Thoughts on the economy - How long will it stay underwater? What can government do?

Will there be a technical US recession this year, or just a continuation of our slowly sinking economy?

John Mauldin of Investor's Insight sees:

The dollar went to bubble-like artificial heights because the world wanted to sell products to America.

American consumption was abetted by ever lower interest rates which allowed consumers to borrow money, especially on their homes, and by a stock market bubble which made people feel wealthy. Both of these trends are over.

There has never been a case in the history of the world that when trade deficits rose to the heights we are now at that a serious currency correction did not soon follow.

Such corrections typically slow down the economies of all concerned

The world, and especially Asia, is focused on selling products to the American consumer. The US was responsible for 65% of the growth in world GDP.

This can't continue forever, so at some point the rest of the world must find additional consumers to sell products their products to. But the major sources of potential customers are in weak positions. Many of the developing countries have little real internal consumer spending.

Many world economies are already weak. Japan is in depression and Europe will likely be in recession by the end of 2003, if not before. Bright spot economies like China depend upon ever increasing world trade for their growth.

To me this is a poor prognosis for any change except for the worse. The question is more how bad, how soon.

Bush has been advised that tax cuts for the rich will lift the economy. Why? Rich invest in luxury goods, savings and property. To make a big difference tax cuts would have to be directed to the other 90% who will spend on mass consumption and improvements in their lives with a broad market impact.

There are some things that will help the economy fast - raising the standard deductions is a good start. How about increasing the earned income credit? How about payroll tax adjustments? Refiguring the tax brackets to start with a 5% rate? Reinstate deductions for medical expenses and charitable giving that most people can take.

A Democrat would have jumped the economy on the first tax cut where Bush's trillions of dollars in giveaways had no effect.