analysis by Reb Akiva at Mystical Paths
(Excerpted) Most Americans are too busy or distracted to realize the world economy now sits on an unprecedented abyss…
What happened to America is that its Gross Domestic Product (GDP), the measure of the nation’s overall economic output, declined by –2.5% (real or inflation-adjusted GDP) in 2009…
As Seattle Times reporter John Talton says it: "The Federal government used its firepower to rescue the financial system… Now ‘austerity’ and the deficit are the big memes in the other Washington. It was politically impossible even to extend jobless benefits…. For decades the American job machine was the envy of the world. Now something is very wrong, and it defies easy talk-radio ideological name calling."
Putting true numbers to the economic crisis is difficult because the government issues more flattering numbers than what the real America experiences. The Bureau of Labor Statistics says unemployment is around 15 million, or 9.7% of the workforce, but in reality, government numbers only reflect the short time period when people have recently been laid off of work and are seeking jobs or applying for unemployment. True unemployment is around 21.7% (near depression-era rate) according to Shadowstats.com. Furthermore, the M3 money supply reported for June 15, 2010 shows a negative 5.91% drop, the steepest decline in the M3 since the 1930s banking crisis. (The M3 is the broadest measure of money. It includes currency, checking and savings accounts, large time deposits, institutional money market mutual fund balances.)
The Federal government keeps saying America will grow itself out of its debt load and unemployment problems, so in the 1st Quarter of 2010 the bailed-out economy reportedly grew by a reported 2.7%, but as results of 2nd Quarter approach, doubts over continued growth are beginning to creep in…
While the article (by Bill Sardi at LewRockwell.com) is equivocal (titled “Is the Bailout going to work?”) and the quote by the reporter is vague (“something is very wrong”), honestly it’s not that difficult in straight analysis to understand. The key is the last paragraph that I excerpted, “The Federal Government keeps saying America will grow itself out of it’s debt load and unemployment problems”.
This is a classic Keynesian approach to economic downswings. Deficit spend to nudge the cycle back up before it bottoms out and suffers the worst aspects, and the deficit will be made up as the economy recovers. However, success at this method is dependent of a few important factors. First, the conditions at the start of the downward cycle and the upward swing remain similar – meaning the economic engines of growth remain available to ‘switch back on’. Second, the debt load of the government at the beginning of the down swing should be at it’s lowest level (since times have been good, previous debts should have been repaid and even some “rainy day savings” set aside) – so the deficit spending doesn’t draw too much money out of the economy.
The US has two serious serious problems relative to a Keynesian recovery:
A – The primary economic engines of the previous 15 years have been TERMINATED. Easy financing, venture capital, hedge funding, (generally) light regulations and very limited free market controls, all these allowed an explosion of business opportunities and the means to take advantage of them.
A simple example. When I was a child I used to fly across country to visit my grandparents. The price of a cross-country ticket was $700 (in the 1970’s), the available schedule was a few flights a day, the available airlines were three. The United States had 5 airlines that covered the country, and entry into the business was impossible with the level of regulation. No matter what ideas you may have had for more efficient, cheaper, or more customer oriented airline travel – there was no way to enter the market with under $1 billion of investment, an impossible amount to achieve.
When the airline business was de-regulated (no longer controlled practically as a public utility), tens of airlines started, cost of travel fell massively, airline travel exploded as did the associated jobs in the industry. The original reason for the regulation, safety, didn’t fall as the regulation refocused on only safety factors and not controlling the market.
A very similar story occurred with the Bell Telephone Company, which was subsequently de-regulated and split into regional companies. The proliferation of telecommunication companies, options, technologies and jobs was explosive.
The current administration has returned to a massive re-regulation mode. Food companies will be regulated due to the public health danger of fat. Every company may be regulated due to carbon release and environmental impact. Health care companies will be regulated and controlled to manage the product delivered to governmental standard. Insurance companies will be regulated to provide their product at government mandated prices. And every company will be regulated on what benefits (in health care to start) it can provide it’s employees, and what benefits (bonuses or stock options) it can’t provide it’s employees.
Every regulation raises the cost of entry, reduces the flexibility with which a company can operate, stops agility in reacting to the market or competitors, and stifles innovation. When those things combine, the ability to enter the market is closed or too expensive for start-up competitors.
B – The US entered the current downturn with a heavy debt load. Both the federal government as well as state and local governments got so used to the extended upswing that they upscaled government services and spending beyond the ability of the tax and economic base to handle it at the height of the upswing – and therefore continued to increase the debt load in the midst of the upswing.
When the downturn started, all levels of government were only getting by with low borrowing costs of the easy money time.
As the economy fell, tax rates crashed and the government (at all levels) had to massively increase borrowing to maintain existing service levels. Even 2 years into the economic crisis, few governments at any level have truly scaled back to meet their current tax bases. In some cases this is due to politicians unwilling to effectively take the necessary actions but get themselves thrown out of office for doing so (nobody likes to lose their benefits), in other cases due to ridiculous laws or regulations that basically ‘legally’ prevent governments from actually reducing benefits / pensions / or laying off employees.
Net net, add existing government borrowing on top of massive debt load increases due to the Keynesian spending for downturn recovery and you have the government (at all levels) absorbing all available investment dollars. Why risk loaning to start-up businesses when loaning to the government provides “guaranteed” returns?
So the government admits it’s strategy is to “grow itself out of the downturn”, but the engines of growth – innovation, start-up businesses, business agility, have been squashed. And the financial structures necessary to support business growth have also been squashed.
Of course, the alternative program is for the government to fund the operational economy, take over businesses, run sectors of the economy, and put all the people into jobs programs. Besides the fact that doesn’t work out so well (check Venezuela or Cuba for how that goes), the government literally doesn’t have enough money left to do so!
Given the strong ideological commitment of the Obama administration to it’s current approach, I’d say the best the U.S. can hope for is stagnation at the current level until the end of this administration.