The Economy Is a Lie, Too
Americans cannot get any truth out of their government about anything, the economy included. Americans are being driven into the ground economically, with 1 million schoolchildren now homeless, while Federal Reserve chairman Ben Bernanke announces that the recession is over.
The spin that masquerades as news is becoming more delusional. Consumer spending is 70 percent of the U.S. economy. It is the driving force, and it has been shut down. Except for the super rich, there has been no growth in consumer incomes in the 21st century. Statistician John Williams of shadowstats.com reports that real household income has never recovered its pre-2001 peak.
The U.S. economy has been kept going by substituting growth in consumer debt for growth in consumer income. Federal Reserve Chairman Alan Greenspan encouraged consumer debt with low interest rates. The low interest rates pushed up home prices, enabling Americans to refinance their homes and spend the equity. Credit cards were maxed out in expectations of rising real estate and equity values to pay the accumulated debt. The binge was halted when the real estate and equity bubbles burst.
As consumers no longer can expand their indebtedness and their incomes are not rising, there is no basis for a growing consumer economy. Indeed, statistics indicate that consumers are paying down debt in their efforts to survive financially. In an economy in which the consumer is the driving force, that is bad news.
The banks—now investment banks thanks to greed-driven deregulation that repealed the learned lessons of the past—were even more reckless than consumers and took speculative leverage to new heights. At the urging of Larry Summers and Goldman Sachs' CEO Henry Paulson, the Securities and Exchange Commission and the Bush administration went along with removing restrictions on debt leverage.
When the bubble burst, the extraordinary leverage threatened the financial system with collapse. The U.S. Treasury and the Federal Reserve stepped forward with no one knows how many trillions of dollars to "save the financial system," which, of course, meant to save the greed-driven financial institutions that had caused the economic crisis that dispossessed ordinary Americans of half of their life savings.
The consumer has been chastened, but not the banks. Refreshed with the TARP $700 billion and the Federal Reserve's expanded balance sheet, banks are again behaving like hedge funds. Leveraged speculation is producing another bubble with the current stock market rally, which is not a sign of economic recovery but is the final savaging of Americans' wealth by a few investment banks and their Washington friends. Goldman Sachs, rolling in profits, announced six figure bonuses to employees.
The rest of America is suffering terribly.
The unemployment rate, as reported, is a fiction and has been since the Clinton administration. The unemployment rate does not include jobless Americans who have been unemployed for more than a year and have given up on finding work. The reported 10 percent unemployment rate is understated by the millions of Americans who are suffering long-term unemployment and are no longer counted as unemployed. As each month passes, unemployed Americans drop off the unemployment role due to nothing except the passing of time.
The inflation rate, especially "core inflation," is another fiction. "Core inflation" does not include food and energy, two of Americans' biggest budget items. The Consumer Price Index (CPI) assumes, ever since the Boskin Commission during the Clinton administration, that if prices of items go up, consumers substitute cheaper items. This is certainly the case, but this way of measuring inflation means that the CPI is no longer comparable to past years, because the basket of goods in the index is variable.
The Boskin Commission's CPI, by lowering the measured rate of inflation, raises the real gross domestic product growth rate. The result of the statistical manipulation is an understated inflation rate, thus eroding the real value of Social Security income, and an overstated growth rate. Statistical manipulation cloaks a declining standard of living.
In bygone days of American prosperity, American incomes rose with productivity. It was the real growth in American incomes that propelled the U.S. economy.
In today's America, the only incomes that rise are in the financial sector that risks the country's future on excessive leverage and in the corporate world that substitutes foreign for American labor. Under the compensation rules and emphasis on shareholder earnings that hold sway in the U.S. today, corporate executives maximize earnings and their compensation by minimizing the employment of Americans.
Try to find some acknowledgement of this in the "mainstream media," or among economists, who suck up to the offshoring corporations for grants.
The worst part of the decline is yet to come. Bank failures and home foreclosures are yet to peak. The commercial real estate bust is yet to hit. The dollar crisis is building.
When it hits, interest rates will rise dramatically as the U.S. struggles to finance its massive budget and trade deficits while the rest of the world tries to escape a depreciating dollar.
Since the spring of this year, the value of the U.S. dollar has collapsed against every currency except those pegged to it. The Swiss franc has risen 14 percent against the dollar. Every hard currency from the Canadian dollar to the Euro and British pound has risen at least 13 percent against the U.S. dollar since April 2009. The Japanese yen is not far behind, and the Brazilian real has risen 25 percent against the almighty U.S. dollar. Even the Russian ruble has risen 13 percent against the U.S. dollar.
What sort of recovery is it when the safest investment is to bet against the U.S. dollar?
The American household of my day, in which the husband worked and the wife provided household services and raised the children, scarcely exists today. Most, if not all, members of a household have to work in order to pay the bills. The jobs are disappearing, however—even the part-time ones.
If measured according to the methodology used when I was assistant secretary of the treasury, the unemployment rate today in the U.S. is above 20 percent. Moreover, there is no obvious way of reducing it. There are no factories, with workforces temporarily laid off by high interest rates, waiting for a lower interest rate policy to call their workforces back into production.
The work has been moved abroad. In the bygone days of American prosperity, CEOs were inculcated with the view that they had equal responsibilities to customers, employees and shareholders. This view has been exterminated. Pushed by Wall Street and the threat of takeovers promising "enhanced shareholder value," and incentivized by "performance pay," CEOs use every means to substitute cheaper foreign employees for Americans.
Despite 20 percent unemployment and cum laude engineering graduates who cannot find jobs or even job interviews, Congress continues to support 65,000 annual H-1B work visas for foreigners.
In the midst of the highest unemployment since the Great Depression, what kind of a fool do you need to be to think that there is a shortage of qualified U.S. workers?
COPYRIGHT 2009 CREATORS.COM
Entries(RSS)
For a change, PCR is right on target.
So very true, and let's not hold our breath waiting for a Congressional hearing to investigate massive shorts by Goldman Sachs, Soros, et al immediately prior to an Israeli attack on Iran.
Sadly, Paul Craig Roberts has been on target for years. I am glad that Chronicles posts his columns, while the Bushbots on Townhall.com kicked him off their site due to problems with the truth hurting.
Everybody I know is suffering terribly in the Bush Depression. Obama is just Bush III, making everything worse.
Empires always go broke and impoverish their own citizens. Our best engineers make bombs and tanks and warplanes instead of cars and tractors and computers. Our wealth is being exported to our overseas Empire; our money is sent down the sink-holes in Iraq and Iran, as well as Germany, Italy, Spain and other NATO outposts, and our Asian outposts in Japan and Korea.
The Fed inflated the currency to keep the illusion of prosperity going, dropping the value of the Yankee peso by 1/3 against the dollar. The most crooked bankers made billions.
America has the worst government an ruling elite of any major country -- a gang of robbers and killers and scoundrels in both parties. The public debt at all levels of government now is so high that nobody now living, even little children, will get out from under it.
Have a nice day.
#4 "America has the worst government and ruling elite of any major country..." I agree, Mr. Seiler, and a lot of what I have written here is an attempt to explain why. I think it is because in other countries the elites have to pay some attention to their actual countries, while here they only have to pay attention to an imaginary "America."
A ‘dead on target’ by PCR. I much prefer his articles on economy. It’s a subject he more completely understands.
I ask: Once the labor of the world is reduced to a dollar-a-day poverty, living in cardboard boxes, where do they plan to find a market for their high profit goods? How many in the third world labor force can afford them now? Following this to conclusion, I don’t believe it is sustainable. It would appear to be a complete preoccupation with the present and the hording of all the wealth that can be accumulated at this moment in time, without regard to the future. We live in interesting times. Greed and stupidity rein supreme.
Monsieur Sailer and Dr. Wilson, the UK Labour Party gives our class a run for their money. So does the Liberal Party provincial government in Québec.
The public debt at all levels of government now is so high that nobody now living, even little children, will get out from under it.
Anyone who can, I admonish you: leave the country. There are greener pastures out there. None of them is truly green, but many are greener than what is in North America for certain.
Some more questions to be added to my post above:
How can the economy return to anything when our jobs have been offshored to the third world?
Lack of work here, coupled with the low wages abroad, must certainly have an impact on sale of products. How can producers destroy the consumer class and still survivie? Or do they even care?
Lack of work and lack of sales will have a dramatic effect upon tax revenue. How will the government(s) survive? How will the enormous debt be paid? How will Obama's social programs get financed?
#6. Yes it is the short-term view that dominates Americans that carries much of the blame. Normal civilised people give some thought to their ancestors and certainly to their posterity. The American point of view is self-centered and momentary.
Ditto to the comments. PCR has really nailed this one.
My only thoughts on our country not flat-out dying are oddly enough that our failures will plant the seeds for future successes. Perhaps labor will become so cheap here, and there will be so much capital in the upper class, that manufacturing will have no choice but to come back to the U.S.
I have a friend who runs a construction copmany in north-central Indiana who says all through there and Ohio and farther East there are great buildings, completely sound and useful, that could be up and running in no time if the money and product is there too. We may be turning the old downtown warehouses into lofts and condos, but in the rural areas, they could become great factories in no time once again.
John Seiler wrote: "Our best engineers make bombs and tanks and warplanes instead of cars and tractors and computers."
And now what incentive still even exists to induce the best and brightest of our sons and daughters to go into engineering or medical or scientific research? Why spend years getting a Ph.D when you can become uber-wealthy trading monopoly money at Goldman-Sachs, smugly secure that if you get so much as a hangnail, the DC chair moisteners will ride to your rescue?
#11
Dr Wilson, I do not think that is a sufficient explanation. As far as I can tell the short term view dominates in most or all Western countries. Even the use of the word "ancestors" would elicit chuckles where I live in Australia.
When the real and total collapse of the economy comes, what will it look like? What will happen first, according to the predilections of the minds of some of the more knowledgeable in this chat room, to signal the collapse of our American house? I was speaking with my wife about this today, about the fact that these blessings, these comforts, these niceties that we enjoy and view as "au natural" are not guaranteed. Indeed, the lifestyle of comfort and relative ease that we live is a unique and peculiar thing in the world. Having traveled to various countries in Asia over the past several months, the daily struggle, the hand-to-mouth subsistence living that those hundreds of millions wage to survive from week to week is not something that Americans are immune to. Nor should we think it is our birthright to live our lives underpinned with the luxuries of Western civilization.
And yet, despite the last decade of growing economic peril, there has not yet been the total collapse that would set America back several decades. Why? My hunch is that too many here and abroad have too much to lose to allow us to totally collapse, and yet the prophetic voices of PCR still yell in the streets that "it will come!" What makes him so sure?
Mr. JMB pinpointed my opinion exactly. I live in Japan, and I can see very clearly that foreign powers are scared to death of an American collapse. Far too much is at stake for them to allow America to fall, which is why they *do* allow us to sustain so much debt. They know perfectly well that an American collapse will cause a worldwide depression that will harm them severely. Personal feelings towards us are irrelevant where economic prosperity is
concerned : no foreigner of an industrialized country unless he be a lunatic would ever wish anything but the best for America. And I have not, at least here in Japan, met a single one yet.
And the bad news just keeps pouring in, the commercial real estate market is heading south as well. My broker told me to get the portion of my depleted IRA out of Manhattan real estate and switch to gold mines instead.
While PCR article is on target, some comments are preposterous like:
"Everybody I know is suffering terribly in the Bush Depression. Obama is just Bush III, making everything worse". This is pure delusional Marxist-Producerist drivel. Obama stand for complete transformation of the USA into a socialist/communist entity. Obama is nothing like Bush. By comparison under both Bushes and Clinton there was prosperity for the most part. There will be no recovery under Obama. That is his goal anyway, to destroy the civil society, ensure permanent grip on power by the Marxists through immigration reform and relocation of wealth to his supporters.
Jack, the economy crashed at the tail-end of Bush II's presidency. You can hardly blame Obama for that.
Economic prosperity under Bush and Clinton was an illusion, it just took some time for the chickens to come home to roost.
Obama is continuing on with the policies of previous administrations, albeit with a bit more intensity.
Jack Bailey,
There was no prosperity under the Infant Bush-unless you were a military contractor or an illegal immigrant. Real wages didn't rise at all under Bush for the rest of us.
Well, there you go again, jackbailey. PCR says nothing preposterous in this article. Obama is exactly like W except for the fact that he speaks English at a higher level and can probably dress himself and cross the street alone. He's a delusional liar, unfit for office, just as every modern president has been. He has much in common with W, especially that of a sheltered and overprivileged upbringing.
The "change that Obama is pushing isn't really sweeping or radical. It's simply more of the same old Fabian socialism that has been progressing here for the past 120 years. The difference is that the socialist agenda is at the end-game stage now.
@ 13 Miles:
Ahhh, but the financial con-jobs are sooooooooo east coast establishment. Every aspiring Ivy League drop-out knows that the hip new thing is to work in computer engineering on the west coast where you can devise ever more efficient ways to search for pornography and sports scores. This, my friends, we are told is activity at the vanguard of a "new economy". Leave the "rust tech" to the Germans and Koreans. And those semiconductor executives who might argue that those backward cars have 60 and increasingly more processors in them or that auto engineers actually use their computers for something other than gaming, well, just send them to a conference in Aspen or Davos and I am sure Bono will distract them with demands for reparations to one disadvantaged country or another.
5, 13, 22, I'm neck deep in this part of our culture now. I don't know if it's true that our "best" engineers are working for the government, but it could be. It's certainly true that a whole lot more do than should. Constantly searching the job market as I am, most opportunities are on the coasts, unfortunately. The Midwest and/or South seems mostly devoid of the kinds of institutional, technological or government money it takes to finance research departments or expand them. It's not just engineers/scientists being choosy, there's been at least a generation of mismanagement of the U.S. companies that we should supposedly want to work for. This is partly a result of the short-term mindset given to us by wall street that dominates the quarterly corporate culture.
But I guess some of the blame could fall on the tech cultures Eagle describes. Although he is painting too broadly with that sour brush of his, Geek culture is a wasteful and narrow-minded thing, and they are too responsible for many design decisions. But their time will come and go, the people fitting his description do not make important decisions usually, and just happen to be in the right place at the right time with the right skill set.
Otherwise, the real guys at the centers of innovation work incredibly hard, are incredibly intelligent and are responsible for laying a large part of the groundwork for future jobs in our country.
It is perhaps more interesting to note that there are some really challenging and interesting problems in healthcare right now. From genetics to health informatics, it is an exciting time and one that needs to be kept far away from the federal government. If a lack of shame doesn't turn engineers towards more healthy problems, perhaps the challenges themselves need more advertising.
Sports scores and porn are just the superficial tip of the iceberg. It is the fundamental shrinking of the globe via new forms of communication (internet and fast/reliablle shipping) that have contributed not just negatively, temporarily to a loss of traditional manufacturing jobs in the U.S., but positively to a whole new mess of jobs in the U.S. to come, both manufacturing and otherwise. This is a fundamental shift. What has stung so badly is that the government has subsidized and hastened this shift unnaturally.
I apologize for this disorganized rant. If I had more time, I'd have done a better job.
@23 McCabe,
I was not making any sort of broad statement about geek culture; what I was touching on is part of a larger economic picture that has emerged in the US:
There is a fundamental misunderstanding of and disrespect for the breadth of innovative work that there could be out there. Innovation is more than computer engineering and computer engineering itself is important to more fields than the ones touted in the mass media, namely the search engine companies and such, whose valuation will have to implode under normal economic consideration if they do not come up with weightier advances beyond porn searches funded by the posting of advertisements.
The reason that the narrow communications fields noted above are the ones getting the attention is because there exists some promise that a "new economy" is arising from this area. I believe you yourself are saying so? But if this is the case, then what are the signs? What are the tradable, value-adding components of it? There may be and are signs of the communications sector growing, to be sure. And, yes, spaces like health care informatics will become increasingly important and are opening up some opportunities for growth. But none of these spaces equal the dollar size of or innovative punch of what "we" (our government and Wall Street) are squandering: manufacturing. Even if they did or may be far more valuable in the future, there is a fundamental thing to understand....
People are being led to misunderstand what happens in industrial revolutions and intervening periods of paradigmatic technological shifts. Here is the fundamental lesson: a sane nation does not destroy entire viable economic sectors, it makes them more efficient. Case in point from a more sane era in the US: the first and second industrial revolutions did not mean the end of agriculture in the US, it meant more efficient agriculture. Likewise the current "information revolution", or whatever it may be called, need not and should not mean the end of manufacturing in this country. (I will leave aside the fact that manufacturing still means more value-addition, and tradable value at that, then does most every subfield of services information technology.)
Further, "geek culture" as you have stereotyped it does not exist outside of a few mass media caricatures. I myself hold graduate degrees in engineering. And like so many engineers in this country, I have left my field to pursue financial or other management-type roles in the workplace. This is another example of what stinks in our economy. I don't know what the answer is - it is merely an observation. I have worked in Germany and Japan and in both countries it is both more desirable and more lucrative to be an engineer in ways that it is not in the US. Just consider how people here regard and how much companies reward a Chrysler engineer as versus a Volkswagen engineer in Germany or Honda engineer in Japan. (I purposefully picked mid-line vehicle companies and not the top of the line prestige companies like Mercedes. The case still holds.)
Eagle @ 24:
Thanks for the excellent post.
Eagle, thanks for your follow-up comment. It appears we are in agreement then. The sacking of our economy has (as you pointed out) most certainly not been replaced by any real and equal value as of yet. I think it's crazy the valuations that some of these tech companies are getting when they have not even turned a profit. But those valuations are coming from wall street, a major source of destructive hysteria.
I just saw a report someone in our lab posted that the average graduate student in the U.S. makes over $2k less a year than the average welfare recipient. I know that a lot of the highest paying jobs, too, are in government, mostly military or military support companies. Out of whack priorities is an understatement.
I do however think there is a Geek culture, even if that's not what you were saying. In many ways it exists only on the web, since that is where such folks "hang out". It's dominated now by mid-20's and older guys who are smart, for the most part reject all tradition, are cynical and anti-social. Indications of this are starting to pop up in huge numbers of autistic children being born in the same areas dominated by tech companies/cultures. Perhaps a majority of the American guys I've met in computer science work on computers all day, then go home and play on computers all night. These types are now very well-funded in general and prospering whereas more "normal" guys can't even find jobs. They are all too often easily lured by big bucks and the veil of secrecy offered by military work that lends their egos some fake importance. This is probably also deepened by the militaristic role-playing video games so many now dunce away their youth on. That all being said, these guys in general will probably not last at this level as we repair the damage to our country and invest in whatever value remains.
Innovation is a sloppy process, and wall street and the federal government have made it even sloppier than it needed to be. However, some good will come of this.
The manufacturing posts have been spot on. Anyone else find it curious that most foreign made goods are shoddily made compared to what Americans made three decades and more ago? Even the thirty year old trash cans and file cabinets at my work are much sturdier than anything comparable I've bought in the last twenty years. Chinese made toasters may be cheap but what savings do I get when I have to replace it every other year? The beer in my forty year old American made refrigerator at work is colder than the beer in my new, foreign made refrigerator at home. Why won't they build things like they used to?
Is the consumer economy today, dependent as it is on cheap foreign goods, an opiate for people with so little to do in life that they have become addicted to shopping for pleasure? Are American consumers somewhat like the 19th Century Chinese hooked on British opium traders?
Mr. Leaberry, you are exactly right. I think we have been given the double switch, at least over the last 30 years or so. As all this "offshoring" has been taking place, we have not just been getting cheaper (price) versions of the same stuff, they are in fact cheaper in quality. I imagine this is done to increase the profit margin, then increase volume as stuff needs to be over-consumed to replace it.
I just got to Mr. Richert's very nice article in last month's magazine, and he talks a little about some opportunities for U.S. manufacturers and innovators, mentioning some higher quality examples like Apple computer and a harmonica maker whose name escapes me. I think that we have reached rock bottom in cheap crap, so my hope is that there has been a mid-level niche opened up (hollowed out?) for companies that believe in personal customer service and high quality products made here, even if these will cost a little more up front. I have already seen this in what I call the $7 lunch that gives a great alternative to pure fast food (though inflation is bringing fast food prices up as well).
We need to think "total cost of ownership", including lifetime length of product, maintenance of product, personal contact with store/manufacturer (not a phone line to India), joy and usability of quality goods, and pride of being mostly or all locally made.