Not Even Close to Recovery

More reasons why anyone advocating spending cuts right now should be immediately sedated and locked up someplace where they can't cause any more damage.

Kevin Drum on the key to recovery:

The LA Times does a good job framing yesterday's economic news:

Retail sales unexpectedly tumbled in May in the biggest drop in eight months, raising a vexing question for the nation's still-shaky economy: If consumers are not going to lead the way back to prosperity and additional stimulus spending by the government isn't likely, what's going to keep the recovery alive?

Last month, Americans slashed spending on everything from cars to clothing to building materials, the Commerce Department reported Friday. Auto sales fell almost 2%, a major drop for a single month.

I'm probably oversimplifying, but whenever I see news like this I keep thinking the same thing: the rich can only do so much. Recovery has to be built primarily on the backs of middle class consumer spending, and the only way for that to rise steadily is for (a) employment to go up, (b) wages to go up, (c) borrowing to go up, or (d) savings to go down. But employment is forecast to remain sluggish, wages are pretty flat and likely to remain so (thanks to high unemployment), consumers are still deleveraging, and although savings rates have recovered, they need to recover more to get back anywhere near historical levels. Add to that the likelihood that housing prices are going to drop some more now that the new home buyer's tax credit has expired, and there's really nothing left to drive long-term economic expansion. The millionaire class may be recovering nicely, but they just don't spend enough to do the job on their own.

And Zandar on the danger of deflation:

We can't cut interest rates to stimulate the economy because we're already at zero. Demand is dropping due to increasing unemployment. Increasing unemployment is making people nervous and they are buying less stuff...hence a decrease in demand, prices have to be pushed down, and deflation rears its ugly head.

We're at the point where government spending to defibrillate the economy is the last resort. Yes, this will mean raising short-term deficits. We have to put money back into the economy because so much wealth has been removed by falling real estate prices and the banks losing trillions more playing the Big Casino. This is going to mean more spending is necessary, or we're going to lock up like an engine without any oil.

If even the WSJ is talking about deflation, then you know it's a concern to the big players in the financial world. The pushback against the deficit hawks is beginning, and not a moment too soon. Let's hope that the Democrats are listening.

If you need ammunition to fend off the "Obama's deficit" crazies, here are the facts and a cool chart: