Amid 'Fiscal Cliff' Stalemate, Main Street Deteriorates

To begin to grasp how "fiscal cliff" uncertainty is paralyzing Main Street business owners, just talk to Charlie Arnold, who has been running a power-washing business in Lewes, Delaware for 13 years.

"Whenever the news is about the government and the economy, it scares the seniors and the phone stops ringing," said the owner of Arnold Powerwash, among whose jobs was the Lincoln Memorial steps in Washington, D.C. Roughly a third of residents in Arnold's coastal community are over 55, and many are on fixed incomes. Lured to Delaware by its lack of state sales tax, they worry when they hear noises about debt levels and changes to the tax laws.

"Since October, my business has dropped off 80 percent and I attribute that directly to the 'fiscal cliff' discussion and the economy," he said, adding local business owners "really are scared. They don't know what to do."

Anxiety over the "fiscal cliff" isn't just affecting Wall Street. Many entrepreneurs report slower activity as uncertainty swirls about how tax hikes and government spending cuts will affect them. Faced with unanswered questions, entrepreneurs are stuck contemplating trimming costs and laying off workers—not creating Main Street jobs, which has traditionally fueled economic recoveries. Read more >>

Of the 2% increase in GDP over one third was "Government Consumption"

Sure enough, the preliminary look at Q3 GDP just came out and "beat" expectations of a 1.8% print, with a 2.0% reading (or just in line with stall speed, a number which previously has been indicative of recessions).

So far so good, but as with every other pre-election economic data point out of the government, one has to look behind the headline to get the true picture. And the details are, as expected, ugly. Because of the 2.02% annualized increase in GDP, over one third, or 0.71% (compared to a deduction of -0.14% in Q2, and 0.64% of the 0.71% came from defense spending), was contributed by "Government Consumption."

This was the biggest rise in government spending in 3 years, and only the first contribution by Uncle Sam to its own GDP print since Q2 2010. Read more >>

Half of U.S. Lives in Household Getting Benefits

Nearly 50% of the population lives in a household where at least one member received some type of government benefit in the first quarter of 2011.

Cutting government spending is no easy task, and it’s made more complicated by recent Census Bureau data showing that nearly half of the people in the U.S. live in a household that receives at least one government benefit, and many likely received more than one.

The 49.1% of the population in a household that gets benefits is up from 30% in the early 1980s and 44.4% as recently as the third quarter of 2008. The increase in recent years is likely due in large part to the lingering effects of the recession.

As of early 2011, 15% of people lived in a household that received food stamps, 26% had someone enrolled in Medicaid and 2% had a member receiving unemployment benefits. Families doubling up to save money or pool expenses also is likely leading to more multigenerational households. But even without the effects of the recession, there would be a larger reliance on government. Read More >>

Sovereign Debt Default: No Time Like the Present

Bill Bonner
While the markets are hot, the economy is cool. Nearly 7,000 people go bankrupt every day – a record number. And in March, M3, the broadest measure of the money supply, recorded its biggest drop ever.

And get this. Peak to trough, December ’07 to February ’10, 8.3 million jobs were lost. As we reported yesterday, take away the statistical tricks and the number of people with real jobs actually fell last month – despite reports of an additional 163,000 new jobs in March.

Consumer credit fell again in February – down $11 billion. To put this number in perspective, the US government has run about $2.5 trillion in deficits since the correction began. So, in spite of pumping monthly deficits on the order of $120 billion…consumer credit still sank by $11 billion.

What can we say? It’s a Great Correction, after all.

Greece is going broke after all. Yields on Greek debt rose over 7% yesterday. So let’s look at how this works. Investors worry about a default. They push up yields (they need higher interest payments to justify the risk). This causes Greece to go further into debt (the cost of paying the extra interest), which causes even more worry among lenders.

Why doesn’t Greece just cut expenses?

Ah…glad you asked. This just goes to show what a dead-end debt can be. The government has already proposed substantial cuts. But it has to answer to the voters – who are on the verge of rioting in the street. And its own cabinet ministers are calling the Germans ‘racist’ because they refuse to give the Greeks money.

It’s hard for a popular democracy to cut spending. And then when it does, it discovers that it is in another trap. So much of the private sector depends on government spending that, take it away, and the whole economy shrinks. This causes tax revenues to fall by more than the budget cuts. In other words, a multiplier works in the other direction – causing the budget deficit to widen when cuts are made!

And guess what? Greece is not the only government that is falling into this hole. Latvia. Iceland. Maybe Ireland, England, California…and even the US…

Where, exactly, the point of no return lies, we don’t know. But it’s out there somewhere…

What’s the solution? Well, just to bite the bullet. Make the cuts. Default. Be happy.

Regards,

Bill Bonner
for The Daily Reckoning