Bill Gross says "Fed Approaching Dead End Unsolvable Dilemma"; Feldstein sees 50% Chance of Recession; Three Cardinal Rules of Stimulus

Is the US economy at a tipping point or has it already tipped over? The best one can possibly say is the economy is at a stall rate.

"Economy Balanced on Edge"

Bloomberg reports Feldstein Sees 50% Chance of U.S. Sliding Back Into a Recession

Harvard University economics professor Martin Feldstein said the U.S. recovery that began two years ago has been losing steam and there are even odds the economy will slip into a recession.

�This economy is really balanced on the edge,� Feldstein said in an interview on Bloomberg Television �Surveillance Midday� with Tom Keene. �I think there�s now a 50 percent chance that we could slide into a new recession.�

The Federal Reserve �has done everything it can,� Feldstein said, though Congress and the administration have failed to address the central problem of weak housing.

�Housing is a major drag on the economy,� he said. �The plan to deal with it has been a failure� and house prices have continued to fall.

Bill Gross Says US Economy at "Tipping Point"



"Fed Approaching Dead End Unsolvable Dilemma"

Here are a few quotes from Gross Says Compromise Debt Deal Fails to Make Significant Dent in Deficit

"In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost"

�We are at a tipping point,� Gross said, adding that the firm has reduced its forecasts for economic growth in the second half of the year to a range of 1 percent to 2 percent, from 2 percent to 3 percent.

"The Fed is approaching a dead end in that all they can do have been done.

"There�s the potential for QE3, but that may take the form of extended language."

�Sisyphus would be familiar with this seemingly unsolvable dilemma,� Gross wrote, referring to the mythological king who was punished by being repeatedly compelled to roll a boulder up a hill, only to have it roll back down again.

No Solution?

There is a solution, just not a politically viable one. It's called debt deflation. That is the economy's way of purging the excesses of a housing bubble and debt orgy.

Instead, the Fed and the ECB protected bondholders at the expense of taxpayers even though the unemployment rate is sky high.

The Fed's action was supposed to get credit flowing again and create jobs. Instead, Fed policy created jobs in China while bailing out US bankers and wealthy bondholders, many of whom arguably belong in prison or stripped of their financial assets.

In the end, Greece defaulted anyway at huge extra cost to European taxpayers. In the US, unemployment rate is 9.2% not counting millions of people who involuntarily dropped out of the labor force.

Keynesian Clowns Argue For More Stimulus

Sadly, Keynesian clowns still argue for more stimulus. Supposedly we need to build infrastructure.

Let me ask a question: Where would the US economy be had we done that?

The answer is certainly in a better position than the alternative of dropping bombs in Iraq. For starters the US would have better bridges instead of holes in the Iraq desert and millions of destroyed lives (and millions more enemies on top of that).

However, the US economy would still be where it is now. Why? Because of the three cardinal rules of stimulus.

Three Cardinal Rules of Stimulus

1. First rule of stimulus: It always runs out.
2. Second Rule of stimulus: All it can do is create a greater pile of debt.
3. Third rule of stimulus: Spend enough money and interest on debt will eventually consume you.

Never, ever do the Keynesian clowns want to throw in the towel on what they suggest. One might think that 20 year history of failed infrastructure stimulus in Japan would be enough to open the myopic eyes of Keynesian clowns but one would be wrong.

US Structural Problems

Before we go throwing money around, why not fix a few internal structural problems to ensure we at least get our money's worth. How do we do that? Easy.

1. Scrap Davis Bacon and all prevailing wage laws.
2. End collective bargaining of public unions
3. Enact national right-to-work legislation

Give me those measures and I will gladly hike taxes a bit. Those measures would at least help ensure we got our money's worth for government work.

However, those three items, while desperately needed, do not solve the problem of why jobs are fleeing the US in the first place.

For starters we need corporate tax laws that do not reward and encourage job and capital flight. Second and more importantly, we need to address the issue of trade imbalances.

I addressed trade imbalances at length in ...

• Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited


• Michael Pettis Warns of "Virulent Political Turn Against Euro", Adds Clarification to "Gold's Honest Discipline"

Before wasting more money on stimulus measures doomed to fail, how about fixing internal and external structural problems first? If we do that, and stop the war mongering, we will not even need stimulus, the economy will heal itself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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