Ignore the Scaremongers - Watch out for the Truly Scary

As a banker noted recently, there is no constituency for pessimism. Americans, he suggested, believe in optimism as a human right. This bright buoyancy is one of this nation's greatest strengths, lapped up by jaded Europeans.

But it was optimism that also enabled Americans to max out on credit cards and other forms of borrowing -- in the mistaken belief that debts are always payable -- sometime in the future.

Such optimism did not help millions of Americans prepare for the shock of losing their job, or for the move into part-time work last year.

Optimism did not prepare investors for the reality check that finally forced Bernard Madoff to admit deluding and defrauding investors. And it probably did not help the shareholders and directors of General Motors prepare for the collapse of auto sales last year -- or for the shock of the biggest industrial bankruptcy in American history.

So while optimism is great; reality checks are vital for a balanced outlook. What is the real world economic outlook now? Although we are clearly still in the midst of the 'Banker's Recession,' the stock market is soaring upwards; there is much talk of 'green shoots' and of consumer confidence rising. Should we start shopping again? Invest in the stock market? Take the plunge and buy a new house?

These are critical decisions, and the economics profession does little to provide Josephine Public with the kind of straightforward analysis that would assist her in making wise decisions.

So how should we realistically view the economy? I would suggest that we do it by summoning up courage and looking the truly scary in the eye; and by rejecting mere scaremongering. But decisions about what is truly scary and what is merely scaremongering can be, of course, subjective. So I will list mine, and leave you, dear reader, to make your own judgment.

This is what I find scary. First: 23.6 million Americans out of work, or forced into part-time work. That is truly scary. 23.6 million Americans short of cash, unable to pay off debts; and unable to finance mortgages. 23.6 million Americans citizens that do not participate in the nation's economic life, and are disillusioned and angry. Many will be devastated, prepared to self-medicate with alcohol or drugs, and many thousands will act out their rage and humiliation. These citizens do not pose a threat just to themselves, to their families and to society. They also pose a threat to the finance sector -- because they will default on debts. The Mortgage Bankers Association's report of record increases in delinquencies and foreclosures by those with prime mortgages is but one example of the impact of unemployment on the banks. To all those bankers celebrating their taxpayer-funded profits that must be truly scary.

Second: a 40% rise in business bankruptcy filings in May. Small, medium and large businesses destroyed, economic capacity wasted, hopes destroyed, jobs lost. That's scary.

Third: a collapse in investment in the first quarter of 2009. According to Global Insight "real spending on equipment and software plummeted 33.8%, the largest percentage drop since the first quarter of 1958." Green shoots when investment plummets furthest in 50 years? Without investment, there is no future for new economic activity, for green technology, for an end to job losses -- for economic hope.

There's plenty more I find scary, but these three are top of my list. Now for the scaremongering.

The parties guilty of this crime, in my humble view, are once again to be found in the finance sector -- in the bond markets. Having forced the US government to nationalize the debts of bankers and financiers -- debts racked up during one of the most reckless, frenzied and self-serving financial expansions in history -- the finance sector is now warning of Armageddon. Why? Because the government's rescue programs for the economy and for the finance sector have -- unsurprisingly -- helped inflate government debt. The talk in all the financial papers and on all the financial blogs is not of unemployment, or insolvencies or the collapse in investment. No, the talk is of the threat of another "wave" of government debt brought on by social programs: of players in the bond markets going on strike and refusing to finance this debt at reasonable, low rates of interest.

On the 3rd June, Governor Ben Bernanke warned Americans that they would have to make "difficult choices" about how much resources to devote to government programs "including entitlement programs." This is the same Governor that, without congressional approval, committed at least $3 trillion over the past two years in lending to banks and to other financial institutions. By his own account, the Governor summoned up these sums out of thin air.

"Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

So no "difficult choices" made there then? If Governor Bernanke could conjure up $3 trillion for bankers, why can he not conjure up money for entitlement programs? Why rely on gamblers in bond markets?

In my view the Governor, and his colleagues in the economics profession, are scaremongering. Calling for austerity, for further losses and suffering for blameless American taxpayers.

This is scaremongering because the government's spending programs, far from posing a threat (in the way that unemployment, insolvencies and the collapse in investment do) -- are absolutely essential to economic recovery. Without public investment in an economy in which private investment has collapsed -- the economy has no hope of recovery.

The government deficit will fall once the economy recovers, as sure as night follows day. This requires Americans -- and especially Josephine Public -- to understand one of the fundamentals of economics: that public debt will only be repaid through the creation of income, and income will only be generated by employment. Indeed, it is absolutely essential for the reduction of the government deficit that employment should rise. That wages should rise. That insolvencies should fall, and that investment should rise. That economic activity should revive.

Right now, both economists and their friends in bond markets are scaremongering in the hope of achieving the exact opposite: cuts in government programs, rises in unemployment, lower wages, more suffering, more destruction of value.

This is lunacy, parading as economics.

Let the sane keep reminding themselves: that without job creation, wage rises and investment, income will not be generated to pay down the government deficit. But as soon as the economy recovers, when employment, wages and investment rise -- the government deficit will fall -- like a stone.

To argue otherwise is not just scaremongering, its lunacy.

Comments

[ClarcKing]

A great article Ann. The monetary financial economic engine is still contracting jobs and businesses. A threat to the population as all out war. Our political leadership can not discern financial warfare; instead, will try to re-inflate the monetary bubble, give the Money Power trillions, give the Fed more power. The Fed and Treasury are doing everything they can to make the criminal perpetrators comfortable. The administration is doing everything wrong. Social Security and Medicaid expansion is a stimulus not a cost to the population's physical economy. A wartime job mobilization program to get 500,000 jobs per month introduced into the population's physical economy is necessary now or there will be no recovery.

[rughead23]

Do you mena scaremongers like Rush Limbaugh whose lack of American optimism is blind to the fact that the economy is an eight year patient on life support while hes critiquing a four month old recovery plan?

[sonofsamphm1c]

"As a banker noted recently, there is no constituency for pessimism. ..."

The author of this article obviously is not paying attention to the The Huffington Post.

[Sundialsvc4]

Very good article, Ann.

Let's start using the word "crime" everywhere. And the words "high crime," too. The crux of this problem truly is: securities fraud, intentional deceit, usury, bribery, and much more. All of it: CRIME.

I categorically reject the notion that this country is, itself, "on the skids." But there comes a time when CRIME simply grows too large, too rapacious, too cruel ... and, too stupid. Massive blood-loss does weaken you.

[dnpvd51]

This article uses fallacious reasoning.

We have a currency crisis. Our government cannot create trillions out of thin air and expect the currency to hold its value.

And the fact that the people that received bailouts are complaining about entitlements does not make the currency crisis go away. It only makes the folks at CNBC et al hypocritical.

[Ann Pettifor - Huffpost Blogger]

dnppvd51.....The US does not yet have a currency crisis. And to everyone's astonishment, as the global economy plunged the US dollar strengthened. I do not disagree that there is concern about the currency - but there is much greater concern - around the world - about the failure of the US economy. The US has acted as engine of the global economy for many decades now, and rightly or wrongly (wrongly in my view) the rest of the world has come to depend on this engine...and so the rest of the world will hold faith with the US currency, as long as there are signs of recovery....To stall or even block recovery - in the vain hope that economic failure will help the currency - is daft.

The dollar will strengthen when the US economy strengthens. It will fall when the US economy fails.....So to wish failure on the economy, while hoping for a strengthened dollar is, as I say, daft.

Of course, there are the activities of players in the bond markets - who may choose to blackmail the Fed and Treasury, and threaten higher rates of interest - in just the same way as bankers blackmailed both the Fed and Treasury these last two years.....The US Treasury would be very unwise to allow gamblers in the bond markets to once again threaten the economic recovery so vital now to the American people. Should they continue to do so, then the Treasury should look at other ways of raising

[CroatianCritter]

I understand your argument and dnppvd51's above your's because these have been the two leading ideas circulating as to why our economy is in the doldrums. But what about this fact which keeps coming back no matter how much I ignore it? What if THE FED is the problem? There is so much evidence pointing to this. What if THE FED, due to its awful monetary policies, was the real cause of most of our bubbles over the past 50 years? I am starting to come around to this belief. I don't think an economy can be guided by a central force without it being corrupted. This point is where I most disagree with my liberal colleagues.

[sonofsamphm1c]

The bankers did not "blackmail" the Fed and the Treasury. That is just plain lunacy.

The situation left the Fed and the Treasury with absolutely no other rational choice.

[CroatianCritter]

Since we overspent over probably the past 20 years, our country is going to have to realize that this economic recovery will be "L" shaped. That is the type of economic recession that collapses quickly but has no real rebound back to the old profit levels. Because American salaries have not kept track with inflation and the American dollar is worth much less than it was 40 years ago, our salaries are too low for most Americans to boost the economy back to its old levels. And the government can not continue to spend expecting it to be boosted back to old levels as this is just going to lead to more future debt. Until this country comes to terms with how much "workers" have been punished in this country and how we hardly produce anything anymore, this economy will be in the doldrums probably for over a decade. It is time for Obama to make this clear instead of defending a system that can not be maintained at its current rate.

[sunshinerain]

I'm making LESS MONEY than in 1996. For the SAME work. LESS PAY THAN IN 1996. Gas is up, food prices are up, everything is up - except my pay - which is down, way down, thanks to "productivity gains" that benefit the higher-ups and not the workers themselves - why - NO UNIONS.

[hypnotoad72]

Like this one?
http://www.workinglife.org/blogs/view_post.php?content_id=13852

>>
"FedEx CEO Fred Smith’s arrogant campaign of threats and intimidation continued this week when his top spokesman threatened to take down members of Congress who oppose FedEx’s position on a key piece of legislation.

When asked about FedEx’s multi-million dollar ad campaign against the legislation that is reported to launch on Tuesday, June 9, top FedEx flack Maury Lane told U.S. News and World Report in a story posted in The White House Bulletin, “I’m going to try to destroy them.”

"

[schatsie]

We have had lunacy for the last 30 years...This country is now in the class with Mexico and Russia where the wealth is concentrated in the top 10% and over 50% of the income goes to the top 20%...

We are keeping our status as the Richest and adding the most corrupt... It is not by any chance that the richest 400 people doubled their take to over 250 million a year and have recieved a tax cut of 25% on top of that...

[hypnotoad72]

No wonder the world hates us.

[marketfolly]

We've noted that Kyle Bass of Hayman Capital thinks we'll see sovereign defaults. If you're unfamiliar with Bass, he was one of the hedge fund managers who profited largely from the financial crisis as sub-prime exploded (literally worked along with John Paulson). So, he's definitely worth at least hearing out. Here are his thoughts on his next major prediction: http://www.marketfolly.com/2009/05/hayman-capitals-kyle-bass-predicts.html

[Thermodynamics]

Thanks, that is a very interesting link:

"American banks have written down around 50% of their losses. European banks, on the other hand, have only written down around 17%."

The amazing thing about current events is that there is so often a surprise, something that comes in from an area that few are watching.

[schatsie]

Wow that is the very first link I have seen pointing to ANY PROBLEMS in EUROPE besides Ireland......Don't know that I would give any credibility to someone paying a special tax rate of 15% and deducting his jet as a business expense....

After all the FRENCH FIRED their BANK CEOs and do not have to bail them out..... and they are all getting 6 weeks of vacation AND HEALTHCARE FOR EVERYONE....

[Rhetticent]

Clearly, the French are doing great. http://www.bloomberg.com/apps/news?pid=20601090&sid=ag2kolFiyf7Y

[madmax2007]

Hi guys!

Check out this great post on Al Jazeera: America's economics are looking more and more like 3rd World Economics:

http://english.aljazeera.net/focus/2009/05/200952792451540149.html

[veracity]

It is more than (tragically) ironic that even as "Liberals" prematurely celebrate the demise of the RepublicanParty (sad to say the otherwise astute Keith Olbermann a textbook example), the Obama administration could be sowing the seeds of a horrific reversal of fortune for the Dems...


That's because some sources are talking about a QUADRUPLING of national debt under the "BAILOUTS" regime
http://www.bloomberg.com/apps/news?pid=20601068&sid=asA5xHwBsIeM
- with Obama an even more ardent practioner of the Bush-Paulson-PELOSI "BAILOUTS" atrocities , than the Bush-Pauls­on-Goldman­Sachs Republicans.
(The obvious reason being that Obama is completely captive, 100% owned, by his goldmanSachs banksters.)

The 'free pass' & "HOPE" that the American public has thus far INVESTED in Mr. Obama could SOON VANISH - if this economy does not turn around quickly
(which, with those monster, monster DEFICITS draining every ounce of US GDP to Mr. Obama's insatiably greedy bankster friends, is increasingly unlikely)
Just ask -
#1. George HW. Bush (Sr.) - EIGHTY-THREE PERCENT approval ratings (83%!!) after Desert Storm expelled Iraq from Kuwait in 1991, soon fell to 43% when Bush Sr. lost re-election in 1992...
#2. The Democrat MAMORITIES in Congress 1994 - swept out of office by back-bench bomb-thrower Newt Gingrich in November of that year...
#3. George W. Bush, who enjoyed 80%+ approval after "Mission Accomplished"

needless to say, IF this ECONOMIC BLACK HOLE continues to DEVOUR American families, the Democrats in charge of House, Senate, AND White House, WILL DESERVE the ignomy.....

[j mcdouglas]

The good thing about how Bernanke and the bankers ripped us all off and sold us their debt (ie made taxpayers pay for their gambling addiction)...

is that now we all know exactly how much money we can get our hands on to relieve our own suffering when we want it.

Ben and his corporate stooge friends can no longer get away with telling us there isn't any money to relieve the suffering of real living breathing people after they flushed so much of it trying to pad the investment accounts of their corrupt friends on Wall Street.

And Obama knew it all along as he let them do what they were demanding to have done. They were holding him hostage... but he also knew that he could hold THEM hostage later when it came to creating social programs and then taxing them to pay for them.

The same thing happened during and after WWII.

Rich corporate stooges got tons of cash from the government to fuel the war machine... but Eisenhower taxed them at 90% after the war in order to get a lot of that money back.

Rich industrialists and bankers never learn. Guys like Bernanke are blinded by their own shortsighted greed.

[veracity]

THANKS for that !! That ("Eisenhower taxed them at 90% after the war in order to get a lot of that money back") is THE most positive thing I have heard since.... well, shortly after Obama DEFLATED all the "HOPE WON" election-night good news, by announcing that he was selecting DLC uber-Neo-Con rahm emanuel to be his White House CheifofStaff.
It is simply AMAZING how PROPAGANDIZED we Americans are...

... I have heard about the EXTREMELY HIGH tax rates back in those (post- WWII) days, but is sure is HARD to FIND the info.... because the neo-con/ne­o-Confeder­ate "GREED UBER ALLES" crowd now OWNS the US media, academic system, and of course corporate America....

... and a statistic like that make REPUBLICAN hero Gen./President Eisenhower look like a flaming "SOCIALIST­"/"Communi­st" - and CERTAINLY by today's Neo-Con/neo-Confed standards that DOMINATE America's national discourse.

[jeffrey678]

Republican Federal Reserve Chairmen are famous for sabotaging Democratic Presidents. Check the Angry Bear Economic Blog "Federal Reserve Chairman and Presidential Elections" They have the numbers and the charts. Example: Greenspan told Pres. Clinton that he had to cut the budget, Then 18 months later gave the green light to Pres. Bush for the largest tax cut deficit in US history. It's all politics. President Obama should replace Bernanke fast .

[James Briant]

How? Are you under the mistaken impression that the Fed is somehow part of the US government? When the president selects a chairman, he has to pick from the five members of the board, not anyone he wants.

He could always try removing some of the Fed's power, but of course *every* US president who tried that was killed. In fact, every president who was killed, first tried to usurp the power of the US central bank.

Probably a coincidence.

[jeffrey678]

Republicans will change parties so that they can sabotage and slow down any progress.

[Rugger]

How about the justice department really investigating what happened to cause the financial meltdown and look for breaches of the laws that pertain to the finance industry? How about investigating those in whom there is found reasonable evidence of criminal activity? How about prosecuting those miscreants and if they are found guilty, confiscate everything they own? Many millions of honest people have lost nearly everything they have spent years working and saving for. They deserve justice. The real criminals behind this disaster deserve severe punishment.