“Scary” US recession underway

December 10, 2008

The median of Bloomberg’s analyst estimates is that US consumption will shrink by about 1 percent during 2009. To put this in context, this is the first time such a contraction is happening since Pearl Harbour. In other words, no one knows what kind of impact this will have on the global economy, let alone the domestic one.

 

By now it’s clear to most people that next year will be a nightmare for the US consumer. The Obama administration is planning total spending to the size of 3-4 billion over two years, but that amount is likely to be dwarfed by what the US economy will eventually need to stay afloat. And I doubt that the government will be willing or able to create anything else in this scale over the next few years.

 

The Federal government’s chosen path is indeed scary, but the danger that state governments and local authorities face is even greater. Unlike the Federal Government, which is still seen as a kind of safe heaven by fearful investors, the local governments are regarded as risky, unstable, partisan entities that can offer little guarantee for asset value during an economic crisis. They are unable to tap the international markets, and in most cases they will not be able to raise taxes to reorder the balance sheets. This will probably add anyother item to the list of federal government bailouts.

 

But the real danger is that the negative loop will be perpetuated by the continued deterioration of the Us economy. At this stage, all should be done to support the US consumer, but I’m afraid that the exponential deterioration in the status of the US consumer is only following a bubble, and it may therefore be irreversible in the medium term, and unstoppable.

 

 

 

 

 

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