Are Americans blind, deaf, and averse to logic? The US wants to move the economy out of the recession by spending. But the US is broke! So, where is the astute, logical, realist analysis of the real situation of the US – as opposed to the emotional, imagined, desired situation of the talking heads – in all of this? America lives in the past, and refuses to see the present!
- Now, the US has a debt amounting to 355% of GDP. As New York Times writes today: “This is a crisis of excessive debt, which reached 355 percent of American gross domestic product … It cannot be solved with more debt.”If you ponder that number, it means that at an interest rate of 5%, the US will be spending about 17.5 percent of GDP just to pay interests on its debt. One sixth of everything produced in the US, that is. Every sixth house, every sixth car, every sixth Microsoft Office program!
- As well, the economy is shrinking fast. Which that means that in the near term, the GDP-base for paying those interests will be smaller, and the proportion higher.
- Also, every economic indicator is pointing down – consumer spending, house sales, industrial orders, unemployment, corporate earnings, you name it.
- And, the US will get very little assistance from increased demand in overseas markets. The economies of US’ major trade partners are heading in the same direction. Demand is shrinking rather than expanding.
This is the real situation (New York Times):
With inventory accumulation gone, the economy will contract in the first quarter at more than a 5 percent annual rate, Mr. Gault said.
Employers reduced their corporate investments in computers, office equipment, machinery and other capital goods by an annualized 19.1 percent in the fourth quarter.
Trade fell, as Americans bought fewer Asian-made televisions and computers, and global demand for American goods and services ebbed. Exports in the fourth quarter declined 19.7 percent while imports dropped 15.7 percent.
And now, in this situation – with the US now, as opposed to in it glorious past, being in reality a relatively poor country that has borrowed much too much in the past – the US is planning to spend more billions of dollars to speed up the recovery from the crisis. If this spending is to be considered as an investment, when will it be recovered? What is the probability that an investment of one extra trillion will be recovered any time during the next 10 years? Very, very small, I think.
America and Americans are impatient. They want things to happen fast. They want a quick fix when things go wrong. And they want it, even demand it, yesterday. Somehow I think the quick fix of this crisis simply isn’t there. And I think hard work and patience is called for. The only card left to play for the US currently, I think, is to redistribute wealth in order to increase consumer demand. Part of that is actually to let businesses fail, so that shareholders and owners lose money. Not to shore up failures in a vain hope that they will some day, hopefully, recover.
See also: Citibank – let it roll
{ 3 comments… read them below or add one }
Hi Nekkid Blogger! You’ve got a cool blog there, but when it comes to the state of the world economy, the U.S. one included, I’m afraid that I have do disagree… totally.
While it is true that the U.S. is running a huge deficit, and that it will grow considerably over the next few years, the key thing is not the number per se (within reason), but what we do with the money we borrow from the future. It’s a tremendous irony that the conservatives are now screaming about deficits and government spending, something they didn’t do when George W. Bush turned the surplus he had inherited from Bill Clinton into an ever growing deficit with his tax cuts for the rich and disastrous invasion of Iraq. It’s only when the U.S. government is going to do some real investments in the future and help the middle class and working that they go bananas.
Nobody is proposing to substitute the capitalist market economy with a centrally planned socialist economy, but when you are in a deep recession on the verge of a depression, you can’t follow the old playbook by having the Fed fiddling with the interest rate.
It sounds like many conservatives would rather do nothing, but this is not an option today, unless you are willing to allow for mass poverty, starvation and possibly a civil war down the line. John Maynard Keynes wrote the book so to say on how to prevent the capitalist economic system from self-destruction, and it’s thanks to him and clever can-do politicians like FDR that the U.S. and world’s major capitalist economies has system stabilizers, which prevents it from collapsing totally. Conservatives hates government intervention, unless it is for Hot Wars like the invasion of Iraq, or Cold Wars like the SDI program, which is why we didn’t hear them protest much against either Reagan’s reckless defense build-up or Bush feckless war in Iraq. What Keynes showed and FDR did was that it is better for the government to spend than sit idle, while the economy settles on an unnecessary low capacity utilization. When the private sector has lost hope, and consumers are terrified, there is no incentive to invest and build the future. But the government can take a longer view, and if it uses its resources and the money it borrows wisely, it can put idle resources (which you have to feed and shelter anyhow unless you want to gamble with a revolution) to work and give the entire economy a jolt and steer it out of the ditch. In today’s world and in the U.S., there are tremendous unmet needs as far as services to the public goes, for investments in the crumbling infrastructure, and in jumpstarting the green economy that is the one and only future for the world. We are facing a structural shift, and market forces typically cannot respond to such major changes as we lack accurate pricing signals for a transition from one economic structure (based on the old, carbon-based Earth destroying energy) to another (based on renewable Earth friendly energy). If you invest wisely, and governments can do that even if they don’t always do it, you can get the economy back on track, a new track, and once the engines are humming again, we can make a plan for paying back our loans.
Of course we would much rather have done this investment in a better future when we had the money and a surplus, but don’t have that luxury thanks to eight years of George W. Bush and his republican boosters.
Give Barack Obama a break. He’s on the right track, and he’s an honest man who cares for you and me.
Ciao!
Hans
Hi Hans!
Thanks for the comment! I think we agree on a lot of things. One of them is that Obama is an honest man who cares for you and me. Also that he is on the right track.
My point, I think – without reiterating – is that the US has less freedom to act due to the giant debt, and that government intervention and stimulation is costly, at least in the short and medium term. The blame for this lies mostly with the Bush administration. Even so, it is a cost the American people will have to pay. And interest payments will restrict the government’s ability to act in the future.
On the other hand, I don’t see bankruptcy as quite as bad as the Fed or the talking heads do. If Citigroup or GM fell, that would not be the end of the world as we know it. Shareholders and debtors would lose their money, and rightfully so, but the parts of GM that are attrative and sound would be bought by somebody and continue to run. Same with Citigroup. So I think the rescue operations so to a large extend have wasted precious resources (and protected owners while unemployed, houseowners, and the average American has paid and will pay the price). I sincerely hope there will be now more bailouts like that, but fear that the bad bank idea being currently discussed will be more of the same.
Wipe shareholders and lenders out first, sell out the viable parts, and keep the rest till times change, I’d say! That’s fair, as it lets those that have taken the risk suffer, not the average American who never concented to the risks taken by for example GM or Citigroup or B of A.
So, to some extent, what I have been trying to with these last two posts, have been to point to the important role of redistribution (especially when contrained by debt), and the facilitating role of bankruptcies in income redistribution. I think we can both agree that income redistrution to stimulate effective demand is just as important in J.M. Keynes’ thinking as government spending.
Oh well. Again – thanks, and may luck be with you!
Hi. Thanks for your reply, which is interesting and thoughtful. I didn’t quite get where you came from when I wrote my reply, and was on the brink of bunching you together with the rightwing hypocrites. I agree that the debt does present a limit on what you can do, but only in a longer perspective. While I’m very sympathetic to the idea of redistribution of income, I don’t see it as a key solution to get us out of the crisis for the simple reason that even the filthy rich are not rich enough to pay for what we need to do even if we stripped them nekkid. However, promoting a more fair and equal distribution of wealth and income is certainly a an important parameter for the design of the solution.
By for now,
Hans
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