The Big Contraction
Look Out Below!
By MIKE WHITNEY May 31, 2011
The slowdown has begun. The economy has started to sputter and unemployment claims have tipped 400,000 for the last seven weeks. That means new investment is too weak to lower the jobless rate which is presently stuck at 9 percent. Manufacturing--which had been the one bright-spot in the recovery-- has also started to retreat with some areas in the country now contracting. Housing, of course, continues its downward trek putting more pressure on bank balance sheets and plunging more homeowners into negative equity.
The likelihood of another credit expansion in this environment is next-to-none. Total private sector debt is still at a historic high at 270% of GDP which augurs years of digging out and painful deleveraging. Analysts have already started slicing their estimates for 2nd Quarter GDP which will be considerably lower than their original predictions. With the economy dead-in-the-water, the IPOs, the Mergers & Acquisitions, and the stock buybacks and all the other ways of amplifying leverage will slow putting a dent in quarterly earnings and pushing down stock prices. Here's a clip from the Wall Street Journal:
"After a disappointing first quarter, economists largely predicted the U.S. recovery would ramp back up as short-term disruptions such as higher gas prices, bad weather and supply problems in Japan subsided.
But there's little indication that's happening. Manufacturing is cooling, the housing market is struggling and consumers are keeping a close eye on spending, meaning the U.S. economy might be on a slower path to full health than expected.
"It's very hard to generate a rapid recovery when rapid recoveries are historically driven by housing and the consumer," said Nigel Gault, an economist at IHS Global Insight. He expects an annualized, inflation-adjusted growth rate of less than 3% in coming quarters—better than the first-quarter's 1.8% rate, but too slow to make a meaningful dent in unemployment." ("Economists Downgrade Prospects for Growth", Wall Street Journal) more
US economy on verge of ‘Great Great Depression’?
Published: 02 June, 2011, 20:24
World markets fall after the US economy suffered its worst day of the year on June 1 with all signs pointing to more declines over the summer.
“We’re on the verge of a great, great depression,” opined a market strategist Peter Yastrow.
The US market was hit by falls in job growth and manufacturing which in turn abolished quarter of the Dow Jones industrial average's gains for the year thus far. As the markets opened back up on June 2 investors were reluctant to take risks as more bad news regarding the US economy is expected to be released June 3.
The Dow dropped 30 points within the first 15 minutes of open trading as market watchers anxiously await the release of US government job numbers. Thus far reports indicate claims for unemployment benefits did not shrink as much as expected, causing many people to fear a labor market recover simply is not taking place.
“We've been through a couple-week period here where basically every piece of economic data has just been awful,” John Canally of LPL Financial in Boston told the Daily Mail.
Yastrow said he has witnessed “near panic” by investors unwilling to take risks in the volatile markets.
“Interest rates are amazingly low,” he told CNBC. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.”
“Almost every bit of data about the health of the US economy has disappointed expectations recently,” noted Mike Riddell of M&G Investments.
Home prices are down, foreclosures are up. Commodity prices are rising and many Americans remain unemployed, some have even exasperated their allotted unemployment benefits, leaving them with nearly no options. more
Obama and the Economy in Freefall
Time to Panic? You Betcha!
By STEPHANIE KELTON June 12, 2011
Earlier this week, President Obama talked about the weakening state of the economy, telling us that he's not worried about a double-dip recession and that the nation should "not panic." It's hard to imagine a more alarming statement at this juncture.
The recovery is faltering. Our economy is growing at annual rate of just 1.8 percent. Manufacturing just grew at its slowest pace in 20 months. More than 44 million Americans – one in seven – rely on food stamps. Employers hired only 54,000 new workers in May, the lowest number in eight months. Jobless claims increased to 427,000 in the week ended June 4. The unemployment rate rose to 9.1 percent. Nearly half of all unemployed Americans have been without work for more than 6 months. About 25% of all teenagers who are looking for work are unemployed. Eight-and-a-half million Americans are underemployed – i.e. working part-time because their hours have been cut or because they can't find full-time work. There are, on average, 4.6 unemployed people for every 1 job opening. And even if all the open positions were filled, there would still be 10.7 million people looking for work.
The Case-Shiller index shows that the housing market has already double-dipped.
And, because of the huge shadow inventory of yet-to-be-foreclosed homes, Robert Shiller thinks home prices could easily fall another 15-25%. As prices continue to decline they create hidden losses elsewhere in the economy, hurting not just homeowners but the financial institutions that hold their mortgages. The list goes on and on.
These are not, as Obama said, "headwinds" that will slow the pace of our recovery. They are gale force winds that will push millions of families into poverty and thousands of business into bankruptcy.
There is a way out, but it seems unlikely that Congress and the White House will work together to do what's necessary to turn things around. Why? Because a recent poll shows that 59 percent of the public disapproves of the president's handling of the economy. And Republicans smell blood. They know that since WWII no president has been re-elected with unemployment above 7.2 percent, so they see Harry Hard Luck and Sally Sob Story as their best chance at reclaiming the White House in 2012. It is a victory the Republicans have been masterfully engineering since February 2009, when they succeeded in restricting the size and scope of the American Recovery and Reinvestment Act (ARRA).
Some of us saw this coming. For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery. Anything shy of that, they worried, would fail to sufficiently improve the economy and thereby make Keynesian economics the subject of ridicule and scorn.
But it's easy to see why the $787 billion package we ended up with didn't do the trick. Remember that the stimulus didn't take effect all at once – it was spread out over a three-year period. And while the left hand of the federal government was trying to rev up the economy with increased spending, the right hand of the private sector (together with state and local governments) was stomping on the breaks. Just consider the fact that bank lending declined by $587 billion in 2009 alone – the biggest one-year drop since the 1940s. That's a $587 billion hole that businesses and households created just as the stimulus was phasing in. ARRA was the right medicine, but it was administered in the wrong dosage, and this became clear within months of its passage. moreOf course, there is a strong case to be made that these economic catastrophes are feature, not a bug, of modern economic management.
The Financial Road to Serfdom – How Bankers are Using the Debt Crisis to Roll Back the Progressive Era
MONDAY, JUNE 13, 2011
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College.
Financial strategists do not intend to let today’s debt crisis go to waste. Foreclosure time has arrived. That means revolution – or more accurately, a counter-revolution to roll back the 20th century’s gains made by social democracy: pensions and social security, public health care and other infrastructure providing essential services at subsidized prices or for free. The basic model follows the former Soviet Union’s post-1991 neoliberal reforms: privatization of public enterprises, a high flat tax on labor but only nominal taxes on real estate and finance, and deregulation of the economy’s prices, working conditions and credit terms.
What is to be reversed is the “modern” agenda. The aim a century ago was to mobilize the Industrial Revolution’s soaring productivity and technology to raise living standards and use progressive taxation, public regulation, central banking and financial reform to distribute wealth fairly and make societies more equal. Today’s financial aim is the opposite: to concentrate wealth at the top of the economic pyramid and lower labor’s returns. High finance loves low wages.
The political lever to achieve this program is financial. The European Union (EU) constitution prevents central banks from financing government deficits, leaving this role to commercial banks, paying interest to them for creating credit that central banks readily monetize for themselves in Britain and the United States. Governments are to go into debt to bail out banks for loans gone bad – as do more and more loans as finance impoverishes the economy, stifling its ability to pay. Yet as long as we live in democracies, voters must agree to pay. Governments are sovereign and debt is ultimately a creature of the law and courts.
Fought in the name of free markets, this counter-revolution rejects the classical ideal of markets free of unearned income paid to special interests. The financial objective is to squeeze out a surplus by maximizing the margin of prices over costs. Opposing government enterprise and infrastructure as the road to serfdom, high finance is seeking to turn public infrastructure into rent-extracting tollbooths to extract economic rent (the “free lunch economy”), while replacing labor unions with non-union labor so as to work it more intensively.
I lean more towards an explanation that much of the economic damage over the past 35 years was caused by true believers in economic nonsense who drank the kool-aide because the repackaged classical arguments touched some theological need in their pinched souls.This new road to neoserfdom is an asset grab. But to achieve it, the financial sector needs a political grab to replace democracy with financial technocrats. Their job is to pretend that there is no revolution at all, merely an increase in “efficiency,” “creating wealth” by debt-leveraging the economy to the point where the entire surplus is paid out as interest to the financial managers who are emerging as Western civilization’s new central planners. more
Nobel Laureate: Globalism Has Been Ruinous for Americans
How Offshoring Has Destroyed the Economy
By PAUL CRAIG ROBERTS May 31, 2011
These are discouraging times, but once in a blue moon a bit of hope appears. I am pleased to report on the bit of hope delivered in March of 2011 by Michael Spence, a Nobel prize-winning economist, assisted by Sandile Hlatshwayo, a researcher at New York University. The two economists have taken a careful empirical look at jobs offshoring and concluded that it has ruined the income and employment prospects for most Americans.
To add to the amazement, their research report, “The Evolving Structure of the American Economy and the Employment Challenge,” was published by the very establishment Council on Foreign Relations.
For a decade I have warned that US corporations, pressed by Wall Street and large retailers such as Wal-Mart, to move offshore their production for US consumer markets, were simultaneously moving offshore US GDP, US tax base, US consumer income, and irreplaceable career opportunities for American citizens.
Among the serious consequences of offshoring are the dismantling of the ladders of upward mobility that made the US an “opportunity society,” an extraordinary worsening of the income distribution, and large trade and federal budget deficits that cannot be closed by normal means. These deficits now threaten the US dollar’s role as world reserve currency.
I was not alone in making these warnings. Dr. Herman Daly, a former World Bank economist and professor at the University of Maryland, Dr. Charles McMillion, a Washington, DC, economic consultant, and Dr. Ralph Gomory, a distinguished mathematician and the world’s best trade theorist, understand that it is strictly impossible for an economy to be moved offshore and for the country with the offshored economy to remain prosperous.
And then there is Bill Black who believes crooks are crooks--and that it is a bad idea to allow crooks to run something so important as the financial system.Even before this handful of economists capable of independent thought saw the ruinous implications of offshoring, two billionaires first recognized the danger and issued warnings, to no avail. One of the billionaires was Roger Milliken, the late South Carolina textile magnate, who spent his time on Capital Hill, not on yachts with Playboy centerfolds, trying to make our representatives aware that we were losing our economy. The other billionaire was the late Sir James Goldsmith, who made his fortune by correcting the mistakes of America’s incompetent corporate CEOs by taking over their companies and putting them to better use. Sir James spent his last years warning of the perils both of globalism and of merging the sovereignties of European countries and the UK into the EU. more
The False Dichotomy Between Banking Honesty And A Sound Financial System
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City Jun. 13, 2011, 3:46 PM
It's exceptionally hard to kill bad ideas. The most spectacularly bad idea in economics and finance is that regulating business honesty is bad for business. The idea is exceptionally criminogenic.
Nothing is better for honest firms than effective police, prosecutors, and regulatory “cops on the beat.” These things make possible “free markets.” Fraud cripples markets. Criminologists know this. The best economists have known this for over 40 years. But really bright people explained why 285 years ago.
"The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man's goods from thieves, but honestly hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage."
Swift, J. Gulliver's Travels, London, Penguin (1967) p. 94. See Levi, M. The Royal Commission on Criminal Justice. The Investigation, Prosecution, and Trial of Serious Fraud. Research Study No. 14, London, HMSO (1993) p. 7.
As I've written, these words should be inscribed on the walls of every relevant regulatory agency.
George Akerlof echoed Swift's words in a formal economics argument in his seminal 1970 article “The Market for ‘Lemons': Quality Uncertainty and the Market Mechanism.”
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
This is the article that led to the award of the Nobel Prize in Economics in 2001 to Akerlof. Akerlof went on to explain that fraud could lead to a “Gresham's” dynamics in which bad ethics drove good ethics out of the marketplace. moreAnd there it is--one more restatement of the economic law that reads: Well-regulated Capitalism ALWAYS outperforms the deregulated version because it allows space for honest enterprise to thrive. Hard-working and honest entrepreneurs ALWAYS outperform crooks!