise, rapidly becoming a point of honour for both parties, is wreaking damage elsewhere, partially shutting down the Federal Aviation Administration and postponing trade bills. At best, the politicians will have slowed a sputtering expansion; at worst they will have killed off the recovery and inflicted lasting harm on the world’s most impressive prosperity machine.
Obama or one of his Republican challengers may yet discover the courage to tell the truth about the American economy in upcoming presidential election. Institution with the power to avert danger is the Federal Reserve. With interest rates so low, that means more quantitative easing. Printing more money is justifiable in the circumstances, but still a tool offering diminishing returns. Fiscal help would have been much better BUT problem of inflation due to non-propotional dem,and-supply may be at risk. USA managed to avoid recession and it is a testimony of its strengths.  U.S. economy hugely advantages over other rich nations due to following strong reason: a) younger, less-taxed population, b) a more innovative economy and c) strength of the dollar as the world's reserve currency.

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