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Economic Slowdown Coming - Even for the Fatcats

Do they hear the sound of the air hissing out of the economy?

There’s a remarkable amount of optimism in the US financial media given the underlying health of the economy. Of course, the sort of short term investors that have come to dominate securities trading had been in a “risk on/risk off” pattern for a protracted period before commodities weakness and the remarkable run of the Nikkei has led to some renewed focus on relative values of various macro plays. But the markets are still dominated by an underlying faith in the willingness of central bankers to protect the backs of investors and limit any downside (while, ironically, many of these same investors howl about ZIRP and QE, which were clearly intended to goose the value of financial assets and real estate, with the hope that would lead to more consumer spending).

And why shouldn’t the professional investors (as opposed to widows and orphans who can no longer rely on low risk bond investments to produce adequate income) be pleased as punch? This recovery may be nothing to write home about, but it sure has served those at the very top of the food chain extremely well. Remember, the income gains in this tepid rebound have gone entirely to the top 1% while the rest of us as a whole have lost ground. And aggregates like that mask increasing distress among at the bottom of the economic ladder. For instance, in New York, a city that has benefitted more from the tender ministrations of the Federal Reserve and Treasury than most cities in the US, the number of poor and near-poor increased in 2011. From the New York Times:

The rise in New York City’s poverty rate as a result of the recession has apparently eased, but not before pushing nearly half of the city’s population into the ranks of the poor or near-poor in 2011, according to an analysis by the Bloomberg administration.

That year, according to the city’s measure, about 46 percent of New Yorkers were making less than 150 percent of the poverty threshold, a benchmark used to describe people who are not officially poor but who still struggle to get by. That represents a rise of more than three percentage points since 2009, when the nation’s recession officially ended.

And with so many left out of the fruits of what growth there has been, there’s a real possibility that the economy will move into stall speed. And the econopundits are finally waking up to the fact that the slowdown in the rest of the world will drag on the US. 25% of S&P earnings come from Europe, for instance. From the Wall Street Journal:

Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.

“Every now and then you see a glimmer, things seem to improve, and then a little bit of bad news comes,” World Bank chief economist Kaushik Basu said….

And this is before you get to the fact that the gangrene of European austerity is reaching the core, yet the only debate among the powers that be is whether to ease up a bit, not whether to change course completely. And political fissures are widening. Italy is the one country that Germany can’t push around much because it could credibly leave the Eurozone. Luigi Bersani, the center-left leader that the Troika had hoped would win the Italian elections, was ousted by his own party in a series of votes over Parliamentary leadership, leading to the re-election of Giorgio Napolitano as President. This development is seen to favor Berlusconi, who has advocated leaving the eurozone. People came to the streets as the vote was announced and Beppe Grillo called for protests, although he said he could not travel in in time from the north to join.