Bernanke gloomy on economic outlook

By Robin Harding in Washington

Ben Bernanke offered a gloomy outlook for the US economy but the Federal Reserve chairman offered no hint of further monetary easing in testimony to Congress.

“We are looking very carefully at the economy, trying to judge whether or not the loss of momentum we’ve seen recently is enduring, and whether or not the economy is likely to continue to make progress,” he said, warning that progress in reducing a 8.2 per cent unemployment rate “seems likely to be frustratingly slow”.

The testimony initially disappointed markets – which are on tenterhooks for a signal of further monetary easing from the Fed – with stocks falling and the dollar rising before turning around later in the day.

A run of weak reports on the economy, with net job creation falling to 80,000 in June, has led to speculation that the Fed could ease policy further as soon as its August meeting.

Mr Bernanke said that recent data points to annualised growth of less than 2 per cent in the second quarter of 2012. “Households remain concerned about their employment and income prospects and their overall level of confidence remains relatively low,” he said.

The Fed chairman set out a list of options for further easing but refused to say which he might prefer. “The logical range includes different types of purchase programs. That could include Treasuries or include Treasuries and mortgage-backed securities. Those are the two things we’re allowed to buy,” he said.

Asset purchases – also known as quantitative easing – are a way of driving down long-term interest rates to boost the economy when short-term rates are already at zero.

The Fed’s other options include lending via the Fed’s discount window, communications about future policy, or cutting the interest that the Fed pays banks on excess reserves, Mr Bernanke said. “We haven’t really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market.”

New data on Tuesday showed little sign of inflationary pressure – the overall consumer price index was up by 1.7 per cent on a year ago – and a rebound in industrial production, which was up 0.4 per cent in June after falling in May.

Mr Bernanke chided Congress for its failure to act on fiscal policy, citing it as one of two main risks to the economy alongside the eurozone crisis, and warning against a repeat of the market volatility and loss of economic confidence caused by last summer’s debacle over raising the debt ceiling.

The Fed chairman has ramped up his rhetoric on fiscal policy with each successive visit to Capitol Hill, but there is little sign that Congress is willing to compromise before the November election, even in order to boost growth.

“The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery,” said Mr Bernanke. “Doing so earlier rather than later would help to reduce uncertainty and boost household and business confidence.”

Top global accounting firm Deloitte says US debt crisis is 'bigger than you think'

* US Government debt "could spiral out of control"
* Interest payments add a new level of fiscal pain
WHAT is the real cost of the US Government's nearly $US16 trillion ($16.07 trillion) debt?

"The debt crisis is likely bigger than you think," a report issued by Deloitte, one of the world's largest accounting firms, concluded.

That is because interest payments on the country's massive debt add a whole new level of fiscal pain to the problem.

Interest payments on the national debt alone, it noted, are expected to total some $US4.2 trillion over the next decade.

And that number could go higher depending on rates.

The lead author of the Deloitte study, director Bill Eggers, stressed that US Government debt could quickly spiral out of control if investors become less willing to lend more money.

"If interest rates go up by simply three per cent over the next decade, the additional cost to the Treasury, just for interest payments, would equal the peak combined cost of the wars in both Afghanistan in Iraq," he said.

The report showed that $US4.2 trillion being spent on interest could instead:

- build 130,000 kms of highways
- pay tuition for every science/math/engineering college degree in the country
- triple US government general research and development funding
- build six international space stations
- offset 80 per cent of global warming pollution in the atmosphere as recommended by the Intergovernmental Panel on Climate Change

But not all economists are on board with the implications of the study.

"The major holders of government bonds are agencies and individuals within the US," Robert Stonebraker, an economics professor at Winthrop University, told FOXNews.com.

"So if you pay $US1 trillion in interest on the debt, a lot of it will go back to Americans anyway."

But Mr Eggers noted that a lot of the interest payments do go overseas.

"If you look at the interest payments going to foreign countries, soon we're going to be spending enough to essentially finance the Chinese military," he said.

Currently, foreigners own some $US5 trillion in US Government bonds, $US1 trillion of which is owned by China.

Not all economists agree with the study.

"I think they're overhyping the need to fix the debit crisis in short run," Dr Stonebraker said.

"It's not appropriate to cut spending during an economic slowdown -- that is exactly when you need deficit spending to stimulate the economy and get people back to work," he said.

Obama Backs Away From ‘Fine’ Comment

By MICHAEL D. SHEAR

President Obama on Friday afternoon backed away from his earlier comments that the “private sector is doing fine,” telling reporters that he does not believe the economy is doing fine.

“That’s precisely why I asked Congress to start taking some steps that can make a difference,” Mr. Obama said in brief remarks to reporters during a meeting with the visiting Philippines president.

Republicans had seized on comments Mr. Obama made during an earlier news conference, in which he repeatedly made the point that hiring at private businesses is doing well, while hiring by state and local government is not.

“The private sector is doing fine,” Mr. Obama said at the news conference.

But by later in the day, Mr. Obama had decided to emphasize that he does not believe that the overall economy is doing fine, as Republicans were trying to suggest.

“Listen, it is absolutely clear the economy is not doing fine,” he said. He suggested that Republicans had misstated his words from earlier in the day.

“I think if you look at what I said this morning, what I’ve been saying consistently over the last year, we’ve actually seen some good momentum in the private sector,” he said. “There’s been 4.3 million jobs created, 800,000 this year alone, record corporate profits.”

He added: “And so that has not been the biggest drag on the economy.”

Mr. Obama said the economy “needs to be strengthened,” adding that “I believe that there are a lot of Americans who are hurting right now, which is what I’ve been saying for the last year, two years, three years, what I’ve been saying since I came into office.”

Global slump alert as world money contracts

Growth of the world money supply has dropped to the lowest level since the financial crisis of 2008-2009, heralding a severe economic slowdown later this year unless authorites rapidly take action.

By Ambrose Evans-Pritchard

The latest data show that the real M1 money supply – cash and overnight deposits – for China, the eurozone, Britain and the US has been contracting since the early Spring. Any further falls risk a full-blown global recession.

Clear signs of trouble are emerging in the US, until now the last bastion of strength. The New York Institute of Supply Management said its ISM business index – a proxy for business demand – flashed a "screeching halt" in May, crashing to 49.9 from 61.2 in April, where anything below 50 denotes contraction. Unemployment is rising again after grim jobs data for April and May, indicating that the economy may have fallen below stall speed.

Central bank governors and finance ministers from the G7 bloc are to hold an emergency teleconference call on Tuesday to grapple with Europe's escalating crisis. There is mounting anger in North America and Asia over the failure of the Europeans to use their vast resources to contain the brushfire in Spain.

The world money data collected by Simon Ward at Henderson Global Investors show that real M1 for the G7 economies and leading E7 emerging powers peaked at 5.1pc in November and has since plunged to 1.6pc in April. The data explain why commodity prices are falling hard, with Brent crude down to a 16-month low of under $97 a barrel.

China's money data are falling at the fastest pace since records began. The gauge – six-month real M1 – gives advance warning of economic output half a year ahead. "Europe needs to start quantitative easing [QE] immediately and China must ease policy," said Mr Ward.

The Americans may act first. Goldman Sachs expects Federal Reserve chair Ben Bernanke to open the door for QE in testimony on Thursday.

Stock markets rallied in Madrid and Milan led by bank shares on rumours of an EU plan to recapitalise banks directly with funds from the EU bail-out machinery.

Olli Rehn, the EU economics chief, said use of the European Stability Mechanism to bail out lenders was a "serious possibility", adding that it was imperative to "break the link between banks and sovereigns".

However, there is no sign yet that Germany will be willing to drop its veto on such action, viewed by Berlin as the start of debt mutualisation. Chancellor Angela Merkel crushed talk of an instant "banking union" after meeting commission president Jose Barroso, saying their could be no quick fix. She called instead for EU banking supervision as a "mid-term goal".

Her spokesman said any options that "resemble eurobonds" are for the distant future. "It's up to national governments to decide whether they want to avail themselves of aid. That also applies to Spain," he said.

Use of the ESM for bank bail-outs would meet fierce resistance in the German, Dutch and Finnish parliaments. A senior EU official said even Germany's Social Democrats are cooling on eurobonds. "They looked at the polling data and shivered. The German people are not willing to send money into a bottomless pit," he said.