An article titled ‘For stocks, summer ends with jobs data’ reports that economists polled by Reuters forecast U.S. job losses of 225,000 for August (July – 247,000), and that the U.S. unemployment rate will rise to 9.5% (July 9.4%) – a statistic that I remain skeptical about.  Government data will be available Friday, while during the week U.S. August manufacturing and service sector data will be released as will U.S. July construction spending and factory orders.

Stay tuned for posts this week on the U.S. jobs estimates and reports.  I continue to believe U.S. jobs and consumer confidence are the most critical ‘key element’ in the timing of U.S. (and broader world) meaningful economic recovery.

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An article today by Paul Krugman, the Nobel Prize winning economist, titled ‘How big is $9 trillion?’ says:  “There’s been some hysteria about the administration’s new estimate that the cumulative deficit will be $9 trillion over the next decade. Don’t get me wrong: this is bad. But it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t”.  Dr. Krugman goes on to say that the U.S. economy and federal tax base is also enormous, that GDP currently is about $14 trillion, and that economic growth averages 2.5% a year (which he says has ‘been the norm’) and inflation is the targeted 2% a year GDP will be around $22 trillion a decade from now (the calculation actually results in $21.74 trillion.  I made the calculation to be sure the 2.5% was indeed a ‘real growth’ factor) – which Dr. Krugman says would result in adding debt equal to about 40% of GDP in circumstances where federal debt is about 50% of GDP.  He goes on to say that “So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. He concludes by saying “Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with”.  My comments are:

•    first, Dr. Krugman’s starting point of accepting the Administration’s ‘new estimate’ of a cumulative deficit of $9 trillion over the next 10 years may prove to be understated given what I think to be the importance (in particular) of the loss of manufacturing jobs in the U.S. over that past decade;

•    second, I am very skeptical of Dr. Krugman’s assumption of 4.5% nominal GDP growth per year compounded over the next 10 years based on underlying 2.5% real growth and a 2.0% inflation rate.  I could better understand it if it were based on a lower growth rate and a higher inflation rate.  In order to accept such numbers I need to know where specifically Dr. Krugman believes 2.5% compounded real growth is going to come from in an economy that continues to lose jobs in general and manufacturing jobs in particular, and specifically why he thinks it appropriate to assume a compounded inflation rate over the next 10 years of 2% – in my view a very long time period to predict anything, particularly in the uncertain economic times we currently are experiencing;

•    third, I think compounding from today on a straight line basis for 10 years is very risky (see my other post today commenting on Roubini’s view of a possible ‘double dip’ recession).  If the growth Dr. Krugman is assuming in his calculations doesn’t happen beginning immediately, the compounding result in the later years of the 10 year period is (arithmetically) significantly reduced.

I for one don’t take much comfort from Dr. Krugman’s article, and I encourage readers to ‘Think for Themselves’ – my increasingly consistent stated mantra.

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An article yesterday titled ‘Roubini warns of double-dip recession: report’ says Nouriel Roubini “sees a “big risk” of a double-dip recession” and “said it appears the global economy will bottom out in the second half of this year, and that U.S. and western European economies will likely experience “anemic” and “below trend” growth for at least a couple of years” after a quarter or two of rapid growth related to recovery in inventories and production levels.  He also is reported as saying that he thinks “another reason to worry is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand” and that the global economy “could not withstand another contractionary shock” if speculation drives oil rapidly toward $100 per barrel from its current +$70 levels.

Roubini has been proven right in the past.  Intuitively what he says makes great sense to me given the U.S. unemployment situation and the other ‘weakness factors’ that I see in the U.S. economy going forward and comment frequently on in these blog posts.  I suggest you read my post today on Paul Krugman’s views on the ability of the U.S. to continue financing its large annual deficits going forward.  From my perspective if Krugman were to adopt Roubini’s views I think he likely would reach a different conclusion with respect to prospective U.S. annual deficits being ‘possible to deal with’.

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An article today titled ‘Bye-bye, recession; hello, higher taxes’ reports the IMF as saying most countries will need to raise taxes in the future to pay off the trillions of dollars they spent in fighting the global recession.  IMF’s Chief Economist is reported as saying that “the time will soon come to pay the piper (related to government stimulus spending) and that higher taxes in nearly all countries is inevitable” and that “the recession that began early last year is virtually over, but … that it has left deep scars that will take years to heal”.

I have said in previous blog posts that taxes will have to be raised in the U.S. and other developed countries to finance both ongoing deficit spending and incremental deficits related to bail-out and stimulus packages.  That said, it seem oxymoronic to me to say on one hand that taxes will have to increase (which has to reduce the amount companies and consumers will have to spend) without commenting on and quantifying the effect that will have on prospective continuity of GDP growth (i.e. which is implicit in ‘economic recovery’).  This doesn’t seem like rocket science to me, in fact it seems to me to be much like sitting down with a comparatively simple jigsaw puzzle comprised of quite large pieces.  It may be that many of the economists and others who regularly comment on things economic are playing with old jigsaw puzzles with missing pieces.

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