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Larry Kudlow: Looming Global Economic Recession

Posted by Larry Doyle on June 18, 2012 9:54 AM |

Do you get the sense that despite any and all efforts of central bankers and government officials on the surface, there is an ongoing, powerful, and deflationary force at work gaining momentum along our global economic landscape? Regrettably, I think there is no doubt of this simple reality.

Regardless of the political outcomes yesterday in Greece, the EU faces daunting prospects. Growth is slowing in the Asian markets and our own economy is staring at an enormous fiscal cliff. Who understands the challenges we face? My former Bear Stearns colleague, highly regarded economist Larry Kudlow who wrote the other day, A Global Recession: The Warning Signs Are Everywhere:

Is it possible that we are already in a global recession but just don’t know it yet? And is the U.S. itself — still the epicenter of the world economy — standing on the front edge of another recession?

I sincerely hope I’m wrong. But warning signs are everywhere.

The eurozone economy is flat on its back. Greece may be headed for a political crackup and an exit from the euro and European Union. Deposit runs in Greece and elsewhere are beginning, and a credit freeze throughout the continent is not out of the question. Meanwhile, emerging economies like China, India, and Brazil are slumping.

Here at home, ex-Clinton strategists James Carville and Stan Greenberg sent a memo to President Obama telling him that his campaign message of slow and steady recovery progress is out of touch with Main Street America. They’re right. Of course, Obama’s “private sector is doing just fine” statement is part and parcel of his disconnect from economic reality.

And the reality isn’t good. Whether you’re a Democrat or Republican, take a look at the numbers:

Job growth has been slipping badly for three months. Retail sales and factory orders are down two straight months. Real incomes are flat. Household wealth is way underwater from the housing collapse, dropping nearly 40 percent in the last three measured years. And GDP was an anemic 1.9 percent in the first quarter. Nearly all leading Wall Street economists are marking down their second-quarter estimates to 2 percent or less.

But here’s the key point: 2 percent growth is not a recovery. Many economists would call it a growth recession. When you get that low there’s little margin for error. A shock from Europe, an inventory selloff in the U.S., or almost any unexpected event could push us back into negative territory for an official double-dip recession.

The last saving grace for the U.S.? Business sales and profits are still trending higher, although GDP-measured profits did fall in the first quarter. That needs to be watched carefully.

That said, a recent IBD poll shows that the number of households with at least one person looking for employment is 23 percent. That translates to 30 million people looking for work. That’s not a recovery.

I can think of two major reasons for the latest economic stall — even inside an overall recovery rate that’s only half the normal pace of post-WWII recoveries. First is the deflationary impact of a sharp, nearly 10 percent rise in the exchange value of the dollar relative to the euro. That’s imparting a deflationary influence on the economy, where both import and producer prices have recently turned negative. The good side of commodity deflation is that oil and retail gas prices have fallen considerably; the bad side is that manufacturers may hold back production and that debtors have to climb out of deeper holes.

As someone who always touts the merits of a strong King Dollar, why am I complaining now that we have one? That’s my second reason for the latest economic stall: King Dollar is not being accompanied by lower tax rates.

The original supply-side growth model argued for a strong dollar and lower taxes, where the former keeps prices stable and the latter provides fresh growth incentives. But instead of easier taxes, a huge tax-hike cliff looms. Big problem. Wrong model. Anti-growth.

As the Bush era tax cuts expire at year end, so do the temporary payroll tax cut and the alternative minimum tax patch. By some estimates, over $400 billion in cash will be pulled out of the economy in 2013, along with a rollback of growth-oriented, marginal-tax-rate incentives. It’s hard to quantify, but it’s quite possible that business hiring plans and consumer-spending expectations have been put on hold until folks can figure out future tax policy.

All this is why the tax-cliff problem needs to be solved immediately. If the tax cuts are extended sooner rather than later, the economy might straighten out faster than most folks think. But House Speaker John Boehner told me that while he’s ready to talk to President Obama, the phone isn’t ringing. And while House Republicans are expected to pass a tax-cut extension in July, it won’t go anywhere without White House support.

Unfortunately, the president is still talking about tax hikes on the rich. He should listen to Bill Clinton who argues for a full tax-cut extension to stop recession. If we wait until after the election to address the tax cliff, we will face uncertainty and chaos, bringing us closer to recession.

Hard to get overly optimistic about our global prospects. Little wonder why long term interest rates continue to move lower here at home.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • michaelD

    with the departure of dennis kneale for fox-land, larry kudlow now ties with jim cramer as the biggest idiot on cnbs. he’s a partisan shill and a mouthpiece for the problems in our society and our economy. and those are his good qualities. i’m not saying, in this instance, that he’s wrong. even bill o’reilly can be right. but if bill were to tell me that today is monday i would require confirmation from no fewer than three independently published calendars before putting any level of confidence in even so innocuous a statement

    your site delivers insightful content, but commentary such as this seriously destroys your credibility. if you’re will to say such things in public then everything else you write requires constant confirmation and vetting.

    it makes me sad to delete the RSS feed to your sight as you have offered up some fabulous content. but i’m not willing to spend the time it would take to ‘backfill’ everything you write.

    farewell sir.

    • LD

      Navigate accordingly.

    • Don

      Wow! Comparing Bill O’Reilly to Larry Kudlow is pretty harsh – I think Larry Kudlow nailed it on this one. Excellent article again Larry.

      • Bruce

        Deflation. Does LK mean less than 10% annual inflation? How are we supposed to navigate that? Answer:

  • fred

    Kudlow has always been one of my favorites, he is one of those unique personalities whose flair and style are appreciated and admired by all, including his adversaries.

    The problem we have, and Larry K understands it so well, is that large chunks of the population are coerced into thinking that more and bigger government will provide the answer to societal needs and inequalities by a charismatic but transient president ‘hell-bent’ on providing handouts to ensure election.

    After a popular president fades from the limelight and is left alone to write his memoirs, we the taxpayers are left holding the tab for a bigger and more inefficient government whose main purpose is to justify its own existence.

    Although I was never a big Clinton supporter, his presidency marks the only time in recent memory when bipartisan political forces clearly understood that lesser government is better government and that a strong dollar should be a fiscal and monetary imperative.

    The Kud is a stud, an American classic!

  • Peter S.

    Kudlow and Michelle Caruso-Cabrera are their own biggest fans. They are shameless shills for all the players involved in the finacial crisis. Both Kudow and Cabrera promote exactly the opposite mantra of Sense on Cents, which is truth, transparency, and intergrity. As an example, both have stated on CNBC that insider trading should not be a crime – enough said! Having had to endure watching both for years, they are far more often dead wrong than close to being right – check the tape. They are comical in their shallowness – they would make a great skit for Saturday Night Live, with Kudlow’s boorish custom ties and bizzare smirks and Cabrera’s constant posturing with her fake filled sweaters.

    LD, you lose some credibility on this one.

    • fred

      What, Cabrera’s wearing falsies? Say it ain’t so LD…
      this can’t be right, as the new CNBC International Correspondent how would she get thru customs w/o being strip searched?

    • LD

      Interesting that people view my sharing Kudlow’s work with a sense that I have given him a blanket endorsement. I did not induct him into the Sense on Cents Hall of Fame. Heck I did not even nominate him.

      I linked to his work given his global economic views and analysis. Does anybody in the audience beg to differ with his commentary there? I personally think he is spot on.

      I do not see any reference to Kudlow or MCC from a personal standpoint. Heck, I have long since maintained that I watch Bloomberg News almost exclusively.

      Back to the matter at hand. The global economy seems poised to reenter a recession if in fact it is not already in recession.

      Navigate accordingly.

      • Peter S.

        LD, with your disclaimer I feel better. For myself and the folks I know the recession has never left. You know that’s true when putting gas in your car becomes a weekly budgeted event.

  • JD


    When the cheerleader puts down the Pom Poms you know it’s bad.

    • Obsvr-1

      yep, Larry K’s green shoots end up being stalks of Hopium …

  • zenhabits13

    Kudlow belongs in the Hall of Shame/Stupidity…..just go back to the show he had with Kudlow and go forward for confirmation of consistency on these two qualities.

  • Huckleberry

    I was about to join the Kudlow pile-on (how could anyone who was calling a housing bottom in 2008 be regarded highly?) but I think in this instance he’s right.

    He’s late to it, of course, and hedges, and his prescriptions, even if they worked (which I doubt) are just a drop in the bucket, but even a stopped clock is right twice a day.

    The roots of this thing go back to the 1970s, back when the economy was reality-based, back when profit margins began falling. We’ve had a thirty year trial of an experimental drug called supply-side economics, and it has done little more than pump blood (debt) into a patient suffering from internal bleeding.

    I know a lot of folks made a ton of money all this, but more of us are worse off as a result. And if profits are all that matters, then Mexican Cartels are the real heirs of Adam Smith.

    Ever hear the tune “Spanish Pipedream” by John Prine? That’s pretty much all you can do when confronted with CNBC…

    • LD

      For those who care to listen to ol’ Mr. Prine…here is the link

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