The $64.000 question…
- Most US states are embarking on big spending cuts even on matters crucial for long-term economic growth like education
- There are more than a million US unemployed who will receive no further benefits shortly
- The housing sector is tanking again
- The private sector is de-leveraging, but this has a long way to go
- Unemployment fails to go down
- There are now worries even about growth in China
- The Bush tax cuts are expiring at the end of the year
- Most of the stimulus will peter out by the end of the year
- The dollar has risen, biting into exports
- The Gulf coast is toast
- In Europe, all the talk (albeit not too much action) is on austerity
- Banks in Europe, Spain especially, are very, very wobbly
But hey, according to a host of commentators all will be alright when we reign in budget deficits. Really?
As we’ve said before, deflation is by far the single biggest risk out there. People who doubt this should read the work of Irving Fisher and Richard Koo. All the plugs should be pulled to avoid that, because once entrenched, it becomes a self-sustaining vicious cycle where the real value of outstanding debt will lead to further spending cuts and forced asset sales, taking most of us down.