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Loose Lips About ‘Double Dips’ Could Sink Obama’s Ship

Despite the generally upbeat analysis of many Fed officials, both President Obama and Fed Chairman Bernanke mentioned the phrase “double dip” in their public talks last week — even though they argued that the second dip would NOT happen. What they fear most, I presume, is not a global economic slowdown but the failure of their political fortunes in Washington. Mr. Bernanke is concerned what happens when QE2 ends, while President Obama is concerned about re-election if growth remains slow.

It didn’t help that the president lost another key economic adviser last week, Austan Goolsbee. Previous departures included Peter Orszag, Christina Romer and Larry Summers. After failing to explain last Friday’s slow job growth, Goolsbee suddenly felt the need to return to academia to “avoid forfeiting his seniority” at the prestigious University of Chicago.

There is no progress on limiting federal spending in Washington. Last week, Fitch Ratings became the third credit rating agency to threaten to downgrade the U.S. government’s AAA by early August if the deficit ceiling is not raised. This follows similar warnings by Moody’s and Standard & Poor’s. Congress wants the debt ceiling to be raised $2.4 trillion to allow the government to operate through November 2012, but the Republican leadership wants this debt increase to be tied to $2.4 trillion in spending cuts.

The problem with making any big spending cuts is that the bulk of the deficit comes from automated spending increases in the major entitlement programs. Social Security, Medicare and Medicaid are rising 3.6%, 3.8% and 5.4% per year, respectively. In the 2012 fiscal year, starting Oct. 1, entitlement programs and the interest on the national debt could consume virtually all of the federal tax revenues!

Complicating matters further, USA Today reported last week that the federal government has added $5.3 trillion in future financial obligations, predominately in Medicare and Social Security, by facing the fact that most Americans are living longer in retirement. This means that the federal government now has $61.6 trillion in underfunded financial obligations, or $534,000 per household. This huge obligation now exceeds the average household debt by more than five-fold, but none of this debt is reflected in the 2011 budget deficit, which only accounts for this year’s obligations, not all the unfunded future obligations.

OPEC Fights and China Slows

In this morning’s briefing, economist Ed Yardeni says there are three global games of “chicken” going on right now. One is between President Obama and Speaker of the House John Boehner over the debt-ceiling negotiations (see above). Another is between ECB President Jean-Claude Trichet and German Finance Minister Wolfgang Schauble over the bailout of Greece, and a third game of chicken is between the two warring OPEC powers, King Abdullah of Saudi Arabia and the Ayatollah Khamenei of Iran.

On Wednesday, the majority of OPEC nations ignored Saudi Arabia’s call to boost crude oil output by 1.5 million barrels per day, led by vocal objections from Iran and its ally, Venezuela. These rebels carried the day, as Algeria, Angola, Libya and Iraq sided with Iran. This caused the Saudi Arabian oil minister, Ali Naimi, to say that this was “one of the worst meetings we have ever had.” Only three of OPEC’s 12 members sided with Saudi Arabia’s promise to boost production, but Saudi Arabia’s leaders still sent out signals that they will likely increase their crude oil production, regardless of OPEC. This dissent within OPEC led T. Boone Pickens to predict on CNBC that OPEC may be on the verge of breaking up.

Turning to China, World Bank economists have warned that a real estate bubble is one of China’s biggest economic risks now. In the past 18 months, the Chinese government has introduced a number of measures to curtail housing speculation, such as raising the required down payment on second homes to 60%, up from 40%, and raising bank reserve requirements. These policies caused apartment sales to fall 37% in April. Overall, Chinese home prices fell 4.86% in April. Chinese homebuyers are angry, since it now takes the equivalent of 32 years of gross income to buy an average home in Shanghai and 57 years of income to buy a home in Beijing. (That seems like the very definition of a housing bubble to me!)

In addition, Chinese exports “fell” to a 19.4% annual growth rate in May, down from a sizzling 29.9% annual pace in April. At the same time, Chinese imports rose by a strong 28.4% (year-over-year), so it appears that China’s domestic consumption remains high, even though its export growth is slowing.

There weren’t many U.S. economic indicators released last week, but the most positive news was that the U.S. exported record amounts of industrial supplies, capital goods and petroleum in April. This week, we will see the May data for producer prices and retail sales (Tuesday), consumer prices, capacity utilization and industrial production (Wednesday), housing starts and building permits (Thursday) and the leading economic indicators (LEI) on Friday.

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