Recession: The Second Coming

     Originally published in the CA and NV Examiner on 11/05/2010 issue

     The American public is indignant on the way the present Administration is handling current government affairs. The most recent survey showed a low 36% approval rate on the President. Two years had passed and the “Obama Change” we were promised if it did materialize, probably needs to be changed-again.

      But brace yourselves. What is more lamentable to note, more than survey results, is that some observers are in fact saying that we will all be witnesses, a polite word for “victims,” again to the second wave of recession. Sounds scary. Haven’t we had enough?

     On the contrary, according to the Obama allies, “Assuming all variables remain constant, the U.S. economy will slowly gain momentum starting next year and should start to be normal again sometime in 2012 or 2013. At that time, unemployment will improve and the housing market will be revived and this should finally boost consumer spending.” Are you saying then, that we should be out of recession?

     The truth is, in the real world, the variables do not remain constant. Variables are dynamic and ever-changing. In my opinion, we may still be stuck in our situation right now and we should be cognizant of the events that could trigger another bout of recession. The possible re-emergence of recession should be understood within the context of national and international scenarios.

     The National Scenario. First let’s look at the national level. The U.S. economy is like a turtle growing at a very insignificant rate of about 2 per cent. It is now election year and the Democrats with supporting actor, former Pres. Bill Clinton on the forefront of the campaign trail, are saying that we are on the road to economic recovery and recession should be over. Sorry, Mr. President, I cannot agree with that. With such an anemic growth rate of 2% and the absence of a healthy demand in the housing market and no sign of increases in consumer spending economic recovery cannot possibly be achievable. The fact is, we are more akin to experiencing a “double dip” recession in light of current situations. When everything else is said and done, do you know, my dear readers of this column, why we will still be overwhelmed and fall victims to another round of recession? Read my lips –“unemployment.”

     Monetary Policy. So what national monetary policies may likely be implemented to get us out of this mess? According to Rick Newmann of U.S. News, “most likely the Federal Reserve Bank will inject more money supply in the economy by buying pools of Treasury securities and this move will drive interest rates even lower. The stock and bond market can rally; our balance of payments will improve, since a devalued dollar could mean cheaper prices of our exports. Businesses can be persuaded to spend that $2 trillion they are hoarding.” We’re all gonna be back on track! Sounds simple. Not really because there are a host of factors that can stop this from happening.

     The International Scene. Let’s look at the international arena. It is a known fact that China is the biggest foreign holder of debt issued by the US government. Rick Newmann writes, “the mutual interests of both countries are served. China gets to keep its currency low, which makes its exports cheap, while the U.S. government is able to run a deficit and keep interest rates low here. But if China were to abruptly dump significant amounts of treasuries, interest rates would spike and the U.S. government would have to pay more to borrow. This alone would probably trigger a recession.”

     Over the past year, China had been gradually reducing its holdings of U.S. treasuries. This had triggered tensions over interest rates and trade policy. Some members of the U.S. Congress are advocating for imposition of tariffs on Chinese goods while the opposite camp are criticizing U.S. borrowings and hinting that China should permanently divest its U.S. holdings. This action could easily destabilize the markets and possibly be the origin of another bout of recession in the U.S. economy.

     Conclusion. My position to this issue is as follows: There are no crystal clear economic indicators to assert that the U.S. economy is on its way to recovery. Let’s not kid ourselves. On the contrary, against the backdrop of local and international scenarios that we have shortly discussed here, the U.S. government should in fact be wary and implement policies and procedures that should counteract the possible second coming of recession. Probably then, the survey rating of President Obama should be up again.