Thursday, January 14, 2010

Double Dip Recession Risk Significant, Feldstein Warns

The best of the insider, mainstream economists, Martin Feldstein, continues to warn of a possible double dip recession.

The U.S. economy faces a “significant risk” of another recession in 2010, unless the Obama administration promotes confidence it can manage a growing fiscal deficit, Feldstein told Reuters.
Without public approval, namely from investors, U.S. bond yields will climb, taxes will rise and a fragile recovery will be short lived, he said.

“I don't think the Obama administration is doing anything to reduce that risk. They are assuming the momentum is there,” said Mr. Feldstein, who is also president-emeritus of the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end.

He thinks additional government spending will do more harm than good. At this point, the U.S. government needs to think about the debts it has accrued, he said.

Feldstein believes bond yields will continue to rise, though he said central banks such as China's will most likely keep recycling the U.S. dollars bought in the market by buying short-dated Treasuries.

That will keep the yield curve, the difference between short-dated and long-dated debt, steep.

Feldstein appears to remain quite tight in the insider loop. He was interviewed by Reuters while in China for meetings with government officials there.

He said he did not think the U.S. government would allow trade tensions between the United States and China to escalate further this year.

He also expected Beijing to loosen its grip on the yuan exchange rate and allow it to strengthen, as long as U.S. officials do not keep publicly pressuring China to act on its exchange rate policy.


  1. Wenzel - does this mean you expect two consecutive quarters of negative growth in GNP during 2010?

  2. That's a good question.

    I generally don't like those aggregate numbers and the way the government steps in to pump huge money into individual sectors,which can distort the GDP who knows what the number will show.

    That said, I fully expect a break in the stock market, soaring interest rates, declinning corporate profits and general overall misery. The feeling will be the way it is now that somethingis wrong with the economy, but the intensity of knowing something is wrong will be multiplied 10-fold.