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Wednesday, November 18, 2009

The President and the Double Dip

The president sat down with Major Garrett of Fox News finally and the news appears to be that the president is concerned about a double dip recession.

The United States' climbing national debt could drag the country into a "double-dip recession," President Obama warned in an interview with Fox News Wednesday from China, though he said he's still considering additional tax incentives for businesses to reverse the rising unemployment rate.

The president, who is in Beijing as part of his tour through several Asian countries to address economic challenges, spoke candidly about the precarious balancing act his administration is trying to perform. He wants to spend money to kick-start the economy, but at the same time is in danger of creating too much red ink.


Now, the president worrying about a double dip recession caused by too much red ink is sort of like your bar tender worrying about what all your alcohol consumption is doing to your liver.

A double dip recession, also called a W shaped recession, occurs when the economy begins to recover and then falls back into a recession. There's two famous cases: the early 1980's and the late 1930's. In the early 1980's, tax cuts were combined with interest rate increases. Paul Volcker, then head of the Fed, began to raise rates to deal with inflation. When Ronald Reagan took over, he was facing stagflation: recession and high inflation dually.

The other double dip happened in 1936-1938. That occurred as the unemployment dropped to 13% from its highs of 25%. With growing red ink, FDR began raising tax rates. This caused the economy to worsen.

President Obama is taking the FDR approach to recovering the economy. He wants to spend, spend, and spend some more. That has consequences and those consequences are massive deficits.

The president is worried about the consequences of said deficits even as he fails to acknowledge that he created them. It's curious and peculiar for the same person that pushed hard for the $787 billion stimulus, fully embraced the bank bailouts, and is now pushing the $1 trillion plus health care bill to know say he's concerned about the deficits all of this will cause.

At some point a sea of red ink will cause high interest rates. More expensive borrowing costs will cause a stunt in the economy and that's what the president means by a double dip recession. The sea of red ink will lead to high interest rates which will stunt the economy. All of this is simple and basic and that's why his admission now is both peculiar and disingenuous. If this was his fear then the stimulus, the bank bailouts, and the current health care plan would not be policies he would be championing.

1 comment:

Anonymous said...

Or at least he could get tough on the Pentagon. The DoD budget is absolutely shameful. There is no reason short of a full scale conventional war with China or Russia we should be spending $700 billion+ a year on this sort of thing.