Despite positive signs, economic struggle is far from over

BY JUSTIN SUGG | JUNE 09, 2009 7:26 AM

If you listen close enough, you might hear champagne bottles uncorking on Wall Street. They come on heels of experts — including one of the guys whose job it is to mark the beginnings and endings of recessions — pronouncing this recession over. There are some signs indicating this may be true, but that doesn’t mean the worst is over.

The Dow Jones industrial average, a benchmark of our economy, has finished the third-consecutive month with a gain in May. That’s definitely a sight for a stockbroker’s sore eyes.

Second — and this is a more authoritative indicator — is the GDP growth rate. After several months of progressing downward, the GDP might finally be changing course … sort of. The previously recorded quarter’s GDP growth rate was a little more than negative 6 percent. This last quarter was only around negative 5 percent. To many economists, this is a sign of the recession leveling off.

Third — and quite possibly the most reassuring sign of global stability — is that Moody’s kept the U.S. Treasury bond rating at AAA, the highest rating possible. A downgrade would have severely hurt the US government’s ability to finance programs with debt.

Call me a negative Nancy, but I think it’s a bit premature to bust out the champagne. There are several factors I’ve seen that tell me we are still driving down a road of economic pain and have yet to reach the right exit.

We may well be seeing the end of the recessionary period, but it will probably be a long time before we see anything resembling a recovery. The GDP drop may not have been as bad as last quarter, but it was still worse than officials had predicted.

Historically, financial crisis-triggered recessions usually precede a long period of slow growth (think the early days of the Great Depression and stagflation of the ’70s). This is usually because the financial markets are too damaged to provide enough capital to kick-start investment and spending.

Even taking this for granted, I still think there are going to be a few added bumps along the way. These bumps are going to come courtesy of the federal government. The government is spending at a rate without precedent. Forecasts indicate in the next few years the federal deficit will equal the nation’s GDP, eclipsing deficits in the Roosevelt, Reagan, and Bush eras. As with all massive spending, inflation will come with a vengeance, and the Federal Reserve and Treasury Department have made no indications they will take actions to counteract it.

In fact, rumors have been circulating for a while that the federal government will devalue the U.S. dollar to keep up its spending rates. This devaluation will only increase inflation’s rising tide. Inflation will eat away at most of the gains the private and public sector have made by greatly decreasing American buying power.

The Chinese government has already shown its fears of U.S. inflation by purchasing more precious metals to balance its reserves. Shift from hard currency to precious metals is a classic hedge against inflation. This shift will produce two effects.

By shifting to metals, the Chinese have decreased their orders in U.S. currency and bonds. Also, the increase in metal purchases will drive up the price of metals everywhere. Many of these metals, copper, tin, and zinc for example, are crucial in production of durable goods. This will certainly lead to a price increase in those goods as well.

We’ll likely soon see a retraction spasm from U.S. consumers. This retraction could have devastating consequences on the global economy and may lead to another GDP dip.

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