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Tags: Wilbur-Ross | Economy | fiscal | cliff

Wilbur Ross Sees Recession, Warns of 'Greek' Situation

By    |   Thursday, 27 December 2012 02:35 PM EST

The U.S. economy faces a recession if the nation goes off the fiscal cliff and key tax cuts fully expire at the end of this year, said Wilbur Ross, chairman and CEO of WL Ross and Co.

And, in the wake of news the U.S. will hit its debt limit earlier than expected, the billionaire financier warned that the United States could soon face its own “Greek” style debt situation.

Failure to stop automatic tax increases set for Jan. 1 “would obviously have a big negative effect on disposable income and consequently, I believe would put us back into the recession when coupled with the spending cuts that are also part of it," Ross told Newsmax TV in an exclusive interview Thursday.

Watch our exclusive video. Story continues below.

Ross says that even a compromise deal that stops tax increases for many still may not save the U.S. economy.

"I think that if we don't go over the full fiscal cliff, because we will go over some sort of a cliff even if you only raise the rates on the high-bracket people, and even if you cut back on the sequester, there still will be jolts to the economy," Ross said.

"So the question isn't whether or not we go over a cliff, it's just how steep is the cliff."

Video: Economist Predicts 'Unthinkable' for 2013 

Ross scoffed at the idea that a deal that includes tax increases on the wealthy could avert disaster.

"It's less damaging than if everybody goes over the cliff, but it still is damaging," Ross said of keeping tax breaks in play for everyone except top earners.

"Worse than that is that it really doesn't solve the problem. The problem we have is not so much too little tax, the problem is too much spending," Ross said.

Republicans have proposed a compromise plan that calls for income tax increases for top U.S. earners coupled with spending cuts.

Republicans in the U.S. House of Representatives canceled recent plans to vote on a proposal put forth by House Speaker John Boehner — widely known as Plan B — that called for tax hikes on incomes over $1 million, well above a White House plan that would hike taxes on incomes topping $400,000. Plan B also included future spending cuts on entitlement programs like Medicare and Social Security.

But Ross believes such proposed spending cuts are not real.

"The other thing that I think people don't focus on is, nobody is talking about, cutting the actual, total amount of spending. All they are really talking about is reducing the rate of increase in spending. And that's what makes it so dangerous," Ross said.

Video: Economist Predicts 'Unthinkable' for 2013 

This past weekend, Treasury Secretary Timothy Geithner sent a letter to Congress informing lawmakers that the government will hit its $16.4 trillion debt ceiling on Dec. 31, earlier than expected, and that unless the limit is lifted, the Treasury will begin taking extraordinary measures to technically delay default.

"You cannot just keep borrowing more and more and keep spending more and more without eventually having a day of reckoning," Ross warned.

"So unless the spending side is addressed, debt is going to balloon and we'll eventually end up in a Greek type situation."

Ross suggests that the Federal Reserve has been a key actor in sustaining the debt problem, noting that “what the Fed has really been doing is their net purchases have roughly equaled the deficits in the last couple of years, so what has truly happened is the Fed has itself financed the deficit."

He said such a policy means that eventually inflation will be a problem. More problematic, however, may be the future of the bond market if interest rates rise.

“What the Fed has really been doing is buying long-term securities and funding that with overnight deposits from commercial banks,” he said.

“So it's a classic trap of borrow short and lend long. If Treasury rates went back up to the 10-year average, the Federal Reserve board would lose 23 percent of the face value of its portfolio and would be technically insolvent."

Video: Economist Predicts 'Unthinkable' for 2013 

In a wide ranging interview, Ross also discussed the global economy and his own investment strategy, including:

Natural Gas

Ross thinks that policies that allow for the extraction of natural gas and oil in the country's shale deposits could transform the U.S. economy by creating jobs and improving the country's balance of payments.

"We are very keen on shale gas. We have been for quite some time. I think it's the one thing that could transform the economy, and the great thing about it is it doesn't need any federal money. All it needs is the federal people not to over-regulate and let it flourish," Ross said.

Investments are flowing into the sector, Ross points out, meaning jobs are sure to follow if policy cultivates drilling of fossil fuels and doesn't hamper it.

"You are seeing BASF, the big German chemical company, putting a plant into Louisiana instead of into Germany. You are seeing Dow Chemical for the first time put chemical plants back into the U.S. because shale gas and the related-type oil are, in fact, the feedstocks for chemicals and plastics and all sorts of things," Ross said.

"Shale gas, if left to flourish, could create several hundred thousand more jobs."

It could also pump billions of dollars into the U.S. economy by reducing dependency on imports from the Middle East and elsewhere by perhaps 4.5 million barrels a day, Ross said.

France: Sick Man of Europe

Turning to Europe, Ross that the surprise “sick many of Europe” will turn out to be France, not Greece, Italy, or Spain.

Ross says that under new President Francios Hollande, France has raised taxes on upper-income earners while eliminating tax breaks as well, reversing many fiscal policies put in place by his predecessor, Nicolas Sarkozy.

"I think at the end of the day, the real sick man of Europe is liable to turn out to be France, not Greece, not Portugal, not Spain, not Italy. The reason is France is very uncompetitive to begin with on a global scale and the measures that Hollande has been putting in have been very, very negative from the point of view of economic growth," Ross said.

Ireland Bit the Bullet Early

Turning to European success stories, Ross cited Ireland as one that took proper reforms early on during the crisis that have resulted in a cleaner financial house today.

"We think that some countries there like Ireland that bit the bullet very early are starting to get themselves turned around, and that's why we went into Bank of Ireland. Many of the other countries have not really dealt with their problems," Ross said.

Still Bullish on China, Key Japanese Stocks

China will continue to run a strong economy even though growth rates have cooled, as comparatively, growth is roughly double the economic expansion taking place in the U.S. and well beyond Europe.

"While growth is slowing down some, it still is growing — it still, we think, is one of the better-managed economies in the whole world. So while they are going into a little bit of a slower period, the wonder is that they grew as fast as they did for as long as they did," Ross said.

"To say they've slowed to 6-6.5 percent growth — that would be miraculous in Western terms."

Japan holds many investment opportunities as well even if the broader economy remains stagnant, as many big Japanese firms export to the more robust emerging markets.

"The typical big Japanese company has somewhere between a third and 40 percent of its revenues coming from developing countries, and about a third of Japan's exports are also to the emerging countries, so in a strange way, Japan, which has very little internal growth, its big companies are a good way to play the emerging markets," Ross said.

U.S. Bank Sector Set for Mergers

Turning to the U.S. banking sector, big banks, or those with assets of more than $50 billion, will endure regulations such as the Dodd-Frank financial overhaul law, though smaller players won't be as lucky.

"The great big banks, the $50 billion and over, they are the ones that are in the eye of the hurricane — a tremendous amount of regulatory impact on them and they have very big differential requirements from the smaller banks, Ross said.

Such big banks don't account for the lion's share of U.S. financial institutions, however.

"Look at most of the banks — of the 7,600 banks — something like 7,000 are under $1 billion in assets," Ross cited as an example.

"I think those are all going to have to be merged or liquidated or be acquired by someone else because the regulatory overlay both from Dodd-Frank and more specifically, from the Consumer Financial Protection Bureau are going to wipe out the profitability of the little banks."

See these other exclusive excerpts from the Wilbur Ross interview:

Wilbur Ross: Shale Gas Could Transform US Economy

Wilbur Ross: France May Be ‘Sick Man of Europe’

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The U.S. economy faces a recession if the nation goes off the fiscal cliff and lets key tax cuts to fully expire at the end of this year, said Wilbur Ross, chairman and CEO of WL Ross and Co.
Thursday, 27 December 2012 02:35 PM
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