A Protracted Period of “Economic Adjustment”: How Bad Will It Get?

Collapse in Consumer Spending

Published on Global Research.ca, by Mike Whitney, Sept 4, 2009.

The U.S. economy is at the beginning of a protracted period of adjustment. The sharp decline in business activity, which began in the summer of 2007, has moderated slightly, but there are few indications that growth will return to pre-crisis levels. Stocks have performed well in the last six months, beating most analysts expectations, but weakness in the underlying economy will continue to crimp demand reducing any chance of a strong rebound. Bankruptcies, delinquencies and defaults are all on the rise, which is pushing down asset prices and increasing unemployment. As joblessness soars, debts pile up, consumer spending slows, and businesses are forced to cut back even further. This is the deflationary spiral Fed chairman Ben Bernanke was hoping to avoid. Surging equities and an impressive “green shoots” public relations campaign have helped to improve consumer confidence, but the hard data conflicts with the optimistic narrative reiterated in the financial media. For the millions of Americans who don’t qualify for government bailouts, things have never been worse …  

… Household budgets have never stretched as far as they are today. Housing prices have dropped 33 percent from their peak in 2007, but household deleveraging has only just begun. There’s a lot of belt-tightening to do if families plan to reduce their aggregate debt by roughly $2.5 trillion and return debt-to-equity ratios to their normal trend-line. Policymakers need to focus on debt-relief and mortgage-principle writedowns to ease the transition and get people back on their feet again.

The current recession has exposed the fault-lines dividing the classes in the US. Neither party represents working people. Both the Democrats and the Republicans are supportive of “social engineering for the rich”; regressive taxation and economic policies which shift a greater portion of the wealth to the richest Americans. The question of inequality, which has grown to levels not seen since the Gilded Age, will dominate the national conversation as the recession deepens and more people slip from the ranks of the middle class. The vast chasm between the mega-rich and everyone else is explored in a recent report by University of California, Berkeley economics professor Emmanuel Saez, who concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression. The report shows that:

“The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007″ …The top 14,988 households received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income, while the top 10% received 49.7% of income (the highest on record.)”

Why does this matter? Apart from the moral question of whether a handful of people deserve to live like kings while others live in squalor; there is the political question: Are our politics being driven by plutocrats whose only interest is to fatten the bottom line and increase their own power? Don Monkerud addresses the issue in his article “Wealth Inequality Destroys US Ideals” (Consortium News):

“Over 40 percent of GNP comes from Fortune 500 companies. According to the World Institute for Development Economics Research, the 500 largest conglomerates in the U.S. “control over two-thirds of the business resources, employ two-thirds of the industrial workers, account for 60 percent of the sales, and collect over 70 percent of the profits.”

Corporations systematically created a wealth gap over the last 30 years. In 1955, IRS records indicated the 400 richest people in the country were worth an average $12.6 million, adjusted for inflation. In 2006, the 400 richest increased their average to $263 million, representing an epochal shift of wealth upward in the U.S.” (Don Monkerud “Wealth Inequality Destroys US Ideals” Consortium News)

The US consumer no longer has the capacity to bounce back and generate sufficient demand to produce positive growth. According to McKinsey Global Institute, Homeowners withdrew “$2.3 trillion in home equity loans and cash-out refinancings between 2003 and 2008.” Most of the money was spent on personal consumption. Where will the money come from now that home equity has gone negative? The Obama administration will need a second, third and fourth stimulus just to fill the gaping hole left by the collapse of the housing market.

The Fed and its allies in the corporate/financial establishment, have killed the Golden Goose. After Obama’s stimulus runs out, consumer spending will again sputter and the economy will slide back into recession. As personal consumption declines, U.S. markets will become less attractive to foreign exporters. There will be no need to continue trading in dollars. (full long text).

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