Heavy debt burden clouds US recovery

Just when we thought we could be hopeful that a recovery's just around the corner, here comes The Economist warning of a double dip recession on account of America's heavy debt burden. This double dip may sound like some yummy ice cream concoction, but it is nothing as pleasant. It has to do about economic output rising briefly as inventories turn around, but falling again as final demand fails to follow through.

And do you know why demand will likely fail to follow through? That's because business and consumers will realize they still have to tighten their belts on account of their heavy debt burden. Five of the past six full-blown recessions, according to The Economist, have included a double dip.

So, even as economists are eagerly revising up their growth forecasts, The Economist warns that "the excesses of the 1990s boom, notably the surge in household and corporate debts, still loom dangerously large. Like a bird that has stuffed itself with too many worms, America’s debt-laden economy will find it hard to get fully airborne."

What does this have to do with us? A delayed American recovery, or a weak one or worse, the return of recession (double dip) "would be a big setback for the world economy, which is still overly dependent upon America." Japan and Europe are in no position to be the engines of global growth. This is why there is every hope that an American rebound riding on its business sector's successful reduction of inventory and a still strong consumer demand will fuel a world recovery this year.

But playing the role of the party pooper, The Economist points out that "the root cause of this recession was the bursting of one of the biggest financial bubbles in history. It is wishful thinking to believe that such a binge can be followed by one of the mildest recessions in history – and a resumption of rapid growth." Sorry to say, The Economist seems to make a lot of sense.

Here is the scenario this year as seen by this party pooper.

"In the fourth quarter of 2001 American companies slashed their inventories by more than they had ever done before. A turnaround in inventories may, therefore, boost output in the first quarter of this year. But for a sustained recovery, consumer spending and business investment need to take over.

"Here lies the problem: consumers and companies are up to their neck in debt. Even through the recession, debts have continued to grow in real terms, as people have borrowed more to sustain their spending. Not only will that limit the usual increase in borrowing that fuels an economic recovery; it also creates a risk that consumers may eventually be forced to trim their spending and save more."

The problem, as The Economist sees it, is that American consumers are in denial. Many consumers seem to consider this recession as just a brief dip before a return to strong growth. The Economist doubts if the spending habits of American consumers can be sustained. "Consumer balance sheets look horribly stretched, and some recent spending, especially on cars, is literally borrowed from the future."

"Eventually," The Economist predicts, "borrowers and lenders will wake up to the reality that their expectations of future growth in profits and returns were too rosy, and consumers will have to reduce their spending to bring debt back to sustainable levels. In this way, America’s excessive debt burden is likely to drag down the economy, either by restraining demand for several years, or even by triggering a double-dip recession."

And for us back here, dependent as we are on exports to the US, we can expect tougher times ahead. Survive, of course, we will. Filipinos are great survivors. Our strong underground economy will see us through. But poverty will worsen and the middle class will shrink as the economy is overwhelmed by negative factors. Even our OFWs will be affected by economic downturns in their host countries. Hopefully, El Niño will not devastate the agricultural sector, our remaining bastion of hope.

In other words, if we know what is good for us, we will stop all the grandstanding and see how we can all work together to mitigate the impact of the harsh external economic environment. Reality-impaired government economists may try and peddle some rosy scenarios to ease political pressure on the administration. We all know better, on ground zero.

Korea flights

If it is true that Cebu Pacific wants all four new frequencies to South Korea for its Manila-Seoul run, then the position of PAL to use two of those frequencies to link Cebu with Seoul makes sense. Cebu is just about the only local tourist destination to survive the current tourist drought. And mostly because of Korean tourists who go to Cebu not knowing it is part of the Philippines.

The last thing we need is to reduce the flights to Cebu. If we can use all of the four new frequencies to go to Cebu, our tourism program will be better served. Who wants to go to Manila anyway? Ironically, Cebu Pacific should be promoting Cebu, not Manila.

Enron, plainly

Texas-based Dr. Ernie E offers us a plain explanation of what really happened to Enron.

In case you were wondering how Enron came into so much trouble, here is an explanation reputedly given by an Agricultural Economics professor at Texas A&M, to explain it in terms his students could understand.

CAPITALISM: You have two cows. You sell one and buy a bull. Your herd multiplies and you hire cowhands to help out on the ranch. You sell cattle. The economy grows and eventually you can pass the business on and your cowhands can retire on the profits.

ENRON VENTURE CAPITALISM: You have two cows. You sell three of them to your publicly listed company using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.

The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more.

Now do you see why a company with $62 billion in assets declared bankruptcy?

(Boo Chanco's e-mail address is [email protected])