May 22, 2012

SandBoxBlogs: National Journal "If It Hits the Fan"

Charlie Cook:
"Talk to economists and people who work in the financial markets these days   and what you’ll hear is reminiscent of the ominous warnings that you occasionally hear from pilots about strong weather fronts. We’re facing not one wave of turbulence, but several.

First, there’s Europe and the eurozone. It’s possible that the situation could be worse in Greece, but not that much worse. There’s a pretty good chance that country will be exiting the eurozone soon, but either way, Greece is putting enormous stress on its economy. Then there’s Spain, which has an economy larger than Greece, also in trouble. With Europe teetering on the edge of recession, there are limits to how much even Germany can do to keep the eurozone—now the world’s largest single economy—from going into a serious tailspin. Europe contributes 21 percent of global economic growth, so there is rather obvious significance for the U.S.

Then, there is China, whose economy is slowing. Acknowledging the problem, the Chinese government just announced that it was placing greater emphasis on economic growth. Its central bank is expected to lower rates soon. It’s unlikely that China will go into a recession, but don’t expect purchases of U.S. goods there to match those of the last few years.

But it’s the fragile nature of America’s own economy—and questions about whether our political process is capable of coping with immediate and simultaneous challenges—that make things so much worse. The Federal Reserve Board has acted heroically to pump up the economy. As the International Strategy and Investment Group reports, the Fed’s efforts put the trade-weighted dollar at close to a record low, making it almost as competitive as it ever has been. But a weak world economy still limits the U.S. advantage to sell.
The term “fiscal cliff” has been rapidly entering the economic lexicon. People using the phrase may not know exactly what is scheduled to happen at the end of this year. Probably more than anything else, though, they may know that the George W. Bush-era income-tax cuts will be eliminated both for earners above and below the $250,000 level if not renewed by Dec. 31. They also may know that some significant spending cuts will automatically be made, unless Congress takes action, that will cut defense and nondefense funding pretty much evenly. Of course, Social Security, Medicare, and Medicaid, the real drivers in the increase of federal spending, are exempted from those cuts....."  (Read more?  Click title)

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