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The Globe and Mail

Double dip recession risk significant, Martin Feldstein warns

The U.S. economy faces a "significant risk" of another recession in 2010, unless the Obama administration promotes confidence it can manage a growing fiscal deficit, a prominent Harvard University economist said Thursday.

Without public approval, namely from investors, U.S. bond yields will climb, taxes will rise and a fragile recovery will be short lived, Martin Feldstein told Reuters in an interview.

"I don't think the Obama administration is doing anything to reduce that risk. They are assuming the momentum is there," said Mr. Feldstein, who is also president-emeritus of the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end.

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He declined to call the chances of another recession after the U.S. economy shrank for four consecutive quarters before growing in the third quarter of 2009. He characterized the risk of a double dip back into recession as "significant."


Mr. Feldstein is a critic of the structure of the Obama administration's fiscal stimulus programs, though thinks additional government spending will do more harm than good. At this point, the U.S. government needs to think about the debts it has accrued, he said.

"They need to bring back a greater sense of confidence that the fiscal situation will not get out of control."

The U.S. budget deficit in the last fiscal year grew to $1.4-trillion (U.S.), or 10 pe rcent of economic output, the largest shortfall since World War Two.

Long-maturity U.S. bond yields have been creeping higher over the last year. The 10-year Treasury yield hit a 6-month high at the end of 2009.

Mr. Feldstein believes bond yields will continue to rise, though he said central banks such as China's will most likely keep recycling the U.S. dollars bought in the market by buying short-dated Treasuries.

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That will keep the yield curve, the difference between short-dated and long-dated debt, steep.

In China for meetings with government officials, Mr. Feldstein said he did not think the U.S. government would allow trade tensions between the United States and China to escalate further this year.

He also expected Beijing to loosen its grip on the yuan exchange rate and allow it to strengthen, as long as U.S. officials do not keep publicly pressuring China to act on its exchange rate policy.

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