You are here: Economy » Jobs and deficit crisis will lead to double dip and more downgrades
Former Fed nominee and Nobel Laureate Peter Diamond spoke to Bloomberg News about how he sees the economic difficulties the United States faces. His view is that America faces a jobs crisis in the here and now and that deficit reduction is a longer-term problem. Like Marc Chandler, Diamond believes an infrastructure public works program is a big part of the jobs and demand problem. Expect a proposal of this sort from the President in the Fall.
The line the Obama Administration has taken to the deficit discussion dovetails with this thinking. I agree with this. As I wrote two years ago:
I argued that the United States faced a policy dilemma in avoiding debt deflationary forces while maintaining fiscal prudence. The reality is that President Obama faces political constraints in Washington right now regarding budget deficits. He is not likely to get another stimulus package through the Congress unless he can credibly demonstrate a longer-term deficit reduction outlook. In my view, this necessarily means changes to Social Security and/or Medicare.
Liberals will resist this, just as conservatives will resist any tax increases or military spending cuts. Everyone knows the deficit issues are almost entirely about military and entitlement spending.
Meanwhile, despite under-employment percentages in the mid-teens and the looming threat of a double dip recession, the US is moving toward immediate cuts to discretionary spending as a result of a threat to refuse to pay its financial obligations.
This is exactly the dysfunctionality that got the US sovereign debt rating downgraded. And yet, we hear from both the left and the right that the downgrade was unwarranted – for completely different reasons of course. This is the rationalisation of economic nationalism.
If you look at Japan, which is ousting its 7th Prime Minister in 5 years and is looking to cut spending by 10%, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction.
In the US, I fully expect zero policy traction on military and entitlement issues and further brinkmanship on the smaller discretionary spending issues because that’s how political posturing about fiscal responsibility works best. Further, I expect the infrastructure ideas to fail, due to obstruction from Republicans. This will result in a double dip recession, an increase in unemployment and a fall in asset prices, weakening the fiscal outlook further. Therefore, I expect further ratings downgrades from all the ratings agencies in due course as a result of this train of events.
The Peter Diamond video is below.
P.S. – I am in vacation mode now, but I will expand on this when I return.
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
Like us on Facebook
Follow Edward on Twitter
- Asset allocation in a period of wealth mean reversion
- The mess in Portugal is negative for debt sustainability
- Jensen: How long bonds could actually outperform equities
- Profit mean reversion and recession
- Credit Writedowns is ending paid subscriptions for now
- If we don’t understand both sides of China’s balance sheet, we understand neither
- Do markets determine the value of the RMB?
- China’s stock markets and revisiting 2011 predictions
- The Greece debt bailout negotiations are really about France, not Greece
- Did lending by foreign banks really cause the Greek debt crisis?
- The coming Greek bank nationalization, bail-in and privatization
- Variable geometry bites back: Schäuble’s motives
- The new European Union
- More on Greek Tax Anticipation Note IOUs
- A Return to Fundamentals?
- Greek default
- The Euro is a failure
- Some thoughts on the coming defaults of Greece
- Greek default and Grexit now increasing in probability
- Morality in the Greek Crisis
-  Brynjolfsson on Bill Gross and markets, Roberts on refugees
- Paul Craig Roberts on the US economy and global refugee crisis
-  New government in Argentina; ECB and Fed poised
-  Rickards: US currency hegemony will pass slowly, not all at once
-  Rickards on China, SDR: “Next panic will be bigger than the central banks”
-  Barclays to cough up $150m in forex rigging scandal
-  Schiff on China and the threat of encryption
-  Anti-terrorism dominates G20 agenda
-  DiMartino Booth on housing and weak Eurozone numbers
-  Greece: First general strike against Tsipras