U.S. economy contracts in fourth quarter 2012 – USA heading for a BIG new recession

BusinessDaily.eu – By Mikkel Roland Egesberg – The US Q4 GDP growth just came in a few days ago, and the US economy is contracting, which not even the most pessimistic economist spoken to by Bloomberg.com had expected. It’s only at a 0.1% annual rate, but I’m not surprised. Take a look at the US federal budget:

Once you realize that the US had a budget deficit of 8,5% of the economy in 2012, and you realize this cant continue forever, you also see that the US economy must contract, once this stimulus stops.

In the chart above i have made the growth calculation for the US economy, and here you can See how much growth the government contribute with. If the US balance the federal budget, they remove a stimulus of 8,5%, and they should see a contraction of the economy, ceteris paribus, depending on the multiplier effect…if the US cuts 1327 billion e.g., they remove income from citizens, which means they will then consume less, pay less taxes, in which case the government get less taxes….all consume less, it multiplies into the economy…and it is a downward going spiral…

To stop this, the US Central bank, FED, prints money, or what they choose to call “Quantitative easing” or by short “QE” and “QE2”. In the chart below you can see that from January 2009 to October 2012 FED’s holding of US treasuries has increased from 476 billion US dollars to 1.659 billion USD, an increase of almost 1,2 trillion US dollars.

If the US continue to print money like there’s no tomorrow, the value of the US dollar will fall, and the US will see inflation, which might make the nominal GDP look like it’s growing, but is not from more output, just prices going up – the real growth will fall and turn negative. Once this printing of money by FED and lending the money to the Federal government stops, a stimulus of 8,5% of the GDP stops, and the US GDP will contract by more than 8%, ceteris paribus. The last quarter of negative US growth is nothing compared to what the US will see, once the budget is balanced. USA cannot keep raising the debt limit, as US politicians have done 13 times since year 2000, it’s not a sustainable path. Forget the so called “Euro Crisis”, the US budget crisis is much worse. The US economy is on steroids right now, and we all know that is not healthy in the long run…


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