Guest Post by Professor Peter Morici.Peter Morici is an economist and professor at the University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. 

The economy is growing too slowly for it to be considered robust- adverse developments in four areas could derail the recovery:

  1. China
  2. Dodd Frank Regulations
  3. EU
  4. U.S. Student Loans
Higher probability of economic disruption than zero...

1. China faces real challenges-falling property values, questionable accounting standards and state banks burdened with bad loans. Foreign investors cannot ignore the size of its market, and firms like GM, Ford and Apple will continue to invest to produce for and distribute products in China. However, rising labor costs and increasing revelations of corruption and intrigue, up to the highest levels of China’s leadership, are causing investors to cast a more jaundiced eye on the Middle Kingdom as a place to invest for serving markets in North America and Europe.

A crisis of confidence in China could disrupt both the Chinese and U.S. economies, and such an event has a much higher probability than zero.

"If I wanted to paralyze the recovery of American economy, I would use Dodd Frank to strangle the flow of cash to small business job creators and potential homeowners to do it." -Miles Free

2. Dodd-Frank regulations are severely handicapping small and moderate sized banks. Writing conventional mortgages has become an increasingly challenging activity, and securitizing commercial loans quite difficult. Despite the fact that these bank woes pose significant barriers to recovery in the housing sector and jobs creation among small and mediums sized businesses, Washington appears disinterested, and smaller banks are selling out to their larger brethren.

Wall Street banks now control more than 60 percent of deposits nationally. The absence of competition in many markets has driven down CD rates, and seniors are losing a lot of purchasing power as interest on their retirement savings shrink. Wall Street banks are less interested in making loans to Main Street businesses than were the regional banks they absorbed.

Not looking so rosy in Eurozone despite the easy credit of the ECB's.

3. The EU is in recession and remains in deep trouble-fixes for Greece, Portugal and Ireland are inadequate and eventually will need to be reworked. Spain is teetering on crisis-a failure of its government to meet budget targets or a further spike in unemployment, already about 23 percent, could set off a contagion beginning with Italy.

European banks are highly stressed. Those have not used the grace afforded by easy credit from the European Central Banks to properly add to capital and rework loan portfolios. Rather, they have often adopted gimmicks to paint up bad loans or move those into offshore vehicles-all reminiscent of tactics employed by U.S. major backs when mortgage backed securities became problematic before the financial crisis.

Average debt per Bachelor's degree holder was ~$18,300 in 2010.

 4. U.S. higher education loans-now more than $1 trillion-are a ticking bomb. Most education loans are not dischargeable through bankruptcy, and big debt coupled with disappointing pay will become an increasing drag on consumer spending.

Undergraduates are borrowing too much against future incomes, and many graduate students are borrowing to obtain degrees that will not markedly improve their circumstances.

In the face of all this, the U.S. private sector is proving remarkably resilient.

Neither policy missteps in Washington nor purposeful incompetence in Europe can keep American capitalism down.

However, the economy would be doing a darn sight better with better leadership on both sides of the pond.

Peter Morici

Professor

Robert H. Smith School of Business

University of Maryland

ude.dmu.htimshr@iciromp

http://www.smith.umd.edu/lbpp/faculty/morici.aspx

www.facebook.com/pmorici1

Photos:

China Real Estate Woes

Dodd Frank

Greek Riots

Student debt

The US, EU and Mexico have just  (2 hours ago) jointly made a formal request to the WTO for a dispute-settlement panel to address China’s export restraints on a number of  raw materials  of interest to our precision machining industry.  Bloomberg coverage here.
Raw materials such as

  • coke ( used in steel), 
  • zinc (used in brass),
  •  bauxite (aluminum ore),
  •  fluorspar (steelmaking slag conditioner),
  • magnesium,
  • manganese (steelmaking ingredient),
  • silicon metal (steelmaking deoxidizer),
  • silicon carbide (desulfurizer)

 These are among the materials listed in the filing. These are important (essential!)  ingredients into the steel and metallic raw materials our industry consumes. We remember reading about this as an emerging concern in June in the Globe and Mail.

r-china-wheeler24_88661gm-a
How they load steel in Hubei, China.

 The economic issue is that this “resource hoarding” results in artificially lowered cost for these raw materials in China  and in effect becomes a subsidy for those  manufacturing operations that China deems “strategic.”  While at the same time making these materials more difficult (and Expensive) to obtain for non Chinese companies.
Peace” according to Ambrose Bierce, in The Devil’s Dictionary, “in international affairs is a period of cheating between two periods of fighting.”  I think that this is a particularly useful perspective in this situation.
Diplomacy,” according to my 8th grade History teacher, Mrs. Abernathy, “is war by other means.”
Our industry, the EU, Mexico, and the United States- all of us  are certainly looking forward to some diplomatic success. 
The panel is expected to be convened Nov. 19th.
China_from_space
We all live here together. Why not trade fairly?

Steel loading Photo via  Globe and Mail originally Shanghai Reuters.
Earth photo credit: NASA.