Don't Rule Out a Double Dip Recession

Meanwhile, in America bank lending continues to decline as does the velocity of money in circulation. If this persists, markets will face worryingly low GDP growth in the U.S. going into 2011. It's this prospect that's begun to be discounted in the recent stock-market correction, which has already seen the S&P 500 give up all its gains for the year. This will sooner or later pave the way for another round of fiscal easing in Washington when both the Obama administration and Congress give up on their current hopes of a normal U.S. recovery.
That political mood swing will again raise the protectionist risk in Washington, with the lightning rod being the Chinese exchange rate. Beijing has been signaling that it will resume incremental appreciation of the renminbi by the middle of this year. But with the renminbi having appreciated by 24% against the euro since late November, China's leaders may be having second thoughts. A trade row between China and the U.S. on top of the growing concerns about a "double dip" in the West is the last thing markets will want to contend with. But they may have to.