Double-Dip recession is an ugly event. Of course any economic bump in the road effects people and therefore is ugly, but the double-dip variety is especially so. Normal recessions are of the single-dip variety. All is normal and then economic indicators head down instead of going up or being roughly level. At the bottom of the dip we sit for a time and then the economy rebounds and we head back up in economic prosperity. That is the normal cycle of economies.
The double-dip recession starts the same and then levels off at the bottom. Perhaps it starts back up to some degree and then the double-dip part occurs and we head back down before we reach the pre-recession level. The “double-dip” refers to the initial downturn followed by an increase and upward trending that ends before the economy actually fully recovers. This is what I and many believe we are in the midst of. Here’s why.
For the example I will go back to 1981. Reagan pushed through tax cuts in ’81, but the cuts would not take effect immediately. I think the cuts were scheduled to begin in ’83. The result of tax cuts being in place but not in effect yet caused an interesting series of events to occur. What happened was since everyone knew cuts were coming in 18 months they did what most with any ability to do so did – they delayed spending discretionary and especially investment income until the cuts would kick in in ’83.
Since the climate for taking profits would improve in 1983 people who had the wherewithal to delay taking the money and being taxed until the more attractive climate of the coming cuts, did so. It’s the exact OPPOSITE of what we are seeing now. I used this example to show the reader the principle is always in play in these events. It must be remembered that people with large sums of money to invest always use that as discretionary income, meaning not needed for daily life, thus the money can sit until they either need it or until a more attractive economic climate presents itself. When the climate is favorable that is when they take their profits and turn them from paper to cash in the bank. It is at that point that the taxes are paid on investment income.
The result was for the last half of ’81 and all of ’82, the economy was stagnant. Those with the ability to let their investments sit did so until the tax cuts would lessen their tax bite in ’83. It was a huge contributing factor to the continued malaise. Once the cuts kicked in the economy took off at something like 6 or 7% growth. The folks with the investment income turned it to cash for spending or investing in business and we grew like a weed.
What we are going through now in the US is the opposite of the Reagan years situation.
What we have now is the known end of the Bush tax cuts that will end on 1-1-11. On that day capital gains taxes, inheritance taxes and income taxes will rise. In practical terms that means people with discretionary incomes will turn that to cash now, BEFORE the tax cuts end in 2011. All the economic activity we see now that makes it appear as if the recession is ending is false. Not that it is not actually occurring but that the “growth” in economic indicators is falsely manifesting due to a time schedule.
Notice how we hear this is a “jobless recovery.” That means unemployment stays very high but money is still moving through the system, creating what appears to be improving economy. But when we take in all the indicators of economic prosperity – lessening unemployment, increased spending, increased productivity and wholesale prices, we see a false economy present itself.
What is happening now is a rush to turn investment income to cash. When persons and business see the time is right, and now is the right time considering the tax increases that will present in January, business and individuals will take the income and pay the taxes now before they go up. Then the money will just sit in a low-yield account and the money can be slowly siphoned off for expenses. Essentially persons and business take a huge upfront payday so they pay taxes on the realized incomes at the lower rate now before the increase comes in January.
So what all this means is this. Come January 2011 the economic indicators that are pointing up at present will take a turn back down, hence the “double-dip” moniker. Basically we are in the middle point of the letter “W.” We have had the initial fall, a bottoming out, a reversal and slow climb back up, but then instead of the line going back to where it was prior to the beginning of the recession, it stops the climb and heads back down. At this moment we are 6 months from the fall beginning again.
To further confuse the reader we must add in inflation and deflation.
We are in deflation now. Housing prices are way down and due to the accompanying recession many wholesale prices have a fallen too, thus lowering the price of goods and services. That is deflation. When the economy is recovering and in real rebound inflation is the worry. The 6 or 7% growth of 1983 was accompanied by a real concern of inflation due to massive growth and the increased prices that went along with an explosion of economic activity. It was more people chasing the same number of goods that drove inflation.
Inflation is not a problem at the moment. Even though economic activity is up from the bottom of the trough, as unemployment is so high and wholesale prices are still declining, we are safe from inflation. When the double dip manifests at the end of the first quarter of 2011 it will be obvious for all of us to see – more deflation – again!
For the double dip to NOT become reality there is one choice and only one choice – to NOT end the Bush tax cuts. Of course I know that will not happen, but it is still the fact that that is the only thing that will stave off the double dip we will see reported at the end of the first quarter of 2011.
Wanna know what the end of the first quarter of 2011 is going to look like? Unemployment will rise more. Spending will fall again. The markets will tumble once again. Business will husband resources, not expand or invest in speculative ventures, and WILL NOT expand their employee rolls, thus unemployment will go well over 10%. Added to the rise in unemployment will be a new housing glut as people in sketchy times do not make huge investments in an uncertain future. Car buying will decline too. Big ticket items will go stagnant.
Basically the result is this: If ya hated the September 2008 fall, you ain’t seen nothing yet. Why will it be worse this time? Because in the 2008 fall it was triggered by mostly one thing – the Fannie and Freddie debacles. When the January 2011 tax increases hit it will cause all of 2008 to pop up again, only worse because it will effect all of the economy at once.
The 2008 event was led off by the housing market bubble popping. That led to all the rest – markets falling drastically, stagflation or deflation and unemployment rising as business husbands resources and cash. To compound it, there will be little discretionary spending and investment due to a lack of confidence in futures markets. Business will pull back and horde more cash than usual to keep their asset to liability ratios in the favorable margin. That will keep them from hiring and in fact many will trim their employment rolls to anticipate the coming continued downturn in demand for their good or service.
Again, I see no mitigation to this event folks. No way the Bush tax cuts are extended, so the writing is on the wall. Progressives have painted a dire picture, and made that picture reality by the things they have done – ending the Bush cuts, being decidedly unfavorable and even demonizing business and capitalism causing business to have no confidence in the future, thus not hiring or expanding, and drastically increasing government spending and deficits.
The part that really chaps my backside is this: Here is how it will play out. Mark my words and remember this. Republican’s will take control of the Congress in November. Then the Bush cuts end in January on Obama’s orders. Then the first quarter will end in March and in mid-April the numbers for the first quarter will be public and guess what we’ll hear from progressives and Obama?
“This new Republican controlled Congress is the reason my (Obama’s) economic efforts are no longer working! Before the Congress switched majority leadership the economy was on it’s way back from the worst recession since the Great Depression, blah, blah, blah.” Obama and progressives will blame the Congress that will have been Republican led for less than 90 days as the reason his two years of meddling and idiot leadership of economy is then failing. Anyone wanna lay cash on this prediction? Anyone? Especially the prediction of progressive mouthing off at the end of the first quarter of 2011?
Lastly, the reason we are having any growth at all reported now is due to government taking nearly $1 Trillion dollars and jamming it into the economy to make it look like there is growth. That is not growth – it is just a lot of new, printed or borrowed mind you, cash that government has thrown at the problem. It is not real growth and that will become apparent at the end of the first quarter next year.
I will follow this offering with a further explanation of this topic and some additional specifics.