It has been a rough four weeks for America. Grim economic news, paralyzing political infighting, and the shocking loss of the sacred AAA sovereign credit rating. To make things worse, Americans' equity-heavy 401k's have suffered from a volatile 16 percent decline in the broad-based S&P stock market index.
It is tempting to dismiss all this economic, political and market volatility as just the usual -- volatility that constitutes irritating "noise" rather than insightful "signals". After all, economic data always fluctuate, politicians always posture, and markets overshoot both on the way up and on the way down. But, be very careful before you are opt for this seemingly comforting interpretation.
There is a lot in play today that, critically, requires a bold response out of Washington. Indeed, the last four weeks have rendered mission critical President Obama's economic speech scheduled for September 5th. If the speech disappoints and if Congress continues to squabble, both the economy and the market will become even more hostage to a harmful feedback loop involving the trio of deteriorating fundamentals, insufficient policy responses, and disruptive technicals.
This is not just an American phenomenon. Europe is in a much worse situation. And, if policymakers on both side of the Atlantic don't get their act together quickly, they will run out of tools that have a chance of being effective circuit breakers. In such circumstances, things could get a lot worse before they get better.
So, how does the negative feedback loop work? You can illustrate starting with any one of its three components (fundamentals, policies, and technical). Let us begin here with economic/debt fundamentals.
Recent data releases, including Friday's horrible fall in a regional indicator of manufacturing production, confirm that the American economy is rapidly losing growth momentum -- and, already, there wasn't much momentum to speak of.
Analysts are again rushing to sharply revise down their growth and job projections for the year as whole. Many are now converging to the notion of "stall speed" (1-2 percent annual growth), with a highly concerning increase in the probability that the US could tip into recession.
The problem with a sharp growth slowdown is threefold. First, initial conditions are very worrisome, including a very high and too persistent level of un- and under-employment. Second, other parts of the world are also slowing and, therefore, there are few engines of growth. Third, the over-indebted segments of this global economy desperately need high growth in order to safely de-lever otherwise they can tip into highly disruptive debt traps.
Normally, Washington would be responding forcefully to put the economy back on track. Also, given the synchronized nature of today's global slowdown, this bold national policy response would be supplemented by effective international policy coordination. Sadly, neither is happening today.
When it comes to economic policy substance, our elected representatives and their appointees have, until now, essentially been MIA. They have shown little understanding of the seriousness and urgency of the economic challenges. Endless political bickering has sapped their energy and focus. And, to make things worse, they are now positioning for next year's elections rather than today's realities.
This national policy disarray limits the scope for a global coordination process already undermined by disagreements on what ails the world economy (and, therefore, who is to blame and what should be done). Also, there is no effective conductor to credibly herd countries into cooperating.
America's standing on the global stage is weakened by domestic economic and political issues, including the debt ceiling debacle and loss of the AAA sovereign rating. Traditional alternatives, such as the G-7 or the IMF, lack legitimacy as they are still dominated by western interests. And the G-20 is yet to sufficiently establish itself.
These factors are behind the recent sharp stock market sell-off, leading to the third element of the feedback loop: undermining the sound functioning of a market economy.
In such environments, market liquidity becomes more elusive, counterparty risk concerns mount, and certain investors turn into distressed sellers. As illustrated in the 2008 global financial market meltdown, these issues can become disruptive in themselves, fueling a chaotic economic and technical de-leveraging process.
Fortunately, the recent volatility also reflects a notable area of strength -- multinational companies with pristine balance sheets and a string of impressive business results -- that could be a critical part of the recovery if other elements line up.
Until now, however, this healthy part of the global economy has been held back by economic and market uncertainties. Companies refrain from deploying their profits and cash hoards to new investments and additional hires. Witnessing this, it is understandable that households, already rattled by high unemployment and the policy debacle in Washington, are becoming more cautious about spending.
In policy circles, there is one group that recognize the need to break this terrible loop of weak economic/debt fundamentals, lagging policy response, and fragile market technicals. Indeed, in the last two weeks, central banks have made two dramatic (and controversial) attempts to act as circuit breakers.
The first came in the form of an unprecedented Sunday evening announcement by the European Central Bank that it will expand the purchasing of debt issued by member governments. The second was last week's previously unthinkable Fed statement suggesting that policy interest rates would be floored at zero percent for two years.
Unfortunately, these actions secured only a few days of market relief -- so much so that people are now looking to Chairman's Bernanke's Jackson Hole speech on Friday wondering whether the Fed has any effective tools left.
But central bank policies are a means to an end, and not an end in themselves. They can only provide a bridge -- and it is often a costly one -- to better policymaking on the part of other parts of government. That is why President Obama's September 5th speech is so critical.
It is encouraging that the media has been picking up signals from the White House that the President intends to take economic policymaking to a higher level. Last week's blog posting was my attempt to identify the content, process and areas that I believe are absolutely critical for restoring economic leadership at both the national and global levels.
America has little time to waste if it wishes to avoid years of insufficient economic growth, devastating unemployment, rising income and wealth inequality, and eroding social cohesion. Let us hope that a refreshed President Obama will return to Washington willing to respond and lead; and let us hope that, for their part, members of Congress will return in a much more constructive mood, able to work with the President to break an increasingly damaging negative feedback loop.
So today's economy is sustained by massive middle class personal debt and equally massive government spending in the form of entitlements. Any slowdown in consumer borrowing or cuts in government spending and our economy will collapse in an order of magnitude of 1929.
I'm tired that I the middle class worker is making this country run.
I'm not saying they don't pay taxes just not even close to the ratio that I do.
As far as businesses that don't pay their fair share take from them what they haven't paid for years i.e offshore corporation.
Nothing could be further from the truth as Americans are paying hugely and on a daily running charge for the destruction of our health and well being which corporate ruthlessness imposes.
Obama can make all the speeches he likes but unless he develops a spine and forgets about re-election, he has nothing to say that will help the majority of struggling Americans.
The first hint that something was different was Edward R. Murrow saying "Anyone who isn't confused doesn't really understand the situation." During Vietnam this morphed into sayings like "Anybody who thinks there's a solution to the problem, doesn't understand the situation."
To my way of thinking "understanding the situation" means getting down to the basic assumptions which sometimes means going down through various layers -- assumptions upon assumptions -- a process I call "boiling down."
...,do the American people really want to see what's at the bottom of the "stew" where being fed?...,it becomes more than- "follow the money",.., it might shake the foundation of everyone, too the "right-of-center's", actual beleifs on what is truely the "American Way",...
I do not agree that we have a spending problem but instaed an "Earning Problem " We have not only killed the " Goose that laid the golden egg " but have dismantled and sold the carcass . We can not get back what we have given away but we can and must start anew by investing in new products , new processes in traditional and non-traditional areas .
Somebody else made this suggestion so I take no credit for the idea but I liked what I heard. Take all the construction projects each state wanted done but has not started because of funding and put them in one super, federally funded plan/project and present that to congress. If congress follows what they have been doing they will reject the plan. Now the president should use his bully pulpit and read state by state what their current unemployment figures currently are, who their representatives in congress and the senate are, state whether they voted for his plan or not and if not, ask that states unemployed population to call those representatives tomorrow and ask them why they are preventing them from going back to work by voting no to the presidents plan.
The president needs to get personal.
That is how the president should deal with obstructionists.
The president should clearly state that if they do not agree with their representation then start recall procedures immediately.
Do you want to bet how quickly things would change if he did as I stated?
And on the GOP side, who is the only not MIA? Huntsman. I hope he gets a chance so I don't have to vote for Obama again because the GOP candidates were wretched.
I don't know a lot about Huntsman, I might likely disagree with him on social issues such as SSM. But he looks like someone with some common sense and that can evolve with our society. Just maybe, once the established GOP gets tired of the rantings of Bachmann and Perry and realizes neither can win a general election they will give a look at Hunstman.
Why did you vote Obama, Pelosi, Reid, and their minions?...The Source of your complaints.
Right on. Right on. Right on. I especially like your nuanced reference to issues of "social cohesion". That's much more palatable among the reasoned middle ground of this great debate about America's future. In my less patient moments, I just go right to the center of the "cause celebre" of this social cohesion unraveling, the extreme right wing of the Republican party who've taken an oath that makes them "SS" material in another time.
I'd have rather had them just taking the "crazy pill" antidote instead of that oath. Oh, and maybe they should check into a prescription while they're reviewing their necessary medications and find one that fixes their "alzheimer's affect" that has completely wiped out of their collective memories the eight years of "Ya, Mein Fuehrer" at the altar of George Bush. And maybe a primer on primary causes for civil unrest throughout the history of civilization. And finally, maybe a sensitivity awareness online course on the concept of "tolerance in a pluralistic" society. Oh, and finally, some basics on logic, hypocrisy, and racism.
Or, we could just elect better people who have an interest in preserving our union.
Signed: Nurse Ratched.
Signed: