The trend lines are undeniable; the US economy is heading into another recession. Debate between economic analysts entail whether what is occurring is an entirely new recession, a double-dip recession, or the continuation of even larger economic contraction that began initially with the 2008 financial crisis (which some would argue is an extension of the 2001 recession) and has properties that are unlike previous recessions. Each of these arguments have some validity in explaining the current situation, but all conclude that this new decline, while not likely to be as severe as the 2008 crisis, will last longer in duration and given the current political weaknesses of the major industrial nations, be more difficult to mitigate.
Leaving aside the debt crisis and economic malaise that is occurring in Europe for the moment or the possible hard landing that has been predicted about China and the entailing risks these situations pose to the global economy, America's economic position is clearly weak.
First, the jobs position is dismal. Last month, zero jobs were added and only a fraction of the jobs necessary to compensate for population growth alone have been achieved in the previous four months. The
NY Times summarizes:
Over the last 50 years, every time that job growth has been as meager as
it has been over the last four months, the economy has been headed
toward recession, in a recession or in the immediate aftermath of one.
The collapse of job creation is not about businesses fearing regulatory uncertainty, creeping hyper-inflation, or the need for further tax-cuts to stimulate big businesses already bloated corporate coffers, but rather it is due to insufficient
aggregate demand. People without jobs, people forced to take inferior paying jobs, people concerned that they may lose their jobs, people forced to subsidize their spouse, adult children, parents, and/or relatives, and people loaded with debt, aren't engaged in making major purchases, because they can't afford to. Consider the following:
But the latest indicators suggest that even if the economy does not
continue to worsen, it appears to be too weak to add enough jobs each
month — roughly 125,000 — even to keep pace with population growth.
Anything less, and the share of the population that is employed will
continue to fall.
The stimulus program offered by Mr. Obama was insufficient to meet the full demands of the financial crash of 2008. This blog has been saying for the past three years (
here,
here, and
here) that the weak recovery was an illusion. Joseph Stiglitz
said back in 2009 that, "We need a larger and better designed stimulus."
Paul Krugman has been waging a public policy crusade to convince the public that a second more robust stimulus is needed. President Obama, instead of listening to these and similar minded economists, decided to split the difference and offer everyone a little of what they wanted: a little bit of tax cuts and some stimulus over a couple years. The problem was that while averting a more severe recession, it failed to create enough power to re-inflate the economy to pre-recessionary levels. Now that the stimulus dollars have been used, the economy is drifting back into negative territory and with a recalcitrant Republican dominated House of Representatives, there is virtually no chance that anything of substance being passed.
Other indicators such as GDP, consumer confidence, consumer consumption, factory employment diffusion index, and housing are all trending downwards. Volatility in the market place, with abundant talk of debt crises across the western hemisphere, has investors and business worried. Last month Asian banks cut credit lines to French banks. Central banks across Europe, Japan, and America have made the unexpected move to offer dollars to European banks to ensure liquidity.
What had been in 2008 a financial crisis has migrated into a sovereign debt crisis. Nouriel Roubini
expands:
We are running out of policy
bullets. The policymakers don't have monetary bullets; they don't have fiscal
bullets; they cannot even backstop their own financial system. That's why it's
more scary than a year ago, two years ago, or three years ago -- when we had
all these policy bullets. Now we are running out of them.
***
Ken Rogoff, Harvard professor and former chief economist at the IMF, has
said, "the real problem is that the global economy is badly overleveraged, and
there is no quick escape without a scheme to transfer wealth from
creditors to debtors, either through defaults, financial repression, or
inflation." As a result, Rogoff points out that many policy makers have badly misunderstood the overall problems associated with this second great contraction, as he puts it. He offers the suggestion that, "If governments that retain strong credit ratings are to spend scarce
resources effectively, the most effective approach is to catalyze debt
workouts and reductions."
Solutions to both individual and national debt problems should be addressed as follows:
For example, governments could facilitate the write-down of mortgages in
exchange for a share of any future home-price appreciation. An
analogous approach can be done for countries. For example, rich
countries’ voters in Europe could perhaps be persuaded to engage in a
much larger bailout for Greece (one that is actually big enough to
work), in exchange for higher payments in ten to fifteen years if Greek
growth outperforms.
Another approach offered by Rogoff to reduce the painful
deleveraging process and years of unnecessary slow growth, would be for central banks to pursue a policy of moderate
inflation of 4-6% for several years.
At this stage, none of the policies suggested by Stiglitz, Krugman, Roubini, or Rogoff appear on the table in either Washington DC or the capitals of Europe. Instead of sustained and ambitious solutions, we are left with blathering idiots telling us of austerity programs that will magically generate confidence, while keeping away the terrible bond vigilantes. The incompetence and stupidity of our leaders is nearly blinding.
