Double Dip...The Shrinking Economy

I have stated several times since the election the economy is headed for a rough road.  I thought there would be a period of time of very low growth, then a southerly dip into a major recession in 2014.

I was wrong.  The rough patch is here now with Keynesian economists being caught with their pants down as last quarter showed a contraction of 1/10^th of percent in the economy when a modest expansion was expected.  How could that be?  The stock market is at all time high!!!!

 Let’s start with the stock market being close to 14,000 in a time of stagnant growth and high unemployment.  The stock market is based on profits, not economic growth.  Corporations are doing well.  They are flush with cash.  They have downsized and reached equilibrium.  Businesses can make money in any kind of an environment once they have adjusted to it.  Add to that the Fed has been pumping money into the economy, and that money has landed in corporate coffers, all’s right with the world.  Add to that companies are seeing the light at the end of the tunnel with health care.  They understand the rules and now no longer will hire full time employees, and they have an out once the insurance exchanges are set up.  They have already figured out it is cheaper to pay the fine for not providing employee health care than to provide employee health care.  For bottom line figures, things are looking good.

The flip side of that is the worker.  Although consumer spending was up this same past quarter in which the economy contracted, consumer spending is a relative term, and in relative terms, it wasn’t so hot.  Workers are now looking at tenuous job security.  There have been major defense spending cuts with more coming. The coal industry has shut down.  The EPA want to regulate fracking.  Social security taxes went up January 1, and folks have less money to spend with take home being decreased by several thousand dollars as a result of the “tax” increase.  Health care rumors abound.  Who is going to lose their health care?   Interest rates are low, but folks can’t get loans to buy houses.  For a family of four, income has decreased by as much as $4,000.00/year over the past four years.  Although housing has rebounded this past quarter, it has been a selective rebound in major cities and anemic at best. Nobody knows how much foreclosure overhang is still in the system. 

Regulations are being pumped out of Washington like running water; thousands upon thousands of pages regulating everything under the sun…but mostly health care and banking.  Nobody knows now, and won’t know for several years the effect of these regulations.  The result is employer pulling in their horns with a wait and see attitude.  Why hire anyone?

And then there is the bogeyman hiding in the shadows: Obamacare 2014.  It will hit our fragile economy like a ton of bricks.  It will take several years of economic adjustment as health care costs shift from employer to the individual as regulated by the IRS through the insurance exchanges.  Folks haven’t figured it out yet, and when they do, it will make the last recession look like a walk in the park.    It will land squarely on the shoulders of the middle class. At the same time all that money pumped into the economy by the Fed…hoarded in banks and corporations…finally leaks into the general economic system and inflation rears its ugly head.  It is not going to be pretty.  Inflation is the back door tax on the middle class and poor...you know....raising taxes without raising taxes. 

Always beware when experts say this time it is different.  Here’s a rule for life:  it is NEVER different.  Basic rules of economics can be perverted and twisted in theory all sorts of different ways.  In real life, they never change. I hope and pray I am wrong.  I would like nothing better than to write two years from now that I was an ass on January 30, 2013.  But I think I am right.