October 2010 U.S. Economic Fundamentals

[Ally]

The U.S. consumer is back. Well, maybe...

After a long slumber, U.S. consumers might finally be waking up to add their weight to the U.S. recovery.

Existing-home sales jumped 10% in September, rising for the second month in a row, figures showed Monday. While the increase was largely just a rebound from depressed levels following the end of a tax credit in the summer, the housing market at least appears to be stabilizing.

Meanwhile, retail sales came in stronger than expected in September, with the U.S. government revealing spending in the previous two months was better than initially reported. Expectations are starting to emerge that consumers will boost their discretionary spending in the fourth quarter.

"I think retail sales are going to be a little better than expected [during the holiday season]," said Joseph Carson, director of global economic research at AllianceBernstein LP in New York. "Consumers` fundamentals are better, and I think their pace of spending will pick up over time."

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[Ally]

The scary actual U.S. government debt

Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. "Let`s get real," Prof. Kotlikoff says. "The U.S. is bankrupt."

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the U.S. is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. "The U.S. fiscal gap is huge," the IMF asserted in a June report. "Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of U.S. GDP."

This sum is equal to all current U.S. federal taxes combined. The consequences of the IMF`s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: "The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

"America`s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care , tax and Social Security systems – as well as military and other discretionary spending cuts."

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[Ally]

The U.S. Economy: Stuck in Neutral

When countries suffer financial crises, history shows, they generally climb back out of them via exports. Their currency falls, and the parts of the world that didn`t go through a financial crisis help them out of their hole by snapping up their goods and services and putting their people back to work.

This time it`s not so easy. The financial crisis wasn`t felt in just a single country. Last year was the first year since the Great Depression in which the economic output of the entire world declined. What`s more, the countries that are growing quickly now, such as China, aren`t willing to step up their imports to stimulate growth in the weaker economies. China and others are actually depressing their currencies to gain or maintain an outsized share of the stunted global demand. Brazilian Finance Minister Guido Mantega warned on Sept. 27 of a "currency war." The problem is that it`s a mathematical impossibility for all countries to grow by keeping exports high and imports low. "There isn`t another planet to export to," says Paul Krugman, the Nobel prize-winning Princeton University economist and New York Times columnist.

What now? For the U.S., the world`s biggest economy, the question is what it will take to restore healthy growth, if it`s not going to be trade. Economists interviewed by Bloomberg Businessweek and Bloomberg News offered an intriguing variety of answers, from technology to animal spirits to the simple passage of time. Most, however, say the U.S. recovery could remain subdued for several more years—and there`s still a possibility that growth will stall out altogether, sending the economy back into a recession.

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[Ally]

U.S. deep in hole

Source: Bloomber Business Week
http://www.businessweek.com/magazine/conte...00013851349.htm