Out Out-of-Whack Economy and the Happy Talk Propagandists

If you listen to the happy-talk folks at Treasury and the Fed, and on the tube, you'd think things had finally turned a corner. The economy grew at a 3.5% annualized rate in the third quarter ended September 30. "The Economy is Back in Gear" shouted the headline on an article by CNN senior writer Chris Isadore. "The recession ended unofficially in September," said a reporter on NPR.

There was some mention of the fact that earlier in the week there were reports that consumer confidence had fallen, foretelling a sluggish Christmas retail season, and that new home sales slipped an unanticipatedly high 3.6% in September, when analysts had been expecting a rise in sales. Meanwhile, new unemployment claims filed during the third week of October jumped to 531,000, well above the predicted 520,000, indicating that the official unemployment rate is likely to top 10% in the next Department of Labor report due out in early November. As well, fully one-third of the nation's homeowners were now said to be "underwater," meaning that their outstanding mortgage balances are greater than the current value of their homes. Not surprisingly, foreclosures are continuing to surge.

How to explain this seeming oxymoronic situation? Well, that positive economic growth figure, which comes on the heels of a 6.4% decline in GDP in the first quarter and a .7% decline in the second quarter is, according to government analysts, actually largely the result of two government stimulus programs -- the "cash for clunkers" program that induced people to rush out and buy a new car (usually a much smaller, cheaper and, for the car makers, less profitable one than they had been buying in prior years), and the $8,000 new home tax credit, which led a lot of people to rush out and buy a first home.

The thing about those two stimulus programs is that they don't so much expand economic activity as they push it forward. That is to say, a person who takes advantage of the cash-for-clunker program is generally someone who owns a worn-out junker and needs to buy a new vehicle anyhow, so what the government subsidy does really is just push that purchase forward. Once the program ended, sales of cars plummeted (not to mention that the bulk of the payments went to people who purchased foreign cars, so the economic boost was just for dealers in the US, not car makers). The same is true with houses. Very few people would make the decision about whether to buy a home or not based on just $8000, but the availability of an $8000 government subsidy for a limited time would lead people to push forward their plan to purchase a home.

What that means is, don't count on this "recovery" to last into next year. The cars that needed to be bought have been bought, and the homes that people wanted to buy have been bought. The car subsidy is gone now, and even extending the home buying subsidy, as the realty industry lobby is pressing Congress to do, isn't going to induce that many more people to buy.

Meanwhile it's worth noting an oddity about this "recovery" being trumpeted in government and media. The relationship between the dollar and the stock market has become very strange. If you look back at stories on these two things to 2007, before the financial crisis hit, and earlier, you'll see myriad articles explaining that the dollar and the US stock market tend to move in tandem. This was always explained as being because as the dollar strengthens, foreign investors want to put their money into dollar-denominated assets. Similarly, if the dollar weakened, analysts would write confidently that the stock market would be hurt as investors pulled their money out of US equities to invest in markets denominated in appreciating currencies.

Now, the analysts say that as equities strengthen, the dollar will fall, but if equities fall, the dollar will appreciate. The reason for this new inverse relationship should be cause for considerable alarm. Why? In fact, it turns out that the last eight months of a rising equities market has been largely the direct result of a shrinking dollar. This is because so much of the sales and earnings of companies in the S&P 500 and the much narrower Dow Index are earned overseas, denominated in foreign currencies, but accounted for on the books of these US-incorporated firms in dollars, that as the dollar declines in value, corporate sales and earnings appear to be growing. Reportedly, as much as 80 percent of the appreciation in the S&P Index since last March 9 when the market hit bottom can be attributed to the dollar's fall against major world currencies.

Financial writers and reporters on TV don't mention this tectonic shift. They just report the new relationship (Stocks up, dollar down, stocks down, dollar up) as though that's they way it's always been. But actually, this is a phenomenon has normally been characteristic of Third World, so-called "developing" economies. That since the end of 2008 it has become characteristic of the US economy should be cause for concern.

So don't be conned by the happy talk salesmen at the Fed and Treasury and in the White House, or by their propagandists in the newsmedia, who are trumpeting the latest GDP growth figure as a sign that the recession is over, apparently in the hopes that people will run out to the mall and start spending (in those remaining stores that don't have their windows taped or covered in plywood). What we've seen was a blip on the chart, engineered by a couple of "going out of business" sales by the car and housing industry.

Real unemployment -- measured the honest way it used to be 30 years ago, to include those who have given up looking for work or who are working part time involuntarily -- is hitting 20% (for those who are bad at math, that's one out of five working-age Americans). Foreclosures are hitting a record. Half of laid-off workers are cashing out their 401(k)s in order to buy food. State and local governments, both major employers, are hitting a wall as tax collections plummet and federal stimulus funds run out. This is not the foundation for a renewal of economic growth; it is the precondition for a renewed or prolonged recession.

And if the dollar continues its slide, which is likely given the US's huge budget deficits and trade deficits, as well as the Federal Reserve's inability to raise interest rates (a move that could strengthen the dollar but which would crush the economy), all those things that Americans buy abroad which are no longer made at home, as well as the oil that is imported, will cost that much more, driving consumers further into the hole. And remember, 70% of US GDP is consumer spending, a result of our decimation of our industrial base.

Recession ending? Don't bet on it.

DAVE LINDORFF, a Philadelphia-based investigative journalist, was a Knight-Bagehot Fellow in Economics and Business Journalism. His latest book is "The Case for Impeachment" (St. Martin's Press, 2006). His work is available at www.thiscantbehappening.net

 

 

Comments

[MajorKong]

Gee, maybe trying to base the economy on selling our houses to each other wasn't the best idea?
Who knew?

[MilwaukeeDan]

This is a great read. Unfortunately, the government is working from the top down instead of from the bottom up. They are using quick fix band aids to prop up this economy. They need to look at keeping and creating more real jobs for the middle class, not just offering them discounts on cars and homes. Due to multinatio­nalization­, GDP numbers are meaningless for the average American. When your economy is 70% based on consumption, and you watch your neighbors and friends lose their homes and jobs, you ain't buying jack.

[texastrixie]

Many people aren't buying even necessities, unless its for their kids. My husband and I drove past the discount mall yesterday, and the parking lot was full. He remarked upon how stupid it was for people to be shopping in this economy. We do shop, but only if needed, and on sale bigtime. While Texas looks like its booming, cracks are starting to appear. Know a woman whose husband has been out of work for at least 6 months. There are beginnings of people being long-term unemployed here too (and that's not good - Texas doesn't know how to spell "safety net").

The rich "investor class" have always wanted an educated, desperate populous that could be forced to work for subsistence level wages, and as few perks as possible. They are well on their way to achieving this goal. But somehow they never figured on the flip side of this coin - people without money don't buy anything (unless they can use credit - see 2000-2008).

[jdevans]

7,000 people a day are having their unemployment benefits run out without being able to find another job. That's going to lead to another wave of housing foreclosures.

[Overtone]

An ignored Human Investment Tax Credit program is a rifle shot, rather than a shotgun, approach to unemployment, designed to create 3 to 6 million new jobs and encourage between 1 to 4 million men and women to become entrepreneurs.

The 2009 Report can be downloaded at http://www.aesopinstitute.org

The 1977 job tax credit program, which adopted a few of the incentives recommended in an earlier Report, generated almost a million private-sector jobs; twenty percent of all new jobs created that year. It resulted in more jobs in less time than any prior legislation.

An updated version will soon appear. This work reflects a post-Keynesian economic analysis. All the tax incentives in the Human Investment Tax Credit program are needed for maximum impact.
Congress and the Administration should fine-tune this potential legislation without delay.

A surprising second path to millions of new jobs is described in the article: 5 Steps to Revive the Auto Industry and the Economy - on the same website. It reflects little known, hard to believe, revolutionary breakthrough technology that opens paths to cars that need no fossil fuel or recharge.

Later, advanced versions can turn cars into power plants, wirelessly able to sell power to the local utility when parked.

Imagine the impact of cars and trucks that can pay for themselves!

Millions of well paid jobs will be generated by these cost-competitive technologies.

They can change much of what is presently believed about energy and accelerate economic recovery.

[Artos]

All Governments lie regardless of political persuasion, even dictatorshipsan, and those who are fine with those lies and go along with them usually do so because they have something to be gained by doing so. Now it's the Democrats turn to lie and they are doing just as good a job at it as the Republicans did. They realize that in order to keep Americans favor they must be perceived as having successes in solving our problems. When for example you want citizens to perceive that you've made some certifiable progress in an area such as unemployment you just fudge and pretend that those who aren't collecting unemployment aren't really there. It's approximately like telling a lie by omission. What's funny is how the 20 percent of those rabid Republicans who never doubted a word told them by their Republican Administration are the same ones who automatically take the tack that Democrats lie all the time. I think though that a good many Americans have gotten pretty good at noting when these things are lies and when not and so rarely get taken in much to the chagrin of our politicos. I doubt that there are many of us nowadays who are so easily taken in. January will be the telling month, and i feel very strongly that it will be the month of Starvation as the Native Americans used to call it.

[Carl Caroli]

"The recession ended unofficially in September,"
Yet another "mission accomplished" moment in the annals of our governance.

[CharlesMac]

"The recession ended unofficially in September,"

comment: "Yet another "mission accomplished" moment in the annals of our governance."

I have been at HuffPo since its inception (2+ yrs before we became "members").

I have collected a list of a top couple of dozen "best single sentence metaphors" and this is definitely among them.

It's an ironic skepticism supported by probabilities based on recent history. It speaks to the ignorance and arrogance of someone framing the present, without one shred of evidence, or control over, what is coming next. And it points to a daunting future, in which We the People resume our roles as the victims-to­-be-taken-­seriously-­much-much-­later.

By that time, much like the tragedy after the tragedy of Katrina, the victims will be blamed for their lot in life.

Acts of AIG et al have ascended to the unquestionable divinity of an Act of God.

The again, we don't give God $12,000,00­0,.000,000 in subsidy, loans, and guarantees for devastating our country.

[ILibertine]

I wholly object to this needlessly pessimistic analysis of the economic situation. Why, one only has to gaze at the idyllic image of Timothy Geithner to know that our situation is in firm, well-meaning and equitable hands and, thus, feel a vast sigh of relief.

Now, as to these irritating numbers that are suggested to indicate something less than a successful recovery, as we have been told is the case from such credible sources as The Administration, I can only view these numbers with suspicion and alarm.

What I seem to perceive here is that the US is being turned into a cheap dollar exporting nation. Could it be that the business community has so undermined the value of our collective efforts (the commonwealth) that we are inexorably being reduced to a nation making proverbial straw hats for the tourists? This does not gibe with the success stories I hear about the recession being over. I am confused and dismayed that commentary as evidenced here seems to project a much different light - that we are being flim-flammed like a used car salesman hawking a shiny Buick with bad valves while simultaneously being reduced to chickens pecking for a deflated dime. Oh happy day.

[libertron]

Great blog, sir! One problem that I have though, is that "underemployment" should not be thrown in with unemployment because people don't get a guarantee that they will always have a job in the field they chose in college. They make have to take a lower-pay job in a field that the market requires more of.

I also notice that the definition of "Recession" used to be two quarters of negative GDP growth. This time, however, the news media who love Obama chose to listen to a think tank that uses other factors, like unemployment, to backdate the start of the recession to when Bush was in office.

Now, they are back to using the textbook definition to call an end to the recession now because GDP is up. They can't have it both ways. If you used the other way to find the end of the recession, it may be many years before unemployment numbers are back to a reasonable level.

[texastrixie]

I agree with you except many people get a degree in college that they should know is not going to give them a saleable skill - history, English, political science, psychology, etc. For a while, jobs just wanted you to have a degree. Now they want you to have a skill. Speaking English is not that unique a skill. Over the next decade we will see a walk away from "liberal arts" degrees in favor of something that an employer can make money off of. And even technical fields may not be much protection. Accounting majors, your jobs can easily be sent overseas via the internet. Remember, a 3 is a 3 all over the world; it doesn't have a language.