At its peak level of GDP, the U.S. economy depended on the American consumer for more than 70% of its output of goods and services. It has been the deleveraging of the American consumer, and to a growing extent, his/her unemployment, that has been the catalyst of the U.S. recession. And not only America; the centrality of the U.S. consumer to the overall global economy has meant his pulling back on a debt induced shopping spree, which has sparked a worldwide synchronized recession.
The vast amount of money that Uncle Sam has borrowed to fund a nearly $800 billion economic stimulus program is supposed to substitute for the falloff in consumer demand, stop the avalanche of job losses and in the process regenerate consumer spending. The perception that this policy response was beginning to bear fruit has been the foundation of a recent flurry of statements emanating from the Federal Reserve, intimating that the recession was winding down, with recovery just around the corner. Both the Fed, Obama administration and Wall Street fully expected that the July retail sales figures would reflect a return to growth in consumer spending, juiced up by a taxpayer funding "cash for clunkers" gimmick aimed at kick-starting auto sales.
When the official sales figures were released by the Commerce Department, jaws dropped right through the floor. Instead of the .7% rise that was expected, July's retail sales figures revealed a decline of .1%. However, the reality was much worse than even the posted decline, for the July figures were artificially inflated by a large increase in automobile related products due to "cash for clunkers." Without the engineered car driven increase in consumer purchases, the actual retail sales contraction was .6%.
The ugly truth is that no matter how manipulated official economic statistics are, including the U3 unemployment number, the reality is that total consumer purchasing power, reflecting the number of hours worked multiplied by average wage, has declined to a level that makes it virtually impossible to recreate vigorous economic growth. Despite the happy talk from Washington, I think it would be surprising if the Obama administration does not ask Congress for a second massive stimulus package before the end of the year.
Should a second stimulus package be proposed by President Obama, he may encounter stiff resistance from Republicans and fiscally conservative Democrats over concerns about the exploding national debt. However, it is likely that the Obama administration will place a higher priority on going into the 2010 mid-term elections with the ability to claim they have reduced unemployment rather than positioning themselves as fiscally responsible.
Higher deficits, however, create the danger of inflation and much higher interest rates. Escalating interest rates will serve as a brake on economic expansion, defeating the purpose of deficit funded stimulus programs. Now, in that situation, one can always resort to monetary policy, with the Federal Reserve reducing interest rates. However, in this unique economic disaster our planet is currently navigating its way through, the Fed, as with many central banks throughout the world, has already reduced its funds rate to close to zero.
Could the Obama administration be running out of options? If fall retail sales continue to plummet and unemployment rises, things could get even more ugly for the problematic American economy.
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http://www.washingtonpost.com/wp-dyn/content/article/2009/08/18/AR2009081803418.html
Some might say that businesses need to rebound before the money feeds downstream. But many large businesses have recorded record profits and still reducted wages, laid off workers, and pocketed the savings; something small businesses can't do and survive, though some tried. Real net income that allows people to save will be the thing that turns the economy around.
Cap&Trade should have waited until after 2010. Does one extra year of new regulations on air/water quality really make the difference between annilation and environmental recovery?
Health care should have started with a bill authorizing Medicare to bargain with every drug company over every drug. Refuse to negotiate? Medicare refuses to approve reimbursement for your drug! Once big savings were realized, move on to other health care reforms. And BTW, how about outlawing drug ads on tv? Would save the drug companies a bundle of money, and keep patients from lobbying doctors for new drugs (with massive side-effects) without having the expertise to realize what a risk they are taking. Here's a hint - OLD drugs are the BEST drugs. Yes they may not have all the bells and whistles, but neither do they have page after page of contraindications.
Sure we need jobs and a decent standard of living - but anyone who thinks the world can continue as it has been is just whistling past the graveyard...
The American consumer is still tapped out and will remain so until our massive wealth inequality starts to reverse itself and those of us among the lower orders actually have something to spend, and not just another way to go into debt.
Sure you can juice some of the numbers by paying people to buy houses and cars, but that isn't sustainable any more than the whole housing-as-a-growth-investment insanity was.
Obama needs to level with people about the debt and nature of our problem and stop the sterile and useless attempts to talk up the economy, and posing his dinky,anemic, tiny little stimulus as something that is going to bring us roaring out if this depression (OH NOZ! I said the D-word! That's politically incorrect!). He is raising expectations that he simply can't meet and will doom himself to being a one-termer unless he levels with people.
Another in a long line of expectation "failures" by supposed experts and analysts.... and it's only Monday. Wonder what "better or worse than" expectation news will come tomorrow.
It's amazing that anything goes right in this country, especially in the financial markets, because nothing seems to go as expected, yet these clowns who issue them continue to work..... what job security. Second only to TV weathermen in the ability to retain a job while being wrong so often.
Pathetic . . .