Capital Gold Group Report: The Great Recession: A Downturn Sized Up

Unemployment Lines Have Been Long Before, but No Prior Slump Since World War II Has Hurt So Much on So Many Fronts

By Justin Lahart

Peter Ferguson

What makes the current recession so bad? Other downturns have been more painful by some measures, but none since World War II has delivered so many severe blows to the economy at the same time.

Already it is the longest. The nonprofit National Bureau of Economic Research, which determines when the U.S. economy slips into recession, says the downturn began in December 2007, 19 months ago. That makes it longer than the wrenching, 16-month recessions of 1973-75 and 1981-82.

The unemployment rate is approaching the peak seen in the 1981-82 recession and the scope of job losses is the worst since the 1948-49 recession. The decline in gross domestic product is the deepest since the 1957-58 downturn, and Americans haven’t seen so much of their wealth evaporate since the Great Depression.

The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.” Among the gauges the organization watches are GDP and employment, as well as income, sales and industrial output. Even if the current recession is, as many economists believe, at or near its end, it looks worse than its postwar predecessors.

View Interactive

Compare key data points to see how past recessions played out.

With a dwindling number of people who remember the Great Depression, the 1981-82 recession is many Americans’ high-water mark for economic pain. To tame the era’s rampant inflation, the Federal Reserve pushed short-term interest rates above 20%, slamming the brakes on the economy. Millions lost their jobs, lifting the jobless rate to 10.8%.

Last month, the unemployment rate hit 9.5%. But most economists forecast it will keep climbing even after the recession ends because businesses will remain cautious about hiring. Making matters worse, the economy needs to add some 100,000 jobs a month to keep pace with population growth.

While the unemployment rate isn’t yet as high as in the early 1980s, the job losses associated with this recession already have been deeper because the downturn started with a lower unemployment rate than in the 1981-82 slump. Last month, there were 6.7 million fewer Americans working than in December 2007, when employment peaked — a 4.7% decline, compared with 3.1% in 1981-82.

“In terms of employment, we’re now way past 1982 and we’re just about to cross the worst postwar recession, which was 1948,” says Stanford University economist Bob Hall, who heads the NBER’s recession-dating group.

In 1948, the demand that built up during World War II rationing programs had been sated. Companies, left holding more inventory than they could sell, throttled back production and laid off workers. The recession that began that year pushed payrolls down by 5.2%. Jobs recovered quickly, however, after the excess inventory was cleared away.

In contrast, the past two recessions, in 1990-91 and in 2001, saw payrolls decline long after the economy began recovering. That lagging drop is a shift in the way jobs respond to downturns that economists worry will continue.

Recent downturns have also been less abrupt, in part because the manufacturing sector, which responds to trouble by slashing production, is no longer as large a part of the economy. The declines in GDP — the value of all goods and services produced — associated with the 1990-91 and 2001 recessions were slight.

That makes this recession’s decline in GDP striking. Through the first quarter, GDP was down 3.1% from the peak it reached last year. The only post-World War II recession more severe was in 1958, when the U.S. was a manufacturing powerhouse. After consumer spending cooled in response to Fed rate increases, manufacturers ratcheted back, sending GDP down 3.7%. But the Fed cut rates, and the economy recovered quickly, making the downturn one of the briefest ever.

“A normal postwar recession ends when the Fed thinks it’s done enough to fight inflation,” says Brad DeLong, an economic historian at the University of California, Berkeley.

But this downturn was set off by a housing and credit collapse, making Fed rate cuts less effective in spurring growth. Economists believe Friday’s GDP report will show the economy contracted again in the second quarter and that, in combination with downward government data revisions, could make this recession’s GDP drop even larger than 1958’s.

The good news: This recession’s drop in household income hasn’t been nearly as severe as one of its predecessors. That is partly because many states have extended unemployment benefits. It also is because workers haven’t seen their earning power eaten up by rising prices.

That wasn’t the case in the recession that stretched from 1973 to 1975, when food and energy costs jumped. Adjusting for inflation, U.S. household income fell 5.3% during that period. In the current recession, it has fallen by 3%.

But this recession has eaten away at Americans’ wealth like never before. Falling home prices have decreased the equity the U.S. households have in their homes — that is, the value of their homes minus what they owe on them — by $5.1 trillion, a 41% drop. They also have lost trillions of dollars in the stock market. No other episode of wealth destruction since the 1930s comes close.

As households work to rebuild the stores of wealth they lost, they spend less. Although spending has recovered a bit, it is still an inflation-adjusted 1.9% below its peak 2008 levels.

Only two other downturns have had comparable spending drops. In the 1953-54 recession, when Congress added to the Fed’s inflation-fighting efforts by extending an unpopular tax on corporate profits, spending fell by as much as 3.3%. That drop was matched in 1980, after President Jimmy Carter, in an attempt to rein in inflation, persuaded the Fed to introduce stringent controls on the use of credit.

Reversing those policies, and getting spending moving again, was relatively easy. But reversing the drop in wealth isn’t. That means that tepid consumer spending could be a drag on the economy for years to come.

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Capital Gold Group Report: 7 MORE FAILED BANKS AS OF JULY 24TH BRINGING 2009 TOTAL TO 64

Security Bank of Jones County	Gray	GA
Security Bank of Houston County	Perry	GA
Security Bank of Bibb County	Macon	GA
Security Bank of North Metro	Woodstock	GA
Security Bank of North Fulton	Alpharetta	GA
Security Bank of Gwinnett County	Suwanee	GA
Waterford Village Bank	Williamsville	NY

Capital Gold Group Report: Gold May Rise on Speculation Dollar’s Decline Will Fuel Demand

By Claudia Carpenter

July 24 (Bloomberg) — Gold, little changed today in New York and London, may rise on speculation a drop in the dollar will spur demand for the metal as an alternative investment.

Bullion for immediate delivery has added 1.5 percent this week, heading for a second weekly climb, as the dollar has dropped against the euro. The metal surged to an 11-month high in February as investors sought to protect their wealth during the worst global recession since World War II. The U.S. currency declined as much as 0.8 percent against the euro today.

“Short-term drivers such as the dollar, oil and inflation expectations are becoming more important again,” said     Suki cooper, an analyst at Barclays Capital in London. “Currency movements are becoming key.”

Gold futures for August delivery slipped $2.80, or 0.3 percent, to $952 an ounce by 8:39 a.m. on the New York Mercantile Exchange’s Comex division, rebounding from a slide of as much as 0.9 percent. Immediate-delivery gold added $2.88, or 0.3 percent, to $952.03 an ounce in London.

Investment demand for gold exceeded usage by jewelers in the first quarter for the first time since at least 2004, according to the World Gold Council. In India, the world’s largest gold buyer last year, jewelry purchases were the lowest in at least 20 years and Chinese demand was six times that of India, the council said in May.

China to Pass India?

“There is a possibility that China might overtake India as the world’s largest gold consumer this year,” Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. The displacement may take closer to five years, John Reade, an analyst at UBS AG in London, said in an e-mailed report today.

The dollar’s negative correlation to gold has increased to about 0.8 in the past month and has been above 0.5 over the past three months, Cooper said. A reading of 1 would indicate the two always move in lockstep. Bullion and the greenback tend to move inversely.

“Our expectations are for the dollar to strengthen over the next month,” Cooper said.

Investors sold a net 9 metric tons of gold out of 15 exchange-traded funds tracked by Barclays Capital this month, heading for the biggest monthly outflow since August, Cooper said. That’s left the market more influenced by speculative traders, and “in the short term, we could see a bit more volatility” as a result, she said.

ETF Holdings

Investment in ETF Securities Ltd.’s exchange-traded gold products fell 0.1 percent to about 7.5 million ounces, the second consecutive decline and the lowest since May 28, according to figures from the company’s website.

Gold was little changed at $949.75 an ounce in the morning “fixing” in London, used by some mining companies to sell production, from yesterday’s afternoon fixing of $950. Platinum was fixed at $1,180 an ounce, compared with $1,176 yesterday afternoon.

Platinum for immediate delivery rose 0.5 percent to $1,184.50 an ounce, palladium gained 0.1 percent to $258.80 an ounce and silver added 0.6 percent to $13.80 an ounce.

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Capital Gold Group Report: Gold Rises to Five-Week High as Dollar Eases; Silver Climbs

By Halia Pavliva and Nicholas Larkin

July 23, 2009 (Bloomberg) — Gold prices rose to the highest in five weeks as the dollar retreated, supporting demand for the precious metal as an alternative investment. Silver also gained.

Gold has climbed 2 percent this week as the dollar dropped 1.2 percent against the euro. Earlier, the metal reached $956.90 an ounce, the highest since June 12.

“Gold is in a range and probably has limited upside in the short term, but is also well supported on the downside,” Patrick Chidley, an analyst at Barnard Jacobs Mellet LLC, said in an e-mail. “There are good reasons to believe the dollar should weaken, and in that case, gold will be a beneficiary, but it’s not necessarily going to occur overnight.”

Gold futures for August delivery rose $2.50, or 0.3 percent, to $955.80 at 11:30 a.m. on the Comex division of the New York Mercantile Exchange. Bullion for immediate delivery rose $4.11, or 0.4 percent, to $955.51.

Silver for September delivery added 14 cents, or 1 percent, to $13.84 an ounce.

U.S. stocks rose, sending the Dow Jones Industrial Average above 9,000 for the first time since January, after some companies reported earnings that topped analysts’ estimates and home resales increased more than forecast.

“Earlier this month, economic worries encouraged investors to buy the dollar and Treasuries,” Pradeep Unni, an analyst at Richcomm Global Services in Dubai, said in a report. “Appetite for other assets, including gold and equities, seems to be returning.”

Before today, gold rose 7.8 percent this year, and silver gained 21 percent

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Capital Gold Group Report: FDIC’s Bair Says New Fund Similar to FDIC Needed to Prop Up Failing Financial Companies in Future

FDIC’s Bair Seeks Fund to Wind Down Finance Firms

By Alison Vekshin and Jesse Westbrook

July 23 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bari urged U.S. lawmakers to impose fees on the nation’s largest financial firms to keep the government from having to prop up companies deemed too large to fail.

Congress should create an industry-supported Financial Company Resolution Fund to provide working capital and cover unanticipated losses when government steps in to unwind a failed firm, Bair said today in testimony at the Senate Banking Committee.

The U.S. should impose “assessments on large or complex institutions that recognize their potential risks to the financial system,” Bair said. “This system also could provide an economic incentive for an institution not to grow too large.”

Bair’s proposal is aimed at preventing the government from having to bail out or arrange an acquisition for a firm whose failure would disrupt the financial system. In the past two years, the U.S. has rescued, taken over or helped sell Bear Stearns Cos., Merrill Lynch & Co., American International Group Inc., IndyMac Bancorp Inc., Fannie Mae and Freddie Mac.

Bair said the proposed reserve would be similar to the FDIC deposit insurance fund, which backs consumer accounts at U.S. banks that pay fees to support the fund.

“In a properly functioning market economy there will be winners and losers, and when firms — through their own mismanagement and excessive risk taking — are no longer viable, they should fail,” Bair said.

She urged creating a mechanism to wind down “large, systemically important financial firms” with no cost to taxpayers similar to the system in place at the FDIC for shutting failed commercial banks and thrifts.

‘Costly, Ad Hoc’

“Without a new comprehensive resolution regime, we will be forced to repeat the costly, ad hoc responses of the last year,” Bair said.

Bair joined Securities and Exchange Commission Chairman Mary Schapiro and Fed Governor Daniel Tarullo in discussing an Obama administration proposal to give the Federal Reserve authority over firms that pose a systemic risk to the economy.

Schapiro said a council of agencies with the Treasury Department, the SEC and the FDIC should oversee “systemically important institutions.” Bair endorsed the idea.

The council should “prevent the creation” of companies deemed too large to fail, rather than just regulating such companies, Schapiro said. It should have authority to identify firms it deems systemically risky, Schapiro said.

‘Large, Diverse’

“Insufficient attention has been paid to the risks posed by institutions whose businesses are so large and diverse that they have become, for all intents and purposes, unmanageable,” Schapiro said.

Tarullo said giving the Fed the authority “would be an incremental and natural extension” of the central bank’s current role.

“I hope people are not expecting that anything that the Fed, the SEC, the FDIC or anybody else does is going to eliminate all potential for systemic risk,” Tarullo said.

Senators Christopher Dodd and Richard Shelby, leaders of the banking panel, opposed giving the Fed new powers.

“The Fed hasn’t done a perfect job with the responsibilities it already has,” said Dodd, the chairman and a Connecticut Democrat. “This new authority could compromise the independence the Fed needs to carry out effective monetary policy.”

Shelby, the panel’s leading Republican, said the power would make the Fed “a regulator giant of unprecedented size and scope,” and Congress “should consider every possible alternative to the Fed as the systemic-risk regulator.”

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Capital Gold Group Report: Gold ends at six-week high as dollar weakens

Jul 22, 2009, 2:12 p.m. EST

NEW YORK (MarketWatch) — Gold futures rose Wednesday to end at the highest level in six weeks, with a falling dollar and rising equity markets boosting gold’s investment appeal. August gold futures rose $6.40, or 0.7%, to end at $953.30 an ounce on the Comex division of the New York Mercantile Exchange, the highest settlement for a front-month contract since June 11.

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Capital Gold Group Report: Meyer Sees No Return to ‘Full’ Employment Until 2015

By Vincent Del Giudice

July 17 (Bloomberg) — The U.S. won’t see a return to “full” employment for another six years, helping to hold down inflation, according to former Federal Reserve Governor Laurence Meyer.

“I think there’s going to be a long legacy of the financial crisis and the deep recession,” Meyer said in an interview today on Bloomberg Radio. Meyer, who served at the Fed from 1996 to 2002, is vice chairman of St. Louis-based Macroeconomic Advisers LLC.

Meyer’s comments echo those of observers including Mohamel El-Erian, the Pacific Investment Management Co. chief executive officer, who foresee an extended period of elevated unemployment. That would follow a decade that is already on course to be the weakest for economic growth in the postwar era.

The economy is “a very, very long way off” from its potential growth rate, Meyer said. While the expansion will probably be “modestly above trend next year” and “significantly above trend in 2011,” that won’t help restore the nation to a “normal” job-market, he said.

“Full” employment — or a jobless rate around 5 percent — won’t return until 2015, he said.

“We’re staring in a hole; we’re going to start from a 10 percent unemployment rate,” Meyer said. “The unemployment rate is going to come down very slowly.”

Inflation Call

A weak labor market “brings with it a significant decline in inflation,” below 1 percent next year, and near zero in 2011, Meyer predicted.

“That’s particularly important for the call when the FOMC is likely to exit from a near-zero rate policy,” he said. The consumer price index fell 1.4 percent from a year earlier in June, the weakest performance since January 1950.

In an effort to prevent a depression, the Fed’s Open Market Committee reduced its benchmark interest rate to near zero last year, and has more than doubled the size of its balance sheet in the past year to more than $2 trillion.

U.S. joblessness has increased to 9.5 percent, the highest in more than a quarter century, from an average of 5.3 percent during the six-year economic expansion that ended when the recession began in December 2007. Fed officials’ projections suggest the rate could reach as high as 10.1 percent by the end of this year.

Meyer said that the jobless rate will probably be 9.5 percent to 10 percent by the end of 2010, and 8.5 percent by the end of 2011, Meyer said. “That’s still very high,” he said. “That’s the defining feature of the outlook going forward.”

Employers in the U.S. have cut 6.5 million jobs since the recession began, the most since the end of World War II. GDP contracted at a 5.5 percent annual rate in the first quarter, capping the weakest six-month performance in half a century.

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Capital Gold Group Report: NO GOVERNMENT FUNDING IN NEAR FUTURE FOR CIT GROUP – 300,000 Retailers and 750 Manufacturing Companies Could Be Affected

By Kathy Schwiff

July 15, 2009: CIT Group Inc. said late Wednesday it has been told there is “no appreciable likelihood” of government funding in the near term.

The struggling commercial lender said its discussions with government agencies have ended and its board is evaluating alternatives for the company, which is facing a liquidity crisis as its corporate customers drew down hundreds of millions of dollars from their credit lines.

Earlier Wednesday, the White House said President Obama has been briefed on CIT’s situation but deferred questions about the troubled lender’s potential government-aid package to the Treasury Department.

The financial position at CIT, a lender to almost a million small and midsized businesses, has weakened in recent days and government officials had come under increasing pressure to resolve the looming crisis. News over the weekend the company had hired bankruptcy lawyers to help prepare for a possible bankruptcy filing prompted nervous investors to draw down on credit lines and the company’s bonds and shares slumped. People familiar with the matter told The Wall Street Journal the drawdowns were about $500 million on Monday, but by Tuesday had risen to around $750 million.

CIT’s shares were halted up 1.9%, or three cents, at $1.64, after trading as low as $1.50. Trading is often stopped when a company is about to announce market-moving news.

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Capital Gold Group Report: GOLD HITS TWO WEEK HIGH ON WEAKER DOLLAR

NEW YORK (MarketWatch) — Gold futures rose Wednesday for a third session, climbing to their highest levels in two weeks, as a weakening dollar and newly released consumer price data raised the metal’s investment appeal.

U.S. consumer prices rose in June at the fastest pace in nearly a year, raising inflation worries and gold’s value as a protection against rising prices. Meanwhile, the U.S. dollar lost ground against most of its major rivals.

August gold futures rose $15.90, or 1.7%, to $938.70 an ounce on the Comex division of the New York Mercantile Exchange. It rose to $941.70 earlier, the highest intraday level since July 1.

The dollar will “provide further direction to gold,” said James Moore, an analyst at TheBullionDesk.com. “Investors are also paying close attention to economic data and Fed statements.”

The Federal Reserve will release minutes of its latest meeting later Wednesday, in which the central bank could provide its outlook for inflation and economic growth. Higher inflation outlook tends to push up gold prices, as some investors buy the metal as a hedge against rising prices.

The U.S. consumer prices index rose a seasonally adjusted 0.7% in June, the Labor Department reported Wednesday. That’s the biggest increase since July 2008. The core CPI – which excludes often-volatile food and energy prices — rose a seasonally adjusted 0.2%.

The data came one day after the Labor Department reported the producer price index, a gauge of whole-sale level inflation, jumped 1.8% last month, climbing by the most since November 2007.

In currencies trading Wednesday, the dollar index /quotes/comstock/11j!i1:dx\y (DXY 79.36, -0.83, -1.03%) fell to 79.396, down from above 80 in late trade Tuesday. A weaker greenback tends to push up dollar-denominated commodities prices such as gold and crude.

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Capital Gold Group Report: Budget deficit tops $1 trillion for first time

Federal budget deficit tops $1 trillion for first time, could reach $2 trillion by fall

By Martin Crutsinger, AP Economics Writer
On Monday July 13, 2009, 9:18 pm EDT

WASHINGTON — The federal deficit has topped $1 trillion for the first time ever and could grow to nearly $2 trillion by this fall, intensifying fears about higher interest rates, inflation and the strength of the dollar.

AP – Graphic compares the FY2009-to-date federal deficit to the annual deficit or surplus of the previous 20 years …

The deficit has been widened by the huge sum the government has spent to ease the recession, combined with a sharp decline in tax revenues. The cost of wars in Iraq and Afghanistan also is a major factor.

The soaring deficit is making Chinese and other foreign buyers of U.S. debt nervous, which could make them reluctant lenders down the road. It could also force the Treasury Department to pay higher interest rates to make U.S. debt attractive longer-term.

“These are mind-boggling numbers,” said Sung Won Sohn, an economist at the Smith School of Business at California State University. “Our foreign investors from China and elsewhere are starting to have concerns about not only the value of the dollar but how safe their investments will be in the long run.”

The Treasury Department said Monday that the deficit in June totaled $94.3 billion, pushing the total since the budget year started in October to $1.09 trillion. The administration forecasts that the deficit for the entire year will hit $1.84 trillion in October.

Government spending is on the rise to address the worst financial crisis since the Great Depression and an unemployment rate that has climbed to 9.5 percent.

Congress already approved a $700 billion financial bailout for banks, automakers and other sectors, and a $787 billion economic stimulus package to try to jump-start a recovery. Outlays through the first nine months of this budget year total $2.67 trillion, up 20.5 percent from the same period a year ago.

There is growing talk among some Obama administration officials that a second round of stimulus may eventually be necessary.

That has many Republicans and deficit hawks worried that the U.S. could be setting itself up for more financial pain down the road if interest rates and inflation surge. They also are raising alarms about additional spending the administration is proposing, including its plan to reform health care.

President Barack Obama and Treasury Secretary Timothy Geithner have said the U.S. is committed to bringing down the deficits once the economy and financial sector recover. The Obama administration has set a goal of cutting the deficit in half by the end of his first term in office.

In the meantime, the U.S. debt now stands at $11.5 trillion. Interest payments on the debt cost $452 billion last year — the largest federal spending category after Medicare-Medicaid, Social Security and defense.

The overall debt is now slightly more than 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product. During World War II, it briefly rose to 120 percent of GDP.

The debt is largely financed by the sale of Treasury bonds and bills.

Many private economists say the administration had no choice but to take aggressive action during the financial crisis.

“We have a deep recession hammering tax revenues and forcing the government to provide a lot of help to the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “But without this help, the downturn would be even more severe.”

History shows the dangers of assuming too soon that economic downturns have ended.

President Franklin D. Roosevelt made that mistake in 1936. Believing the Depression largely over, he sought to reduce public spending and to balance the federal budget, but that undermined a fragile recovery, pushing the economy back under water in 1937.

Japanese leaders made a similar mistake in the 1990s when they temporarily withdrew government stimulus spending, prolonging Japan’s recession into one that lasted a full decade.

Republicans in Congress are seizing on the deficit — and the persistence of the recession — to attack Democrats.

“Washington Democrats keep borrowing and spending money we don’t have,” said House Republican Leader John Boehner of Ohio.

So far, interest rates have remained low.

This is partly because the Federal Reserve has kept a key short-term rate at a record near zero. Also, all the economic troubles in housing and the rest of the economy have depressed demand for credit by the private sector, meaning the government’s borrowing costs are relatively low.

The benchmark 10-year Treasury security has risen by about a percentage point in recent weeks, but analysts note it is still trading at historically low levels of around 3.35 percent.

Geithner travels later this week to Saudi Arabia and the United Arab Emirates, where he is expected to face questions about the U.S. deficit. As he did during a visit to China last month, Geithner will try to reassure investors in the Middle East that their U.S. holdings are safe from a calamitous bout of inflation.

The deficit of $1.09 trillion so far this year compares to an imbalance of $285.85 billion through the same period a year ago. The deficit for the 2008 budget year, which ended Sept. 30, was $454.8 billion, the current record in dollar terms.

Revenues so far this year total $1.59 trillion, down 17.9 percent from a year ago, reflecting higher unemployment, which cuts into payroll taxes and corporate tax receipts.

Under the administration’s budget estimates, the $1.84 trillion deficit for this year will be followed by a $1.26 trillion deficit in 2010, and will never dip below $500 billion over the next decade. The administration estimates the deficits will total $7.1 trillion from 2010 to 2019.

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