Doomsayers begin to see cracks in healthy world economy

WASHINGTON - Over the last decade, the world's major economies floated themselves out of recession on oceans of easy money and low, or even negative, interest rates.

For the moment, policymakers and analysts talk of a "Goldilocks economy" in the United States, which is enjoying low unemployment, brisk growth, improved household finances and a strengthened banking system.

But with much of the pain having subsided and US interest rates steadily rising, prominent investors and economists are shining a light on the issues that could trigger the next recession.

They point not to risky subprime mortgage lending, which sparked the last crisis 10 years ago, but instead to voracious borrowing by corporations and emerging market economies.

Martin Feldstein, chief economic adviser to President Ronald Reagan, paints a grim picture where rising interest rates could pop a debt-fueled Wall Street bubble, gutting investment portfolios and consumer confidence, and causing "another long, deep downturn."

He offered some eye-watering numbers in a column in The Wall Street Journal on Thursday, warning that a drop in stock prices back to their historical averages from current dizzying heights would eliminate $10 trillion of US household wealth, slashing consumer spending by about $400 billion, and cutting two percentage points off GDP growth.

"Add in the effects on business investment, and this spending crunch would push the economy into recession," Feldstein wrote.

Neither the Federal Reserve nor Congress are in a position to do much to respond, since there is little room to cut interest rates, and the government deficit and debt are high.

Outside the United States, liabilities may also lurk under all the accumulated debt.

Billionaire investor Stanley Druckenmiller warned that dollar-denominated borrowing by emerging markets, like Turkey, Argentina and others, meant they already are facing "a shrinkage of liquidity" as the US central bank raises interest rates.

- The trigger -
Federal Reserve rate hikes raise borrowing costs for companies and governments, particularly those with dollar-denominated debt, and those who need to refinance.

"My assumption is one of these hikes -- I don't know which one -- is going to trigger this thing," Druckenmiller said, according to Business Insider.

Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, said: "The Fed's tightening is already rattling emerging markets."

He worries that markets have grown "too big to fail," bloated by money which poured in following the 2008 meltdown as central banks tried to stabilize the system. 

Central bank balance sheets went from $5 trillion to $17 trillion in the last decade, he wrote this month in The New York Times, swelling the value of global markets to $290 trillion, or a record 360 percent of global Gross Domestic Product.

Meanwhile, debt held by S&P 500 corporations has risen to 1.5 times earnings since 2010, near peaks that preceded past recessions. 

The typical privately-held corporation purchased by private equity investors in that time is leveraged to six times earnings, twice what a ratings agency would consider junk, according to Sharma.

"When the American markets start feeling it, the results are likely be very different from 2008 -- corporate meltdowns rather than mortgage defaults, and bond and pension funds affected before big investment banks," he warned.

Economist Joel Naroff told AFP the fading boost of December's tax cuts, combined with stagnant wage growth, could leave consumer spending "out of gas" in the next six to nine months.

With the housing market already soft, a slowdown in the real economy could be the first shoe to drop, he added, with debt-fueled market bubbles being the second.

"My view is that the next recession will be an average recession," Naroff said, but added, "The worst-case scenarios are not unreasonable to project."

source: news.abs-cbn.com

Tax cuts or tax increases? Which will move the economy?

There's always a flurry after a presidential debate to determine who misrepresented what -- and there's always plenty of fodder.

During last week's faceoff at Hofstra University in Hempstead, N.Y., both President Obama and Republican challenger Mitt Romney stuck to their favorite lines -- no matter the question and no matter whether fact-checkers had previously challenged their statements.

Take taxes.

Everyone has an interest in taxes -- rates, deductions, credits, loopholes. Trouble is, one person's deduction is another's loophole. What's fair?

Romney says what would be fair is to simplify the tax code by lowering tax rates across the board 20 percent and limiting deductions for the wealthy to make up the loss in revenue, ending some altogether.

What Romney hasn't said is who he thinks is wealthy and which deductions he would limit or eliminate. Much of his argument relies on the theory cutting tax rates will stimulate businesses to expand, leading to jobs and more people working, leading to more tax revenue.

Obama argues the proposal would cut tax revenue by $5 trillion and there are not enough deductions built into the tax code to make up the shortfall -- even if all deductions are eliminated for everyone. The result, he says, would be a tax increase on the middle class and a windfall for the wealthy, who he defines as those earning more than $250,000.

Who's right?

During Tuesday's debate, Romney said middle class taxpayers have lost $4,300 in income and are paying $2,000 more for gasoline and $2,500 more for health insurance. He also noted food and utility prices are up. He promised the top 5 percent of taxpayers would continue to pay the 60 percent share of income taxes they currently pay.

"Middle-income people are going to get a tax break," Romney said. "And so in terms of bringing down deductions, one way of doing that would be to say everybody gets -- I'll pick a number -- $25,000 of deductions and credits, and you can decide which ones to use. Your home mortgage interest deduction, charity, child tax credit and so forth -- you can use those as part of fill in that bucket, if you will, of deductions. But your rate comes down, and the burden also comes down on you for one more reason, and that is every middle-income taxpayer no longer will pay any tax on interest, dividends, or capital gains; no tax on your savings.

"That makes life a lot easier."

That will work, he insists. He's balanced budgets before as a businessman and governor. He'll do it as president.

Obama countered it's not that simple.

"Look, the cost of lowering rates for everybody across the board 20 percent, along with what he also wants to do in terms of eliminating the estate tax, along with what he wants to do in terms of corporate changes in the tax code, it costs about $5 trillion," Obama said.

"Governor Romney then also wants to spend $2 trillion on additional military programs, even though the military is not asking for them. That's $7 trillion. He also wants to continue the Bush tax cuts for the wealthiest Americans. That's another trillion dollars. That's $8 trillion.

"Now, what he says is he's going to make sure that this doesn't add to the deficit and he's going to cut middle-class taxes. But when he's asked how are you going to do it, which deductions, which loopholes are you going to close, he can't tell you."

Obama said the only way to keep the Romney plan revenue-neutral is by eliminating some deductions for middle-class and lower-income taxpayers.

"You can't buy this sales pitch," Obama said. "Nobody who's looked at it that's serious actually believes it adds up."

Later in the week, he added a new applause line to his usual stump speech:

"You've heard of the New Deal; you've heard of the Square Deal and the Fair Deal. Mitt Romney is trying to sell you a Sketchy Deal" -- a reference to an earlier campaign comment calling Romney the Etch A Sketch candidate, likening his policy positions to pictures on the children's toy.

As former President Bill Clinton said at the Democratic National Convention last month, when it comes to taxes and the budget, it's all arithmetic.

Both Romney and running mate Paul Ryan keep citing six studies they say support their tax theory while Obama and Vice President Joe Biden have relied on an analysis by the Tax Policy Center that says the numbers don't add up.

The fact-checking website Politifact said by cutting individual and corporate tax rates, eliminating the estate tax and eliminating the alternative minimum tax, federal revenue would shrink $5 trillion in a decade. At the same time, Romney's and Ryan's refusals to detail specifics on how the cuts would be offset make it difficult to analyze their proposal. It boils down to "Trust me."

"I was someone who ran businesses for 25 years and balanced the budget. I ran the Olympics and balanced the budget," Romney said. "I ran the state of a Massachusetts as a governor, to the extent any governor does, and balanced the budget all four years. ...

"I know what it takes to balance budgets. I've done it my entire life."

The main two analyses cited by Romney backing up his proposals come from Martin Feldstein of Harvard University, a chairman of the Council of Economic Advisers under President George H.W. Bush, and Harvey Rosen, a former Reagan adviser and economist at Princeton University.

Feldstein, a Romney campaign adviser, defines high-income households as those earning more than $100,000 annually, giving him a broader pool of taxpayers for whom deductions would shrink while the Tax Policy Center sets the bar at those earning more than $200,000. Feldstein would also add a tax on employer-provided healthcare benefits.

Rosen found when households making less than $200,000 are shielded from a loss of deductions, the Romney plan suffers from a $28 billion revenue gap. To make the numbers work, he said, he too would include households earning $100,000 to $200,000 among those who would lose all deductions.

"Of the studies that examine the middle class tax burden, none shows conclusively that households making less than $200,000 would be spared a tax increase," Politifact said. "That is a group of taxpayers that Romney defines as middle class and says he would protect.

"None of the studies can accurately model Romney's tax plan because he has said so little about how he would pay for it. As a result, all of them make assumptions as to what tax breaks might be reduced. They can speak in rough terms about a concept, but they can not verify a plan when no detailed plan exists."

Both studies use data from 2009, which skews the numbers because of massive losses racked up in the 2008 crash that served as offsets for 2009 gains earned by wealthier investors.

At the same time, Politifact rates as "mostly false" Obama campaign claims the Romney plan would require massive tax increases for those earning $100,000 to $200,000.

source: upi.com