Courtesy of Zero Hedge, JP Morgan has a “preview” of what will happen as a result of the jobs plan. They note, “All in all, we anticipate that little will come out of tomorrow’s speech to make us re-think the near-term outlook.” But what stuck out at us was what they view as the real purpose of the proposed jobs plan:
“[T]he expiration of the two above-mentioned programs, (that would be the payroll tax cut and the unemployment extension) as well as the gradual phase-out of other temporary stimulus measures, implies a narrowing of the structural (i.e. non-cyclical) deficit of around $350 billion next year. Our estimates put the implied drag on GDP growth at over 1.5 percent. If the President were to get all he wanted, this would offset almost all of that drag.”
We read this as an admission that the country never really had a functional recovery. It was mostly stimulus and now that its running out, there is a rush by the administration and the establishment to replace the loss and prevent further deflation.
“Cynically, one could say this is merely pushing back the fiscal drag past the time of the next election. More constructively, one could argue that this is pushing back the fiscal drag to a point in time when household sector balance sheet repair has hopefully progressed enough that the private sector can generate self-sustaining growth momentum.”
So the “jobs bill” is really a “delay the double dip” bill. Considering the systemic problems with the economy, the concept that the private sector will be ready to take off in 2013 is contrary to everything we know about current growth rates and the general direction of the economy. It should be noted that the administration and most major financial institutions now expect unemployment to remain above 9.0 percent until after the 2012 presidential election.
This is also a not so subtle reinforcement of our previously held belief that the establishment will do whatever they can to hold things together until 2013 to prevent the next president from having a mandate to take action against the banks. Furthermore, Bernanke has been sending hints all month that further stimulus must be done on the fiscal side, not the monetary side. It seems to us that this is what that it is really about.
By maintaining demand and providing a supplemental “stimulus” to the economy, the status quo can be maintained for a little longer, perhaps avoiding a full blown recession. All of this is likely to come to a head sometime after the next election, possibly culminating with what Hedge Fund manager Ray Dalio says will be a currency collapse sometime around 2013. From July 25 in the New Yorker:
Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said… I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.
