We are already in a global recession but just don’t know it yet. Warning signs are everywhere. The Eurozone is melting down. Emerging economies like China, India and Brazil are all slumping simultaneously, plunging the entire world into a global economic crisis. A rising number of small business are closing down, the number of homeless on streets is growing and anger against austerity cuts is at a boiling point.

US Job growth has been slipping for three months. Retail sales and factory orders are down two straight months. Real incomes are flat. Household wealth is way underwater from the housing collapse, dropping nearly 40 percent in the last three measured years. And GDP was an anemic 1.9 percent in the first quarter. Nearly all leading Wall Street economists are marking down their second-quarter estimates to 2 percent or less.

Business sales and profits are still trending higher, although GDP-measured profits did fall in the first quarter. There are two major reasons for the latest economic stall. First is the deflationary impact of a sharp, nearly 10 percent rise in the exchange value of the dollar relative to the euro.

That’s imparting a deflationary influence on the economy, where both import and producer prices have recently turned negative. The good side of commodity deflation is that oil and retail gas prices have fallen considerably; the bad side is that manufacturers may hold back production and that debtors have to climb out of deeper holes.

King Dollar is not being accompanied by lower tax rates.

The original supply-side growth model argued for a strong dollar and lower taxes, where the former keeps prices stable and the latter provides fresh growth incentives. But instead of easier taxes, a huge tax-hike cliff looms. Big problem. Wrong model. Anti-growth

As the Bush era tax cuts expire at year end, so do the temporary payroll tax cut and the alternative minimum tax patch. By some estimates, over $400 billion in cash will be pulled out of the economy in 2013, along with a rollback of growth-oriented, marginal-tax-rate incentives.

It’s hard to quantify, but it’s quite possible that business hiring plans and consumer-spending expectations have been put on hold.

This time around, if the rich countries can’t get our act together, the whole world will spiral into recession. All this is why the US fiscal-cliff problem needs to be solved immediately. If the tax cuts are extended sooner rather than later, the economy might straighten out faster than most folks think.

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Tags: Financial Services

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