What the Double Dip Recession Will Look Like

Posted: August 13, 2010 at 3:34 am

7. Budget

The budget deficit would grow beyond the $1.5 trillion it should reach this year. Treasury receipts fell to $2.1 trillion in the federal fiscal year 2009 and are down to $1.7 trillion so far in the 2010 period. If history is any guide, r
eceipts in a second recession could drop by as much as $200 billion a year as tax receipts from both business and individuals falter. The demand on the federal government to render aid to the unemployed could add $50 billion to annual government outlays. Unemployment insurance will cost Washington $44 billion this year. As states run out of money to cover benefits, more of the burden could fall to the federal government.

8. National Debt

The rise in the deficit and a rapid increase in the American national debt would cause concern among the capital markets investors who purchase U.S. treasuries. The inability of the Treasury to rein in spending will cause borrowing to increase. This in turn could bring the government’s debt rating down, in turn causing US borrowing costs to rise. Increasing costs will then raise the annual expenditure to run the government by increasing debt service.

9. Stock Market

If the performance of the equity markets in 2008 and early 2009 is any indication, the S&P 500 would drop from its current level of about 1,100 to a low of 676, which it hit in March 2009. This would take trillions of dollars off business balance sheets and from consumer retirement and brokerage accounts. Businesses would become less likely to invest in new plants, equipment, and services. For individuals, many would see a large part of their retirement disappear. That would cause a huge drop in consumer spending as people attempt to preserve cash, perpetuating further drops in the stock market.

10. Banking

The effect on most of the financial services industry would be catastrophic, particularly at the regional and community bank level where a number of home and commercial real estate loans are held. The FDIC would be forced to borrow money from the Treasury to cover bank closings. The number of failed banks could reach the level of the Savings & Loan crisis during which over 700 banks and mortgage lenders were shuttered.

11. Interest Rates

As the great majority of economists have pointed out, the Fed has already dropped interest rates to zero. This means the central bank is out of ammunition.