Path to Economic Recovery Filled With Lethal Obstacles

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We just stepped off the plane… We’ll have to catch our breath and open our eyes before we have anything to say about China…

In the meantime, let’s look back at what is happening in Europe and America.

And we will begin by thanking Paul Krugman, economiste ordinaire at The New York Times.

Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we’re alone. And far from home.

Maybe we’re wrong. Maybe we’re leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn’t what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.

What a relief it was to find Krugman in today’s International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we’d have to re-think our position.

“America is not Greece,” he says. So far, so good. His geography is correct.

It is all downhill from there.

Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.

The US is running about the same size deficit as Greece; but don’t focus on that, says Krugman. The two places are not the same, he insists. Because the US has a “much lower debt level.”

He’s wrong about that. If you add to the US national debt the debts of Fannie Mae, GM, and all the other financial holes, which the government will ultimately have to fill, the crater is about 120% of GDP – the same as Greece’s debt.

“Even more important,” he writes, “is that we have a clear path to economic recovery.”

Oh. Where’s that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles. There are now nearly as many people relying on the US government for food as the entire population of Spain. There are about as many people unemployed in the US as the entire populations of Greece, Portugal and Ireland…combined. And there are as many people who have gotten negligible income gains as…well…the entire population of America.

Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?

The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can’t tell the difference. But government spending generally produces negative real growth.

Nevertheless, Krugman explains that IF the economy improves…and IF the administration cuts deficits…and IF the new health care program doesn’t cost more than the Obama team says it will – heck…everything will work out just fine! With a few tax increases, of course.

Then, he tells us that, yes, over the long run we’re going to hell in a handcart. But that problem can be solved by a “combination of health care reform and other measures.”

Finally, he’s right about something. Enough ‘other measures’ and you’ve got the problem licked.

What other measures? Well, the deficit is now at about 10% of GDP. So, all you’ve got to do is to cut spending by 11% of GDP and you’ve got a surplus. Let’s see, where are we going to cut $1.4 trillion dollars? That’s cutting out 100% of the defense budget. And 100% of Social Security too.

And if you don’t do that…you get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you’re Greece.

What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They’ll think that the US can borrow as much as it wants for as long as it wants…

In The Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is “zero.” He says deficits don’t lead to trouble. The US has been running deficits since the ’70s, he points out.

And look at the Japanese, he adds. They’ve been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they’re still able to borrow at practically zero interest.

Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn’t.

A man jumped off the 65th floor of a skyscraper. As he went by the 11th floor, the secretaries heard him remark:

“All right so far.”

The US is all right so far. So is Japan.

And more thoughts…

– Deep Do-Do Horizon

“Following the Gulf disaster…it will be a long time before any new permits are issued for drilling for oil in the Gulf…” said Rick Rule, at the Family Office get-together this weekend.

And this from Bloomberg:

Senators from California, Oregon and Washington introduced legislation to ban oil drilling off the West Coast amid mounting concern about the spill in the Gulf of Mexico.

“We believe that offshore oil drilling is simply not worth the risk,” Senator Dianne Feinstein, a Democrat of California, told reporters today in Washington.

The measure would amend the Outer Continental Shelf Lands Act to impose a permanent ban on drilling off the three states.

Offshore drilling was banned for decades after a 1969 spill about five miles off the Santa Barbara coast soaked California beaches in a 35- mile long oil slick. In July 2008, then-President George W. Bush lifted the presidential moratorium. Congress allowed its own drilling ban to expire three months later.

“This oil spill could destroy the future of offshore drilling,” adds our Family Office researcher, Charles Delvalle. “More states will be allowed to decide whether they want drilling offshore or not. And Senators are trying to allow neighboring states to have a ‘veto’ over any one state’s offshore drilling decision.

“So let’s say Florida wanted to put some offshore rigs up close to Georgia. If Georgia doesn’t want that rig up, it can ‘veto’ Florida’s decision.”

Daily Reckoning readers can see where this is going. Even if the oil were available beneath the sea, the oil industry is going to have more and more trouble bringing it to market.

Rick notes that even on dry land, the oil industry is facing disasters. A number of major exporters – Mexico, Iran, Venezuela and Peru – could take themselves out of the export business in the next few years, he says, thanks to their habit of using oil revenues for social/political purposes and failing to invest in additional capacity.

This is occurring as the number of cars – and the demand for energy – is exploding.

Implication: a higher oil price.

“There’s plenty of $200 oil,” said Rick.

Trouble is, there isn’t that much $70 oil.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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