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US GDP - Sinking!

GDP Annual Growth - Official vs SGS
Source: www.shadowstats.com

The Bureau of Economic Analysis (BEA) released its headline US GDP number (2nd estimate) for the 3rd quarter on Tuesday. The number was revised down from 2.5% to 2%. The market had been expecting at least 2.3%. As Shadow Government Stats www.shadowstats.com points out this is little more than statistical noise. They noted that given a 95% confidence interval this number could have easily been negative as it was positive.

Shadow Stats releases its own set of numbers that reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes over the years that have resulted in a built-in upside bias to official reporting. Based on SGS's GDP numbers the US entered recessionary territory in Q3 2000 and except for a brief period during the 1st through 3rd quarter 2004 the US has been in a recession for the entire decade.

With the focus these days on Europe there is less attention being paid to the goings on in the US. But the woes in the US are considered by some to be almost as severe as Europe. Nothing currently is being done with the US $15 trillion (and growing at over $1 trillion annually) in debt. The current US debt ceiling is $15.194 trillion. That was just raised in August 2011. With the current debt estimated at $15.040 trillion it won't be long before the US is forced to raise the ceiling again.

The failure of the Congressional Super Committee to reach an agreement on how to deal with the debt has exacerbated concerns in domestic and global financial markets as to the long-term solvency of the US according to SGS. In order to offset a clear drop in foreign buying of US debt the Federal Reserve has increased its purchases both outright and through their program known as "Operation Twist" (exchanging short term debt for long term debt). According to the latest balance sheet of the Federal Reserve they hold almost $1.7 trillion in US Treasury securities. This is more than China holds and is rapidly approaching what both China and Japan hold. The Fed also holds upwards of $0.9 trillion in mortgage backed securities (MBS) and another $100 thousand or so in Federal agency paper. Many believe that most of the MBS paper is for all intents and purpose worthless.

If most of the MBS debt is nearly worthless it could effectively wipe out all of the capital of the Fed which is estimated to be around $52 billion. The US has been downgraded once by S&P and both S&P and Fitch have warned that the US could be downgraded again if it fails to resolve its budget issues. The odds of that happening are apparently close to nil as Congress is deadlocked between Republicans who want cuts with no tax increases and Democrats who want tax increases to go with cuts. Neither side agrees on the cuts. With an election next year each side is willing to blame the other for the failure to come to an agreement. It is dysfunctional politics at its worst.

With anaemic economic growth (that could be negative if they used the SGS figures), a budget impasse, debt that is now 100% of GDP (Italy is at 120% while Greece is at140%), threats of downgrades and war drums beating in the background (Iran, Syria) the US Dollar would probably be falling if it wasn't for the woes of the Euro. With the Euro the current focus of attention the US Dollar has been spared at least for the moment.

With consumers burdened by structural income and credit problems, with a deficit that has no immediate solution, with a huge debt to GDP ratio and no will to resolve it, with dysfunctional politics grid locking the ability to do anything especially with another debt ceiling crisis coming up, with the threats of war in the background there is very little hope that the US economy can grow any time soon.

Unemployment remains persistently high with a headline number of 9% but when one counts long term unemployed who are no longer counted as being in the labour market and those that are marginally employed but seeking full time work according to SGS the unemployment rate is 22%. Upwards of 50% of all mortgages are underwater meaning the mortgage is worth more than the house. This is preventing people from moving and refinancing their homes at lower interest rates. Upwards of 60 million Americans are considered to be living in poverty and 45 million are on food stamps. Upwards of 50 million have no health insurance. The current fiscal deficit is 9% of GDP. Against this backdrop interest rates are at all time lows close to zero.

With the Eurozone threatening to fall back into recession and recent signs that China is also slowing the odds of the US falling into recession once again (based on the headline GDP) is considered by many to be over 50%. It seems that all the Fed can do is try and push everything off a little bit further into the future. The situation will only get worse as the US goes into the primary season that leads up to the US election in November 2012. The S&P 500 is down 7% thus far in 2011. The year before a presidential election is normally the most bullish of the presidential cycle. If the stock market closes down in 2011 it would be the first losing year in a pre-presidential election since 1907.

And as to tools for the Fed to use it appears that all they can go to is further quantitative easing (QE). Another round of QE would be potentially inflationary and could make the US$ vulnerable to devaluation as it did in previous rounds of QE. The US is already experiencing annual 3.6% inflation even as ten year Treasury notes are barely over 2%. It is the cost of propping up the system that appears to be coming apart at the seams.


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