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Martin Feldstein, Harvard Economics professor, weighs in on the current economic climate and the fiscal cliff negotiations.
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Our first guest this hour house -- doll in terms of economic cycles and he's is -- US economy may fall into recession next here.
Even if congress strikes a budget deal by year end.
Joining me -- Fox Business exclusive from Stanford California Martin Feldstein Harvard economics professor.
Doctor Feldstein thanks so much for being with that's I don't know if you heard my colleague -- -- report from Washington Republicans now responding negotiations well under way to avoid a fiscal cliff.
But to your point you recently said that even if need get a deal to avoid falling off the -- -- The economy still at serious risk of recession.
That's right I mean we are looking at an economy that right now is very weak this year.
Growth was very disappointing less than 2% real GDP growth in 2012.
And we're going to be struggling to achieve that next year even without.
Hitting the economy -- more fiscal bad news so if we go over the cliff it's really a major downturn.
If we don't go over the cliff but we have substantial increases in taxes and some cuts in spending and yet.
Uncertainty remains about what's coming next.
Put all that together and we could certainly be on -- -- recession and perhaps even slip into one.
That manufacturing number for the US coming in below fifty again signalling contraction after two months of an expansion pace.
If at first signal that this economy -- Chile is in trouble with or without a deal on the -- Certainly not the first signal I mean industrial production.
Was down.
Household earnings down real disposable personal income hasn't increased since may.
So we're really looking at an economy that is weak in the only thing that's keeping consumer spending going.
Is that -- souls have been prepared to cut back on your savings rate.
To such a low level that I don't think there's more room for that in 2013.
There are bright spots on the economy you have to point to housing the auto sales numbers for November which came out today obviously.
Pretty good especially Ford US automaker.
-- sales have been better than expected as well.
-- well the housing though is the big the big number.
And it has definitely turned the corner.
But you know it's telling from such a low base.
That it's really not doing much for GDP growth if you look at what happened in the third quarter we just got those numbers last week.
We had any.
Residential.
Investment.
Up 14%.
In real terms annual rate.
Very good what -- and to GDP three tenths of 1%.
So we're coming from such a low base and it just doesn't do much.
For the overall growth rate.
Doctor Feldstein is there anything that can be done by way of negotiations on the cliff to avoid the -- That will avoid a recession altogether.
Yes I think the key is to -- to provide some certainty about what's gonna happen next.
Not just a small down payment with a big question mark halfway through next year.
And I think another thing that can be done is to do these things gradually.
And I think.
Would it remains to be seen whether the deal that either the White House -- the Republicans wanna come up with is going to have that kind of gradual introduction in 2013.
That will allow the economy to get on its feet.
Talking about spending what are your thoughts on -- entitlement seems that's really not in the forefront right now but.
What kind of impact will government spending on things like Medicare Social Security I -- to think it's gotten out of control many people do.
Well it's it is scheduled to go up by several percent of GDP over the next couple of decades.
And that has to be turned around I think that everybody recognizes that that's we're spending control.
Has to be.
Has to be focused on if we're to avoid much higher tax -- or an explosive.
National debt.
So I think.
It's clear that the Republicans are saying.
We're only going to go a long.
-- is higher tax revenue not higher tax rates but higher tax revenue.
If the administration will come forward with some plans to slow the growth of spending and that means entitlements and.
And all of this going on against a backdrop where we've had very low inflation inflation really not a threat at all.
-- the Fed has promised to -- record low rates all the way through 2015.
At the very -- -- so what happens if we do get a situation.
Where the fiscal cliff deal does involve higher taxes at least for some portion of the population more than likely the welfare class.
He got higher taxes slowing economy committee inflation what do you think will it start -- weekend I mean this is recipe for for the disaster.
What well there's no reason to think -- inflation is gonna happen in 2013.
Or 2014.
But I think the real problem is that -- -- this building up from risks for the future.
By the accumulation.
Excess reserves in the commercial banks.
It right now are just parked at the Federal Reserve.
But while the Fed says it has an exit strategy nobody knows nobody if the Fed knows how high interest rates would have to go.
In order to prevent to those excess reserves more than a trillion dollars of excess reserves.
To prevent that.
From becoming the source of inflation.
Later in this decade is -- just what worries me that the Fed has built up a kind of liquidity.
-- that will be very hard to control.
May require very high interest rates at a time when the unemployment rate.
Is still high and the Fed may back away from tightening fast enough to prevent an increase in inflation.
Wish I had all data speak with you doctor Feldstein do you think interest rates will -- -- Low levels for and we know from the Fed but you know the fact we haven't had a market reaction -- message or bond vigilante stepping in to raise rates sharply.
What do you think about -- Well the Fed can keep the short rates.
Low but at some point rates are gonna have to go back to normal levels and for inflation picks up.
They'll go up very substantially so it wouldn't surprise me if five years from now we're looking at rates on ten year bonds and 5%.
-- and a lot of folks are going to be saying.
GM made a mistake I shouldn't have bought those long term bonds.
What I gained.
And relative to.
To -- treasury bills or -- deposits.
I lost in the value of those bonds.
To remind everybody the tenure today it's trading at one point 60% Martin Feldstein of Harvard Harvard economics professor so great to have you with us this afternoon many thanks for your time.
Good being -- -- -- so let's get straight to our floor show we've got traders have been.
