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So is the US Economy in a depression or on the way to a recovery?

By : Ziad K. Abdelnour| 28 April 2011
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The April 20-23 Gallup survey of 1,013 U.S. adults found that only 27 percent said the economy is growing, 29 percent said the economy is in a depression and 26 percent said it is in a recession, with another 16 percent saying it is “slowing down”.

That means that more Americans think the country is in a Depression, let alone recession, than growing.

How can so many Americans believe that we’re in a depression, when the stock market and commodity prices have been booming?

Well, it seems that instead of directly helping the American people, the government threw trillions of dollars at both the giant and foreign banks (including believe it or not the Bank of Libya). The big banks have – in turn – used a lot of that money to speculate in commodities, including food and other items which are now driving up the price of consumer necessities as well as stocks. Instead of using the money to hire Americans, they’re hiring abroad and getting tax refunds from the government.

But don’t rising stock prices help create wealth? Not really.

A rising stock market doesn’t help the average American as much as you might assume.

Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.

So how bad is it out there?

Well, the housing slump is clearly worse than during the Great Depression unlike what advocates of the Obama Administration’s policies would want you to believe.

States and cities are in dire financial strait, and many are on the verge of default. California for example is issuing IOUs for only the second time since the Great Depression.

Things haven’t really been this bad for state and local governments since the 30s and top economists throughout the land have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent.

In fact, so many Americans have been jobless for so long that the government is now changing how it records long-term unemployment. Citing what it calls “an unprecedented rise” in long-term unemployment, the federal Bureau of Labor Statistics (BLS), has just recently raised from two years to five years the upper limit on how long someone can be listed as having been jobless. The two year limit has been in place by the way for 33 years.

1 out of every 7 Americans now rely on food stamps. While we don’t see soup kitchens, it may only be because so many Americans are receiving food stamps. Indeed, despite the dramatic photographs we’ve all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression. It is also a fact that millions of Americans are heading to foodbanks for the first time in their lives.

Given the above facts, it would seem that the government hasn’t been doing much. But the scary thing is that the government has done more than during the Great Depression, but the US economy is still stuck a pit.

The amount spent in emergency bailouts, loans and subsidies during this financial crisis clearly dwarfs the amount which the government spent during the New Deal. It is a fact that Paulson and Bernanke’s bailout program will so far cost taxpayers over $8.5 trillion….and going.

So why haven’t things gotten better for the “Little Guy”?

Well, the Obama Administration can always make happy talk about how things are improving, but happy talk cannot and will not fix the US economy.

I still believe two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:

• Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today.
• Inequality was another major cause of downturns – including the Depression – but inequality is currently worse than during the Depression

There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.

Bottom Line: This is not a question of big government versus small government, or Republican versus Democrat. It is not even a question of Keynes versus Friedman or left versus right.

It is a question of focusing any government funding to the majority of people – instead of the titans of finance – so that the game can continue. If the hundreds of billions or trillions spent on bailouts had instead been given to ease the burden of consumers, we would have already recovered from the financial crisis.

In reality, the entire debate regarding more-versus-less stimulus misses the mark. As painful as it is to think about, the Fed’s policies – like those of the Treasury, White House and Congress – have been geared towards redistributing wealth upwards.

To the extent that both the Republican and Democratic parties lavishly follow these meta-policies – which supersede the stated “conservative” and “liberal” goals – they will ensure that we lose our AAA credit, and they will destroy our economy.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. Andrei PetersonAndrei Peterson

    Ziad, the answer to your question is NEITHER! Using the commonly applied definitions for “Recession” or even “Depression”, clearly the US economy is presently experiencing neither. Statistically it is growing. However, the growth of the economy is well below the rate of inflation (Regardless of where and how you measure it). Growth below inflation is NO GROWTH, but represents an erosion in the purchasing power of the Dollar. Therefore, we all are worse off, poor and rich alike, having to pay more to get the same amount of goods and services. In short, we are probably closest to a state of STAGFLATION; stgnant or low economic growth with a higher rate of inflation. Economic theroy (and the experience drawn from the Japanese economy over the last 2 decades) teaches us that stagflation is more dangerous for the long-term growth prospects of the economy than even Recession (and dare I say Depression?). It will inevitably lead to a longer period of limited or no growth, continued high-unemployment, erosion of the purchasing power, while at the same time, government services will continue to be restricted and cut, while taxation will have to go up, interest rates will have to go up, and inflation will continue to spiral up. All these are very dangerous. Why is stagflation more dangerous than a recession? It is rather obvious. In a recession, with slow-down in demand, and pressure on prices, the economy contracts and reaches a new point of “balance”, a “floor” with new production costs, lower commodity and input costs, which allow the country to recover some of its competitive advanateg in the world markets by manufacturing good and services at lower cost, which will pull greater demand. In periods of stagflation however, prices don’t go down. Because of inflation the cost of labour, and other inputs remains high. The high Commodity prices we see today are in great part due to the anticipated rise in inflation (as a result of the QE 1&2, low lending and liquidity rates, higher interest rates, and world events). With higher costs of inputs, we cannot reduce production costs and adjust prices downward, to attract more demand, not can we anticipate greater demand due to currency purchasing power erosion, and the ongoing slump in demand due to lower rates of dispoasbale income… and so it goes. The political discourse shows a fundamental lack of understanding of economic dynamics. I agree with Ziad, that it is not a conservative v. liberal, right v. left, rich v. poor argument. It is much more simple and basic. It is “We have a clue and a plan” v. “We have no clue, but we can shout louder”. What this country needs at this time, and not a minute too late, is someone with the guts and fire of Ronald Reagan, and the knowledge and experience of Paul Volker. This duo saved the US from the disasterous years of the Jimmi (peanut brain) Carter. We need a “Hail Mary” pass for a touch down, consisting of an overall flat tax rate (on business and individual income – without allowing any deductions) of 25%, a one time levy of 2% on all assets (corporate and individual) over $5 million (per tax-payer, corporate and indicvidual). Apply the proceeds of the one time Levy to reduce the National Debt by 4 Trillion (rather than legislate an increase in national debt limits – what an insane notion!), and raise interest rates to a real level (right now interest rates are below the rate of inflation, namely “negative rates”). The rest will take care of itself. Consumers will have more money to spend, corporates will have more money to invest. Banks will have less demand for loans and will be able to return to “reasonable” liquidity, and with inflation under control, commodity prices will go down, reducing production costs, and able to meet greater demand at lower prices. With increased supply, at lower prices, revenues and profits will return, tax revenue will increase, and the short -term hole created in the Federal budget (due to reduction in tax revenue) will be balanced out. The one time Levy will reduce the debt service, leaving more money in gov’t coffers to provide services, reducing the need and pressure to raise taxes. Done and Dusted…. But, who will have the Iron Balls, and Intenstinal Fortitude for such a move? Obama? You must be joking!, Bernanke? Well, he still needs to finish Economics 101! The Politicians? They cannot pull their fingers out, to save the nation bewfore they try to save their own seats… they are already raising funds, for us to pay their way in life after 2012!

  2. Andres VazquezAndres Vazquez

    First we must recognize that the world order has changed. The rules are different. Specifically agree in inequality that begins with the moment we live. but it is not necessarily an effect of the financial and economic movement of a specific country, this is because of a well structured series of events in politics and military operations worldwide, but imperfect in the results planning of economic and financial worldwide as well. With this understanding, we can not compare with local metrics that have the effect of the dilution of money into emerging markets that offer better opportunities and that in the minds of investors in capital goods also has an effect of splitting their money. This ultimately creates jobs. Then your local metric one may be comparing wrong (you are taking 39′s deppresion as an element). I suggest making new measurement metrics that allow you to see the global impacts in specific economies, and then using these new metrics, criticize and suggest at local level. As always, I appreciate this opportunity to explain my point of view.

  3. S HojgaardS Hojgaard

    Z – You offer some strong tenets showcasing the symptoms and the causes for much of the problems with the economy/society of the US and the broader ‘Western World’. It has been my belief for some time that we are not at some ‘run of the mill’ stage of the economic cycle. I think we are seeing signs that the very fabric of the ‘Western World’s’ economic and societal systems has started to fray and tear. Without going into to much detail at this juncture it would appear that the foundations of modern economics are flawed and have met the limit of their expansion; namely the belief that insatiable demand for more goods and services is a permanent feature of humanity. This is also the basis of that other foundation of modern economics – the extension of credit so consumers can buy more NOW than their savings and earnings would otherwise allow. The middle class has been lured into debt by the purveyors of debt. The top 10% control 50% of investment assets and only has 5% of the total debt – the bottom 90% control only 12% of investment assets and are burdened with 73% of the total debt. Financialization and centrally planned speculative bubbles have undermined the real economy – that is why things are falling apart. The Worlds banks face a $3.5 Trillion wall of maturing debt in the next two years and must compete with debt-laden governments to secure financing – The debt based “super cycle” is coming to a close and it will not end well – since 2002, global credit has grown at an annualized rate of approximately 11%, while real GDP has grown approximately 4% over the same timeframe – credit growth has outstripped real GDP growth by an astounding 275%. This is clearly not a sustainable course! Time for a rethink of how we proceed from here on many levels of society – there are serious threats as well as incredible opportunities ahead. The next couple of years will be very very significant for us all and the road is fraught with unpredictable twists and turns. There are no easy solutions and our so-called leaders are not the answer – more a part of the problem or a symptom of the problem. Real change starts with you and the people around you – then it will work its way up in the system the other way of the belief in centralized all-seeing leaders is a terrible fallacy based an large quantities of ‘hopium’ and propaganda.

  4. owen shulerowen shuler

    well said Z…..now the next step is to align the independant parties together and promote a viable presidential candidate to split the two major parties and force change on WDC. There is no more wealth to extract from Main Street.

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