Published on Global Research, by Pablo Ouziel, March 6, 2008.
An excerpt: … America’s “new business cycle” which began in the 1980’s has created as Thomas Palley ex Chief Economist with the US-China Economic Security Review Commission puts it, large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth. It has used financial booms to support debt-financed spending, an easing of credit standards to support borrowing, and cheap imports to ameliorate the effects of wage stagnation. As Palley puts it, with “debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted”.
According to the New York Times, the sound fundamentals Bush likes to refer to, are alarmingly parallel to the Japan’s lost decade, when the Japanese economy after a long boom in the 1990’s, was stopped by a sharp fall in the real estate market causing a stretch of stagnation which ended only a few years ago. Clyde V. Prestowitz, president of the Economic Strategy Institute in Washington, says “the American economy is very fragile now,” a sentiment which is echoed by Nouriel Roubini, an economics professor at the Stern School of Business at New York University, who warns that “the roughly $100 billion in bad loans reported by banks to date could increase nearly tenfold, as the defaults spread beyond the subprime mortgage loans to consumer loans, credit cards and corporate lending”.
European Central Bank council member Guy Quaden points out that “it is clear that the slowdown in the U.S. will be more pronounced than previously foreseen.” According to Bank of Italy governor, Mario Draghi, in the meeting held in Tokyo by the finance ministers and central bank chiefs of the Group of Seven industrialized nations, “Bernanke said that while house prices are falling, they can’t say how long and deep the crisis will be.” But as lawmakers, politicians and bankers continue to debate about the current state of the American economy, what is clear is that the latest consumer price index (CPI), the government’s main inflation indicator shows that for the year ending in January, all prices were up 4.3 percent. Excluding the temporary surges after Katrina, inflation hasn’t been higher since July 1991. As for the producer price index, year over year the PPI is up 7.4% the fastest pace since 1981. As Robert Brusca, chief economist at FAO Economics says, with this data at hand, it will be hard for Mr. Bernanke to testify…and hold to the fiction of inflation as under control and the Fed as master of tamed inflation expectations. Yet Bernanke is telling lawmakers that inflation expectations appear to have remained reasonably well anchored, and George Bush is convinced that fundamentals are in place.
As for now, while talk of subprime exposure has diminished, Ted Wieseman, an economist at Morgan Stanley, warns that investor worries about potential further writedowns are shifting in a big way from subprime residential mortgages to commercial real estate lending. Also as major retailers reported chilly January same-store sales, Wal-Mart with a meager 0.5% increase, Target with a 1.1% drop, Macy’s with a worse-than-expected 7.1% decline, Kohl’s with an 8.3% plunge and Nordstrom with a 6.6% drop in comps, the National Federation of Independent Business said its index of small business optimism slipped to the lowest reading since January 1991, when the U.S. was mired in recession.
To add to this economic and social carnage, Macy’s Inc. has reported that it plans to cut 2,300 jobs across the country, Hasbro Inc the second-largest U.S. toy company, expects a 14 percent to 15 percent increase this year in the costs of made-in-China products, Time Warner has reported a 41 percent decline in fourth-quarter profits, Office Depot a 85% plunge in profit, and Jeffrey Garten, professor of international trade and finance at Yale School of Management has said that the United States “is beginning to look like a bargain-basement.”
Of course, if the world’s economic engine looking like a bargain-basement is a reflection of sound fundamentals, then I must accept my misreading of today’s economic reality and subscribe to George Bush’s sound fundamentals equation. (full text).
(Pablo Ouziel is a sociologist and a freelance writer based in Spain).