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08.03.2011 2

Are We Double-Dipping?

By Robert Romano – As the poor economic data continues to come in, the bad just gets worse.

Poor manufacturing numbers, growth revised downward to nearly zero for the first quarter, and now lower-than-expected consumer spending all weigh on the weakest economic recovery in modern history.

Housing hit new lows in March.  High gasoline and food prices are squeezing household budgets.  The U.S. is being threatened with a credit downgrade.  And unemployment has remained unacceptably high for the longest period since the Great Depression.

Now speculation has begun anew that QE3 from the Federal Reserve is right around the corner.

Apparently, expanding its balance sheet from $896 billion in Aug. 2007 when the housing slump began, to $2.9 trillion today — a 223 percent increase — has had little effect at stopping the bleeding.

Whether the Fed steps in again or not, renewed calls for it to fire up its printing press again are a very poor economic indicator.

Meanwhile, gold continues to reach new record highs at over $1650 an ounce while the dollar weakens further, risking its status as the world’s reserve currency.

This is a vote of no confidence in Washington, and against a deal to reduce the deficit that will only save $22 billion in Fiscal Year 2012.  The rest of the $900 billion in savings depend on out-year cuts, and a super-committee is being formed to get at another $1 trillion.  Nobody expects those savings to ever be implemented.

Markets are also responding to the near certainty that America will remain one of the most expensive places in the world to do business, with some of the highest corporate tax rates in the developed world and regulatory burdens that require teams of lawyers just to comply.

Responding to the anxiety, Barack Obama took to the microphone on Aug. 2 to assure us that “In the coming months I’ll continue also to fight for what the American people care most about: new jobs, higher wages and faster economic growth.” The rush to the exits could almost be heard as the Dow tumbled 266 points.

Obama’s “stimulus” policies have failed to keep unemployment in check, and yet he made a point of extolling the virtues of yet more Keynesian deficit-spending from Washington.  What a joke.

If only wealth were created by the public treasury, we’d be growing at double digits like the national debt.  In fact, the growth of the national debt is far outpacing the growth of the economy until soon, it will become larger.  Since 2001, the economy has grown nominally by about 46 percent.  But the debt has grown by 146 percent.

In the meantime, the only way we are currently meeting our principal and interest obligations is with the Fed’s printing press.  Pimco reports the Fed bought about three-quarters of treasuries in 2009 and 2010.

A trend, mind you, that is likely to continue.  Although QE2 is over, the Fed continues to sell its $900 billion of remaining mortgage-backed securities and is using the money to buy more treasuries.  It now holds over $1.6 trillion of the national debt — more than 11 percent — making it the largest holder of U.S. debt in the world, more than China.

In the meantime, Europe continues to melt because its governments are spending and borrowing too much.  Nobody expects the latest bailout regime for Greece to do anything other than kick the can, postponing the day of reckoning.  Default seems all but a foregone conclusion.

So, with all the bad news, the worst news of all may be just around the corner.  Are we headed for another recession? That’s what economists at Goldman Sachs are now saying is becoming increasingly likely.

Yet, the government continues to project robust growth over this decade, where the economy is predicted to nearly double.  It is expecting more than $2.5 trillion in new revenues to pay for all the new spending as the annual budget grows to more than $5.5 trillion by 2021.  If it is wrong, the debt could grow by as much as $7 trillion more than expected to over $30 trillion by then.

Something’s got to give.  The only question is whether anybody in Washington will be able to stop the spending madness — before it is too late.  This just isn’t working.

Robert Romano is the Senior Editor of Americans for Limited Government.

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