Double Dip Recession: A Double Dip On The Anvil
Is the US headed for a double dip recession? This is the uncomfortable question that is doing the rounds in the intelligentsia these days
. But, just what the hell is a double dip recession? As the terminology suggests it is a recession followed by a short lived recovery and then another bout of recession or negative growth. It is often caused by a cutback in spending and layoffs from the previous recession resulting in another slowdown in demand in the economy.
Some of the key indicators suggest that the US economy's squeezed position may be the ripe making for a double dip recession. Consumer confidence is taking a beating, demand for gold is likely to shoot up, banks are become weary of lending to each other and G 20 nations plan to cut government spending. To top it all Nobel laureate and leading economist Paul Krugman is of the view that the US economy is headed for a long siege and a slowdown in the second half of the 2010.
US employment figures for June suggested that employment fell by 125,000 due to layoff of temporary workers, while the private sector hired 83,000 workers, which was lower than the forecast numbers. At the same time the Conference Board's consumer confidence index dipped to 52.9 in June indicating that consumers are becoming weary and consumer spending is likely to take a hit. Home sales also took a hit in the month of May. S&P 500 companies have allegedly hoarded excess cash to the tune of 1.8 trillion dollars above their regular cash flow requirements in anticipation of bad times to come. US banks also appear to have hoarded over a trillion dollars worth of excess reserves with the Fed. All indicators suggest that the US economy is still fragile, if not headed for a double dip and no one wants to take chances.
The economic situation seems to warrant further fiscal stimulus, but various G 20 governments are planning to demonstrate more fiscal responsibility and reduce deficits. This is a difficult situation as without stimulus a double dip eventuality is likely and with further stimulus, deficits are going to bloat. Certain European nations have already borne the brunt of excess deficits leading to a loss of confidence in their banking systems only and external help has helped prevent a total collapse. Several US states have actually raised taxes to balance their budgets. These taxes, mostly levied on businesses have dampened economic activity and are likely to add to economic woes. This suggests that the government is left with very little leeway as far as choice between fiscal stimulus and fiscal prudence is concerned. The US government needs to think fast and come up with a strategy to balance out the needs between fiscal stimulus and fiscal prudence, without burdening future generations.
The uncertain economic environment could lead to a surge in the dollar initially as it is the first risk hedge along with the Japanese Yen. However, once the level of risk rises further, gold prices are likely to firm up. But, it is as yet unclear if a double dip is a reality or if it could be avoided.
by: Pete Migz
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