Wall Street Finally Understanding we are in a Recession

With the official downward revision of GDP from 1.9% to 0.4% for the first quarter of this year, and a anemic 1.3% growth rate for the second quarter, Wall Street is coming to the realization that we are headed towards another recession. 83% of the time in the past when growth drops below 2% a recession has followed. I would argue that if the 1980 CPI rules were used we would already be in negative growth territory, and a recession.

John P. Hussman loves his numbers

A excellent Wall Street blog to follow is Hussman Funds by John P. Hussman. In the latest blog he goes through, in excruciating thorough detail, why he thinks there will be a recession. Outstanding work.

Most Austrian economist think there never was a let up in the recession. We simply borrowed money to mask the pain we were in. Now that money will become more expensive at some point in the near future as countries in Europe and Asia scramble to fight inflation and default pressures. China, Italy, Spain, have seen their cost of borrowing go up past 6%. With the debt deal adding another $2.4 trillion it is only a matter of time before our total private and public debt to GDP ratio of 367% becomes a problem. Not to mention our 4.2 million foreclosed homes and another 2 million waiting to be foreclosed on. Money will become more expensive.

It is simple math. The economy slowed down to about a 2.4% growth rate since 2006, and government spending went up about 8.5%. The yearly deficit has gone from less than 2% of the GDP to over 10% of the GDP. The “recovery” was the federal government running up the credit card. And now the card is run up.

There is no more room for the Federal Reserve to “cheapen” money since the Federal Funds rate is 0.09%, the monetary base is 18% of the GDP, and private banks have $1.652 trillion in reserves with the Federal Reserve. Plenty to lend out in a healthy economy. More stimulus will either downgrade the economy with “crowding out” or be inflationary. Bernanke know this. Will he or wont he pull that trigger?

But I can hear Keynesians arguing the federal government has another $2.4 trillion to spend. And they will spend it, but sooner or later that interest rate will climb and instead of paying 9% of the budget to service the debt that number will increase to 10%, 11%, 12% and that $2.4 trillion will not go as far as the Washington crowd hoped.

What Mr. Hussman does not see in his infatuation with data is the overall economy. We are creating more regulations and market concentration with Dodd-Frank. More expense in hiring employees with Obamacare. More debt and artificially low interest rates killing private sector lending. Capitalism is hindered by the federal government in unloading the excess housing capacity. The federal government not allowing insolvent banking institutions to fail and clear the marketplace. In other words none of the problems that caused the housing bust and recession have been addressed. In some cases the problems have been made worse by federal government action. All we have is a credit card run up to the maximum. Same junk, different year.

So please do not act so surprised when the party is over. The Democrats hope the $2.4 trillion buys enough of a party to last until 2013. 2011, 2013, it makes little difference. The crash will be hard and severe. Why is Wall Street surprised?

“The best way to destroy the capitalist system is to debauch the currency.”

Vladimir Lenin, leader of the 1917 Russian Revolution