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U.S. Debt Is Not Like Europe’s: It’s Time to Spend Our Way to Recovery, Says Galbraith

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There has been a remarkable turnaround in the expectations for the U.S. economy for the rest of the year.

At the end of September co-founder Economic Cycle Research Institute, Lakshman Achuthan, who has yet to make a false recession call, told The Daily Ticker's Aaron Task a new recession was unavoidable. (See: "It's Going to Get a Lot Worse": ECRI's Achuthan Says New Recession Unavoidable).

Fast forward to a few weeks later and now the negative sentiment is dissipating as parts of the U.S. economy are holding up better than expected:

Consumer Spending: "Recent data indicate the US economy is not in recession, but growth is extremely weak," according to Global Insight's October World Flash. "The no-recession call for the US economy is based on recent evidence that consumer spending is holding up better than weak consumer sentiment readings would suggest."

Retail sales grew 1.1% in September, the fastest pace since February, while consumer confidence remains at a 30-year low.

GDP Growth: "Despite recession fears that prevailed in the marketplace just over six weeks ago, it now looks like the economy grew by as much as 2.5% in the quarter, up from less than 1.5% in Q2," writes BTIG's chief global strategist Dan Greenhaus ahead of Thursday's release of first estimate for 3rd quarter gross domestic product.

But James Galbraith, professor of economics at the University of Texas, still has his concerns about the state of the U.S. economy.

"I think the previous talk of a double recession was largely a red herring — through this entire period we have been on a track of very weak performance after an extraordinarily large downturn," he says. "From the stand point of the unemployed in the population there is practically no recovery at all and I think that is still the present situation."

<H3>U.S. Debt: Impact of Another Credit Downgrade</H3>

This weekend an economist at Bank of America's Merrill Lynch warned that the U.S. is in jeopardy of another credit downgrade because the 'not-so-super' deficit commission seems to be further apart than Congress on how cut $1.5 trillion over the next 10 years.

"The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan," wrote Ethan Harris, North American economist at BofA Merrill. "Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes."

In August S&P cut its triple-A rating for the U.S. to AA+. Moody's and Fitch still rate the U.S. triple-A.

There is obviously a lot of fear that too much debt will kill the U.S. economy in the end, which is why the super committee has been tasked to find ways to cut the budget. But Galbraith believes drastic cuts in a time of economic distress is the wrong strategy and could do more harm than good.

So what about the warnings from the ratings agencies? Galbraith doesn't give them much credence.

"[Unlike Europe] there is no long-term [public] debt problem. We're clearly in a sustainable situation or the markets would not be giving the U.S. government the rates that they're giving it," he says while noting that debt to GDP in the U.S. is no where near 100% when you factor out the amount of debt that is actually held by the government itself.

Watch the interview to see why Galbraith is not a fan of short-term stimulus projects, but does support a long-term strategic plan to re-inflate and rebuild the U.S. economy.