Sunday, June 6, 2010

Is the Double-Dip Inevitable?

After I posted about the unemployment situation and the possibility of the Great Recession slipping back into contraction, I saw similar sentiment from around the blogosphere. Robert Reich of the RGE Monitor also believes we're heading back into recession. He looked at the job numbers as well, but made the claim that at least 100,000 jobs are needed each month just to keep up with population growth. Reich gives three reasons as to why the U.S. has avoided the double-dip until now:
"the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can’t continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories)."
Another bad sign is that some of the insiders like the super-rich believe that a double-dip will indeed occur. Robert Frank of WSJ's Wealth Report, wrote that the super rich were buying gold again and how troubling that is. For additional support he points to a survey of the rich and super rich which found that 25% of those with a net worth of $15 million or more believed the global economy will deteriorate in the next five years, compared with an average of 17% of respondents with $1.5 million or more. His theory (and i tend to agree with him on all three points) is that:
"First, the wealthy have better information than most Americans, and that information suggests more bad news to come.

Second, the wealthy have more to lose (in pure dollar terms) than the nonwealthy. The risks of losing a fortune right now appear greater than the potential for building a fortune.

Third (and related to the second theory) the wealthy are making conservative bets with their money, avoiding bold trades and preferring to sit on cash. People who hang on their cash to preserve their fortunes are by nature going to be more cautious about the broader economy."

It will be interesting to see if all these rumors will become a self-fulfilling process as the economy's state is all of a sudden highly questionable. Macro Man is skeptical of the markets and economies ability to recover because the negatives seem to be overwhelmingly outweighing any positives, for example pointing to the recovery in manufacturing and how it's unlikely to be the miracle we're looking for. Macro Man is worried about all the problems in Europe becoming even worse as they brace themselves for epic disaster:

"In spite of the authorities the world over seemingly having thrown everything, including the kitchen sink at the problem, the market seems to have gone back to square one in the past couple of days. The panic in the EUR periphery not only continues unabated, but is now spreading to “soft-core” countries (Austria, Belgium, Finland) and France (welcome to the Club Med, Mr. Sarkozy)."

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