The U.S. is suffering from high unemployment combined with too much consumer debt in a weak economy. Current stock market exuberance reflects earnings increases at selective companies that benefited from sputtering stimulus programs. In late 2007 through the fall of 2008, our economy had an appendix attack, and Congress issued potent addictive painkillers instead of fixing our problems.
Meanwhile, the financial system has strangled U.S. growth by parasitically growing from 3% of GDP in 1965 to 7.5% of GDP currently. As Jeremy Grantham pointed out in his quarterly letter to investors, financial services were sufficient for the economy when they were 3% of GDP, but that sector grew by strangling GDP growth elsewhere. The nation's GDP growth slowed from 3.5% in 1965 to 2.4% between 1980 and 2007, and the slowdown occurred before our current crisis.
In other words, our bloated financial sector has been sucking the life-blood out of the U.S. economy for years, and recent decisions insure it will continue to feed off taxpayers, while the host economy struggles for life.
Jobless "Recovery"
Unemployment exceeds 10%, counting the underemployed it is closer to 20%, and the figures soar beyond that when one counts our unemployed youth. The recovery is being strangled in its crib by low job creation, high consumer debt, high local government debt, high federal government debt, and falling tax revenues. [Update August 6, 2010: Official figures for overall unemployment as of July, announced August 6, held at 9.5%.]
Since the first meltdown, we've had rising--and still very high--consumer loan defaults. The Fed tried to monetize bad loans, which is just another way of saying the U.S. taxpayer is paying for bad lending decisions by Too Big To Fail financial institutions.
Nominal income is falling. Selected prices have fallen more rapidly than income, but we've had a negative wealth effect. Housing prices and investment assets fell in value. Consumer loan payments of debt-loaded consumers have to come from falling nominal income.
If we didn't have too much borrowing (leverage) in our system, the Fed's rapid pumping of money into the economy might have worked. Unfortunately, consumers and many financial institutions are still overleveraged and many of them will default or fail. This continues to be a drag on the economy and on consumer demand.
Deflation Plus "Staple" Inflation
The economic picture is distorted by both deflation and inflation. Interest rates are low for now, but consumer demand also remains too low. Banks are unwilling to lend to all but those who don't need money in the first place. The negative wealth effect of reduced home prices, a weak housing market, and reduced value of investment accounts and retirement accounts is combined "staple" inflation on items like school tuition, utilities, certain food items, and even mundane items like printer paper. Many prudent investors and consumers are unwilling to borrow, even at low interest rates.
Moreover, consumers are worried about potential local tax rises and federal tax rises, since many local government's are broke, and our national debt is $13 trillion.
If deflationary pressures combined with rising prices on many consumer items weren't bad enough, many investors are carefully watching long-term U.S. treasury interest rates in case demand for U.S. debt falls and inflation takes off.
The economy's stranguflation is the result of wealth destruction and the quadruple threat of the weak economy, high government debt load, asset deflation with price inflation of essentials, and the fear of future overall inflation.
In October 2009, I explained to Max Keiser of The Kaiser Report, why the economy would suffer an ongoing deflation crunch (instead of the stagflation I had originally expected):
Janet Tavakoli's book on the causes of the global financial meltdown and how to fix it is Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.
After Note (August 3): The bailouts were a perversion of capitalism and the principles upon which The Republic was founded. This was the result of influential interested parties reaching into the U.S. Treasury with no accountability. Capitalism doesn't call for bailouts, instead investors take losses. Shareholders in failed financial institutions should have been wiped out, debt holders would have had to accept discounts combined with debt for equity swaps, and financial institutions would have then been recapitalized without taxpayers footing the bill. Instead banks lobbied for relaxed accounting and ineffective "financial reform." No one, including bank managers, can tell how much capital is truly needed, and taxpayers' ongoing heavy subsidies give these financial institutions the appearance of stability.
Second, Obama should have handled unemployment with DIRECT GOVERNMENT EMPLOYMENT programs similar to the old WPA and CCC ... sensible direct government spending on repairing national infrastructure as was done in the '30s ... reducing unemployment, maybe allowing more people to remain current on their mortgages rather than facing foreclosure ... while creating a more positive economic enviroment and possibly contributing to more widespread consumer spending.
???
How does mortgage cramdowns generate another bubble?
I just assisted one of my employees make a major purchase by using my own credit card. There was no way the individual could get a small loan even though he is paid well and has a good long term record with my company. Credit is extremely tight--everyone knows this and is staying home. Thus, the slow pace of retail sales--which IS the economy, is preventing job growth and causing people to lose wealth and lose optimism about the future. Financial instituions need to rethink the long term damage being done to the consumer psyche by keeping credit terms as strict as they are.
Aside from tight credit, It is a CHORE to shop--principally, in my opinion, because ingenuity in the corporate suite is so depleted that a 2% rewards card is the best idea a company like, for example, Home Depot can imagine. Do I want to do paperwork and save 2% or would I rather the corporate folks train their employees so I can get my stuff quicker and get out of there. In fact, time is money.
Fantastic summary of the what people are feeling is true on an intuitive level, and it bears repeating.
I really don't know where these financial wizards got such unrealistic notions about how capital is created.
I suppose they are working off the same idiotic assumption that by creating major new economic competitors like India and China instead of reinvesting your profits in your own economy it will grow. You can't just be interested in shareholder return. One must build durable equity to use as principal for the future expansion of an economy.
It's only been about short-term profits and parlor tricks since Greenspan lowered interest rates to zero to pay for the Bush welfare for the wealthy. There has been no effort made in over a decade to create the long-term growth of capital, inside this country, necessary to sustain our stance as a major economic giant. None. That's as unbelievable as it is a fact.
And why isn't fraud being prosecuted in this country any longer along with slander, blackmail, and bribery? The Lifestyles of the Rich and Famous might as well have been the fourth chapter of The Godfather.
Reinstitute a currency with a "real" standard. Currency backed by assets!
Cut defense spending
Fairtax.org
Cut overseas aid
Cut subsidies for non-producing farmland
Reinstitute usury laws
Legalize and tax marijuana
Cut earmarks
Put qualified professionals into leadership roles instead of qualified beuraucrats (scientists in charge of FDA, EPA etc.)
Kill coporate lobbies
So the financial system grew as borrowing increased. I get the impression between now and 1965 the owner class decided to cut our wages and then loan us the difference.
Then buy up that Treasury debt that pays 2-3% with zero percent loans from the Fed and make an instant 2-3% profit on the difference. Next rub your hands in glee as the U.S. government falters in terms of credit ratings and Treasury bond interest has to go up.
It's pathetic how cannibalistic and sadistic this charade has become. And then these same home wreckers have the nerve to say it's morally questionable for the overburdened middle class to "strategically default" and walk away from their upside-down houses which are worth 200K less than it was when they bought them?
Then have big banks buy up that Treasury debt created by their own bailouts that pays 2-3% with 0% loans from the Fed and make an instant 2-3% profit on the difference. Next rub your hands in glee as the U.S. government falters in terms of credit ratings and Treasury bond interest goes up and the yields and the profits of big banks goes up along with it.
It's pathetic how cannibalistic and sadistic this charade has become. And then these same home wreckers have the nerve to say it's morally questionable for the overburdened middle class to "strategically default" and walk away from their upside-down houses which are worth 200K less than they were when they bought them?
Why? Prisons are privately run. Doesn't that scare you?
With the issues in food, again, I hope you all have invested in cheap food, meaning a garden of your own. I can't speak on the food prices of fresh fruits and veg at the store because we either grow it ourselves or buy it from a local farmer, but I have heard about how expensive they are from poor folks to which I respond: start a garden. People need exercise badly and you can get it in the garden. People need vitamin D desperately and you can get it in your garden.
Write your congressmen, local politicians, and president and tell them the time to stop the drug war is now! At the very least this is a state issue, not a federal issue.
And Obama is their ally (just as much as Republicans).
We need to take this to the streets.
Wall Street prevailed, the people lost. End of story.
In other words, they kept the winnings, and WE took the losses. So much for justice. So much for democracy. This was shock therapy (read Naomi Klein) applied to the US population at large.
"...the financial system has strangled U.S. growth by parasitically growing from 3% of GDP in 1965 to 7.5% of GDP currently." and, "The bailouts were a perversion of capitalism and the principles upon which The Republic was founded. This was the result of influential interested parties reaching into the U.S. Treasury with no accountability. Capitalism doesn't call for bailouts, instead investors take losses."
Inverted Totalitarianism:
http://en.wikipedia.org/wiki/Inverted_totalitarianism