Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘Federal Reserve’

• Americans Say it’s Still a Recession—or Worse!

Posted by Ron Robins on June 21, 2011

By Ron Robins. First published June 1, 2011, in his weekly economics and finance column at alrroya.com

Why don’t Americans believe Mr. Ben Bernanke, the chairman of the US Federal Reserve, that the economy is growing and getting better? Americans are right not to believe him and the Obama administration that the economy is on the verge of significant and sustained growth. Past predictions by these parties have either been flat out wrong or overly optimistic. Hence, Americans are not fooled and their own experience tells them that the US economy is still in recession—or worse.

They see the reality every day of joblessness and increasing poverty, and hear about out of control government deficits and debt. They know that massive deficits and debt can only mean belt tightening and increasing taxation ahead—resulting in even higher joblessness.

In a Gallup poll published April 28, Gallup found that, “more than half of Americans (55%) describe the U.S. economy as being in a recession or depression… Nor does it seem likely that — given surging gas and food prices — most would agree with the Committee [the Federal Reserve’s Open Market Committee] that ‘longer-term inflation expectations have remained stable and measures of underlying inflation are subdued.’”

And Americans are not convinced that cutting the federal government’s deficit will create jobs. A New York Times/CBS News poll on April 21 reported that, “for all the talk from Congressional Republicans and Mr. Obama of cutting the deficit as a way to improve the economy, only 29 percent of respondents said it would create more jobs. Twenty-seven percent said it would have no effect on the employment outlook, and 29 percent said it would cost jobs…”

Most Americans are also beginning to understand that despite the huge growth of corporate profits and executive pay in recent decades, their pay has been left far, far behind. And this adds to their belief that the economy for most Americans is one of continuing and growing recession.

On March 16 Yahoo Finance noted that, “since 1973, the median take home pay of full-time workers is virtually unchanged on an inflation-adjusted basis. [That] the top 11,000 households in America have more income than the bottom 25 million. [And] since 1976, 58% of real income growth has gone to the top 1% of Americans… ” Jeffrey Sachs, professor of economics at Columbia University, says in the article that, “we’ve reached the greatest income [and] wealth inequality in history… the people at the top buy the politicians… All of them – all parties. Everyone is in the hands of the super wealthy.’”

However, the above inflation adjusted median take home pay situation of full-time workers is probably even far worse than depicted. Unfortunately, the take home pay data above is discounted by US government inflation statistics which have had numerous ‘modifications’ over the years that cumulatively, effectively, and dramatically, have lowered the inflation rate from what it would otherwise have been. With a higher inflation rate, the real take home pay in the above analysis becomes almost miniscule.

For many years now, the current US consumer price index (CPI) no longer measures the prices of a fixed basket of goods and services. To understand what the CPI really is, see my post, Unethical Statistics Lead us Astray. Shadowstats.com has created their SGS Alternate CPI which they say is a true “measure of the cost of living needed to maintain a constant standard of living,” and it is now running about 10 per cent higher than a year ago. That compares with nominal wages increasing only around 2 per cent over the same period, according to the US Bureau of Labor. No wonder that Americans feel they are still in a recession—or a depression.

Adding to Americans’ sense of economic distress is that the US job market is becoming one of lower paying jobs. In 1980, the US had a plethora of middle income jobs—about 75 per cent more than low income jobs. However, by 2010, the number of middle and low income jobs were almost even at just over 40 per cent each of America’s job market, as reported by Sherle R. Schwenninger and Samuel Sherraden in, “The American Middle Class Under Stress,” released by the New America Foundation on April 27.

Schwenninger and Sherraden also report that, “wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-War high… [and] America’s social wage has been eroded by the rising cost of health care and education. Health care spending increased from 9.5% of personal consumption in 1980 to 16.3% in 2010… The average cost of one year of college… after adjusting for inflation… has risen 72% since 1990… ”

They continue that, “household net worth declined from $65.7 trillion in the second quarter of 2007 to $56.8 trillion in the fourth quarter of 2010… At the end of 2010, 23.1% of all residential properties with a mortgage were underwater [home value being less than the principal left on the mortgage]… Over the past three decades, household debt as a share of disposable income increased from 68% to 116%.”

The data is irrefutable that Americans are suffering financially in ways they never before imagined. While the rich get richer, they get relatively poorer and ever more dependent on debt and government handouts. No press conferences like the one on April 27 by Mr. Bernanke, or government propaganda, will convince suffering Americans that the ‘system’ has not been rigged against them, or that there is the possibility for any substantive improvement ahead. It is no wonder that most Americans believe that the US is still in recession—or worse!

Copyright alrroya.com

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• The Coming 21st Century Global Trade War?

Posted by Ron Robins on December 9, 2010

By Ron Robins. First published August 6, 2010, in his weekly economics and finance column at alrroya.com

A ‘long depression’ is starting in the US unless massive new stimulus measures are taken to increase consumption and China forced to mark up its currency. This is what renowned Nobel economics laureate Paul Krugman believes. Since any new massive stimulus action is unlikely soon, and if we are to believe what Mr Krugman is saying, then with a depression occurring the ranks of American unemployed could swell by millions more. They, together with the uproar of US unions and politicians, will blame China and others for their woes.

The US Congress would then enact trade tariffs and restrictions beginning round one of the 21st Century Global Trade War!

But have we not learned from the 1930s that a trade war can lead to a depression? Mr Krugman disputes that finding. In a July 10 New York Times post he says that it was not the trade restrictions of the Smoot-Hawley bill that created the depression. The depression had already started and, “protectionism led to falling exports! Indeed. Also falling imports. It’s not at all clear what effect all this had on overall demand. Insofar as it did, it was because tariffs were a form of tax increase — but in that case you should be focusing on the whole range of fiscal actions, not just the tariff hikes.”

As indicated, currently there is little likelihood of Mr. Krugman’s proposal of enacting massive new stimulus measures—he mentions around $1 trillion—as well as for China marking up its currency significantly against the dollar. However, he may still get his way if unemployment or economic stagnation—or worse—takes hold.

If the stimulus is enacted it is highly debatable if it would work any better than previous ones in firing up consumption and investment. Already over the past two years or so, the US government and the Federal Reserve have poured about $4.5 trillion into the American economy. In rough figures, this comprises about $3 trillion in US government deficits and over $1.5 trillion from the Federal Reserve as it bought bonds and other assets to increase cash in the financial system and promote lending. Then there are of course the trillions more in guarantees to various financial and industrial entities such AIG, GM etc.

However, the Federal Reserve also says it stands ready to act should the economy weaken further. Would it spend another $1, 2 or 3 trillion? If the trillions spent so far by it and the US government have not worked, how much more will be needed?

Furthermore, the additional government deficits and Federal Reserve actions might alarm holders of US dollar denominated assets about America’s solvency, encouraging them to sell such assets. In fact, China’s new debt rating agency Dagong says the US government is already insolvent.

So, additional stimulus actions might also crash the US dollar. If that were to happen, it would cause dramatically rising prices for oil and other goods. A significant increase in living costs amidst high or growing unemployment will promote social unrest and add further impetus to growing calls for protectionism.

A dollar crash would create conditions for ‘competitive currency devaluations.’ In 2009, when the euro was trading as high as $1.50, Europeans became alarmed. Henri Guaino, right-hand man of President Nicolas Sarkozy remarked, “the euro at $1.50 is a disaster for the European economy and industry… ”

Would Europe stand idly by and see their euro go into the stratosphere as the dollar crashed against it? Would the European Union then enter into a currency war with the US? Would Japan be silent seeing its currency rise substantially against the dollar? Of course Japan is famous for intervening in currency markets to lower the yen’s value against the dollar in previous difficult times. Unfortunately, competitive currency devaluations would add fuel to a trade war.

Already Global Trade Alert counts 650 protectionist measures implemented between the advent of the financial crises in 2008 and the June 2010 G20 Toronto meeting.

According to the International Business Times, the G20 communiqué “included a ritual promise to ‘refrain from raising barriers or imposing new barriers to investment or trade in goods and services.’ But missing from the final declaration… was a sentence reportedly included in an earlier draft of the communiqué: ‘Where any protectionist measures have been enacted in the context of the economic crisis, we agree that these should be lifted.’ Somehow that sentence, pledging a rollback of protectionist trade barriers erected during the Great Recession [2008 to today], disappeared sometime between when the draft declaration was leaked to the media by Greenpeace and when the final declaration was released to the press with solemn summit fanfare.”

Furthermore, the G20 in Toronto took off its agenda setting a further date for completing the vital Doha round of global trade talks that have been stuck in neutral for several years. Perhaps the US already staked out its real position – remember the ‘buy American only’ clause in its $787 billion stimulus package.

The woes of the US stem from failing to see its years of over consumption were a problem. Now, economists like Mr Krugman want even more money from their financiers like China, so they can further increase consumption, while blaming China for their overconsumption.

Unfortunately, an extended double dip down recession-depression is increasingly probable and with it rising unemployment. In a few weeks or months, the pressure for more action to stem the economic decline could impel the US government and the Federal Reserve to spend more, much more—and to what effect? The alarm of all this might cause holders of dollar assets to sell, culminating in a dollar crash—and further incite a 21st century global trade war.

Copyright alrroya.com

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