Our asthmatic economy

Written by Andrew Szabo
Thursday, 04 August 2011 00:00

In the midst of the crisis over the debt limit of the United States, the most recent numbers came in on Friday for our gross domestic product (GDP). They brought no joy. It appears that our economy is still breathing, but asthmatically. With its flow of federal stimulus oxygen cut back and choking on high oil prices, a continuing huge trade deficit with China, and state and local government cutbacks, it’s gasping.

In particular, according to the U.S. Bureau of Economic Analysis (BEA, part of the Department of Commerce), U.S. GDP grew at only a 1.4% annualized rate in the second quarter of 2011. (GDP measures the total final value of all goods and services produced in a country during a given year.) Even more striking is that first quarter GDP was revised downward from 1.9% to only 0.4% annualized. I suspect in due course that the second quarter GDP advance estimate will similarly be revised downward.

U.S. economic weakness parallels the painful economic and fiscal problems in the Eurozone. Even Germany is losing steam. In Asia, Japan is locked in its structural problems. Australian growth is slowing. Indian GDP is expanding rapidly, at an 8.2% rate expected for the current quarter, but with inflation around 9%. The Chinese policy of restraining GDP growth to control inflation is starting to take hold, likewise in Brazil.

Meanwhile, the world watched with horror as gangrene spread through our legislative limbs. The morbid stalemate, induced by the inflexible stand of some freshmen in the House from the “Tea Party” caucus, brought the federal government to the brink of default on some obligations. When we carry $13 trillion of debt, when we bear responsibility as the world’s major reserve currency, when our economy is limping along, and as the European Community attempts to rescue Greece and other tottering members — this was not the time for “Cry Uncle!” hijinks. The uncle to cry for was Sam. As I wrote in the recent column, “Paralysis of the Body Politic,” something has been lost in our civil culture. Shall we elect voting machines for uncompromising ideologies rather than representatives?

As I write, it appears that congressional leaders have cobbled a last minute deal that will avert default. A joint committee of Congress will be formed to explore deficit reduction. On the whole, the deal that emerges will probably look less balanced and credible than the one Speaker Boehner and President Obama reached earlier — it collapsed in mid-July, when Boehner faced a rebellion within his own delegation.

Obviously, fiscal contraction implies a drag on GDP and the risk of falling back into recession. As a rule of thumb, with a GDP of about $15 trillion, each reduction of $150 billion in federal spending per annum implies a reduction of 1% in GDP (if we conservatively assume no “multiplier effect”). Unfortunately, there are limits to what the Fed can do with monetary policy alone. The target rate on Fed funds is close to zero percent nominally and is negative when inflation is considered. It is now almost certain that the Fed will need to launch “QE3” (Quantitative Easing Stage 3), meaning it will again massively purchase securities from banks in order to encourage lending.

I wish to share with my readers that I will shortly be giving up my authorship of this column, which I have been writing weekly for eight years, owing to the pull of other duties. (You may always find issues of Post columnists going back about one year at Greenwich-Post.com). I appreciated the chance to serve the public by trying to clarify some of the issues we face. Thanks to my loyal readers! I also want to express appreciation to the Greenwich Post editors for their support! I’ve had complete freedom to express my views, sometimes even in extended series such as the recent ones on the economic policies of our Presidents and on the future of federal entitlements.

The Post has asked me to make some screening interviews of possible candidates to continue the financial/investment column. The editors will of course have the final say. If you feel you are qualified, and you would like to be considered, please peck out an e-mail to me with some relevant facts about your background.

Andrew Szabo is managing director of Greenwich Financial Management Inc. (dba). Securities offered exclusively through Choice Investments Inc., member FINRA/SIPC. Contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

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