July is shaping up to be a great month for contrarians and the cruellest month to date for Barack Obama, the US president. Seldom have so many economists, money managers, business owners, investors and even politicians converged on the side of the same dreary prognosis. Green shoots? That happy talk wilted along with the announcement that the US jobless rate had risen to 9.5 per cent last month, the highest level in a quarter of a century. Unemployment in the world's largest economy has doubled in only 16 months and economists now expect it to reach 11 per cent by next year.
To make matters worse, wage growth is stalling and may be on the verge of decline. High unemployment and diminished household income dims the outlook for consumer spending, which had been recovering from its collapse last year. Less spending means weak retails sales, which leads to more lay-offs and an end to that illusory fourth-quarter recovery. This would be bad enough for an economy on a sound financial footing. For the US, which now expects trillion-dollar budget deficits every year for the next decade, the prospect of anything less than a robust recovery amounts to a threat.
According to a recent report from the Congressional Budget Office (CBO), the burden of US borrowing will reach 82 per cent of GDP by 2019, about double what it was just last year. Having spent US$700 billion (Dh2.57 trillion) in rescue packages for Wall Street and troubled industries such as the car sector, in addition to a $787bn economic stimulus package, America's rate of indebtedness is growing faster than economic output.
Soon, the US government will owe more money than at any point since the early 1940s, when it was busy helping the British make the world safe from Nazi Germany and Imperial Japan. The combination of lost jobs, record deficits and the prospect of a long, shallow recovery has fuelled talk in Washington and Wall Street about the need for a second stimulus package. Mr Obama sold his first spending bill, which became law in February, on the assumption it would restrict the unemployment rate to about 8 per cent. Since then, 2.5 million labourers have been laid off.
While some economists and politicians credit the stimulus for preventing an economic collapse, others say its effects will have been exhausted by the end of this year, just as the tax cuts from the previous president, George W Bush, are scheduled to expire. The last thing Mr Obama needs is to invest more political capital in a second package. Though most economists acknowledge deficit spending was the only alternative for a president who inherited an economy on life-support - his spending on initiatives is equal to about only 10 per cent of the total debt - Americans are understandably nervous about the sustainability of Washington's fiscal policy.
Mr Obama's own party is divided over the need for another rescue package. Laura Tyson, a member of the White House Economic Advisory Board, said last week the first programme was too small, while Democrats leaders in Congress, sensing grass-root alarm over the public debt, disagreed. Last week, Mr Obama was obliged to respond defensively to remarks from Joe Biden, his vice president, that the White House "misread" the depths of the crisis. In some parts of the country, Mr Obama's approval ratings have dropped below 50 per cent.
For now, the White House is trying to allay fears of a looming "debt trap" by pledging to cut the deficit in half by next year and to write a healthcare reform bill that will pay for itself. No one believes this, particularly not the Chinese government, which is talking down the dollar again. Last Thursday, Dai Bingguo, a member of China's delegation at last week's Group of Eight industrialised nations summit, called for "a diversified and rational international reserve currency system".
It was a clear swipe at America's onerous public debt and its long-term consequences for the US currency. As the world's top buyer of US treasuries, China is Washington's most important banker and custodian to $2tn worth in mostly dollar-denominated foreign exchange reserves. Mr Dai's comment followed news last week that Beijing would allow companies to invoice and settle transactions in local currency, an important step in the internationalisation of China's financial system.
Although Beijing knows the dollar will remain the world's reserve currency for some time, it is, through currency liberalisation and the occasional raspberry at high-level summits, signalling that its patience for America's debt addiction is wearing thin. firstname.lastname@example.org