The U.S. Economy Doesn't Look Too Bright

Despite the mighty efforts of a deeply corrupt media to portray the American economy as being on the eve of an economic miracle the American people know otherwise. They know that something is seriously wrong. If only most economists were as perceptive as poor ol' Joe Sixpack who has to rely on his "lying eyes" to get at the truth. How could Mr Sixpack possible know more than those highly educated economists who declared victory for the Obama administration by pronouncing the end of the recession thanks to the wonderful effects of his stimulus.

The only thing missing was a rousing chorus of Happy Days are Here Again. Adding even more intellectual authority to this announcement was Kenneth Goldstein, an economist at the Conference Board in New York, who cheerfully stated that "We've averted the worst, and there are clear signs the stimulus is working". (This lot remind me of the old British NCOs — drill sergeants to you Americans — who used to abuse draftees with degrees as being educated beyond their intelligence. I now know what they meant.)

No sooner had these "best of the brightest" made public the results of their tea-leaf readings than the real figures came in, showing that not only had sales dropped in July but that unemployment also defied the predictions of these brilliant prognosticators by rising, with 558,000 more people filing for unemployment benefits. So far the economy has lost about 6.7 million jobs since December 2007. So much for these economists' rosy prediction of 2 per cent or more growth in GDP for the next "four straight quarters through June".

But hey! Things have gotta be looking up. The Dow is rising and productivity is on the up along with profits. If only things were that simple. The Dow reached its bottom of 41.63 on 5 July 1932 after which it rose — with some severe fluctuations — reaching 194.15 on 1 March 1937. Right through this period and into the early days of WWII unemployment remained tragically high.

A little known fact is that productivity also rose, particularly in the early stages of the depression. This is because manufacturers closed marginal operations and shut down inefficient plants in a desperate effort to slash costs. My point is obvious: a rising Dow and productivity do not necessarily mean recovery is underway. Moreover, profits are being made not by increasing revenue over sales but by slashing costs. If profits were due to increased sales one should expect capacity utilisation to rise. Instead we find it lingering around the 68 per cent level, the lowest since the late 1930s. (The slight uptick in capacity utilisation was due to the ridiculous "cash for clunkers" scheme.)

Irrespective of screams of outrage from the Obamabots who insist on calling me a "fascist" and a "racist" — among other things — for daring to point out their hero's intellectual shortcomings in the fields of economics and economic history, facts are facts. Once again, Obama is leading the most anti-business administration since Roosevelt. And he is just as profoundly ignorant of economics.

Obama and his happy band of economic vandals are out to reverse the Bush tax cuts, nearly double the capital gains tax, raise income taxes even further while planning to push energy prices through the roof. To top it off, someone is even floating the idea of a national value added tax. How in heaven's name are these policies and proposals supposed to put the economy on the road of sustained economic growth? The question answers itself.

In a situation like this, businesses batten down the hatches and do what they can to cuts costs — and that means cutting back on labour. No wonder want ads are disappearing. What America is experiencing is defensive action by business in order to stay in business.

In the meantime, Obama is being advised that a second stimulus is necessary to expand demand by promoting consumption. How many times does one after to say this: production, not consumption, drives demand. But this fallacy is being preached even by some of Obama's most fervent opponents.

It is argued that since the end of WWII the world has prospered on the coattails of the American consumer. This is nonsense. The post-war boom had nothing to do with consumer incomes. Thanks to the war the shackles that Roosevelt had used to hold back the economy were shattered. The regulatory apparatus that restricted output was gone, along with nearly all of the New Dealers, and market clearing wage rates were once again allowd to prevail. War-time inflation repealed the minimum wage and rapid capital accumulation expanded the capital stock.

Pent up demand was not in the form of money savings and higher money incomes, as economic folklore has it, but production directed to war-time use. Once peace had been declared there was a massive redirection of production — the true source of demand — to satisfying consumer wants. The sudden unleashing of this "pent up demand" gave America its post-war boom.

What the vast number of Americans do not know is that between 1945 and 1947 the Truman government slashed Federal annual spending from $95 billion to $36 billion — a $59 billion cut in two years, a 62 per cent reduction that amounted to 26 per cent of GDP as it stood in 1945. According to the Keynesians of the time, including Paul Samuelson, this colossal cut in government spending should have created mass unemployment. Instead of learning from this pivotal event America's brilliant Harvard-trained economists are trying to sell Americans the exact opposite message. Only Mr and Mrs Joe Sixpack ain't buying.

We now get to it. Anything that retards production will retard demand because — as the classical economists were prone to say — "supplies constitute demands". The Keynesian key to unlocking demand is to inflate it by expanding the money supply. And this is where the banks come in. If we were living in normal economic circumstances the banks would be holding about $60 billion in reserves. They are in fact holding about $800 billion in reserves and Bernanke and Obama want them released into the economy. If this pair succeed in opening the monetary floodgates Americans will quickly find themselves facing surging inflation.

Comments

[VennData:]

You claim "They are in fact holding about $800 billion in reserves and Bernanke and Obama want them released into the economy."

...but Bernanke could simply lower the interest payments on those reserve ratios and it would be in the banks interest to find something else to do with those reserves, and whatever that "what else" would be would be buying assets and increasing credit growth.

More proclamations that "conventional wisdom" of Joe Six Pack is preferable to educated scientists, economist, and researchers don't make it so. It's simply when people don't have the education to understand they chose not to.

Choose to learn. Support science, education not the "feeling" that you know what's best in your guts. You don't.

Aug 17 11:40 AM

[Tony Petroski:]

"We now get to it. Anything that retards production will retard demand because — as the classical economists were prone to say — "supplies constitute demands". '

Wasn't it Say's Law? "Supply creates its own demand?"

Another good article Mr. Jackson.

Aug 17 11:55 AM

[Valley Boy:]

To refresh my memory about the 1945-1947 economic situation, I thumbed through some articles in the Time.com cover archives site index. A couple of articles I read were titled:
Where Are the Goods? Time Magazine, Nov. 26, 1945 and
Full Speed Ahead? Time Magazine, Sep. 09, 1946
It seems that an important difference between that period and the current period is that back then the economy was suffering from shortages of this and that but now we are suffering from a glut of this and that. Therefore, there was a screaming need back then to boost the production of goods, the various strikes notwithstanding.
It is now important to retire our debt and reduce our inventories.
I think it is worthwhile to educate ourselves about which economic policies actually worked on which set of economic circumstances.
President Truman had a much better economic record than did President Roosevelt. It is interesting to delve into why that was so.
And I think it is also worthwhile to listen to our gut emotions about the economy considering our situations.

Aug 17 12:54 PM

[The Geoffster:]

I live in a majority African American city where the politicians deem any criticism of their policies to be racist. Most of the criticism is grounded in anti corruption and anti socialism but politicians will use any disingenuous argument at their disposal. The debate should be centered on the merits of the proposal, of course, but it shall never be thus. The problem with capitalism is the losers it leaves behind. The problem with socialism is it makes us all losers.

Aug 17 02:23 PM

[Annie 1:]

Our government didn't know how to honestly handle the first stimulus package, why would we consider a second one?

The government is grasping at straws, people like Obama, Bernanke and many others were too busy playing politics to take care of our Nation. We need to remove the ones who are destroying our country, there must be a way to impeach each and every one of them.

Americans want their Nation back in one solid piece - we want jobs, our homes returned to us, food on the table and most of all our children and their children protected. As Always, Annie

Aug 17 04:20 PM

[aldol:]

Many are asking when will America acknowledge that the emperor has no clothes?
Indications are that more and more people are willing to stick their neck out and say so.
I made the prediction at the end of February 2009, when Obama had been in the job for about a month, that Obama, Pelosi, Reid, Frank and Dodd were the best possible help that the GOP could ever hope for.
I do also agree with the comments by Jackson relative to the IQ of the competition.
In fact, last February i added that, given the low intellectual horse power and the high level of arrogance of this administration, Obama would likely end up being the end of affirmative action as we know it and the end of the democratic party stronghold on key voting groups as we know it to be as of recent times.


On Aug 17 02:23 PM The Geoffster wrote:

> I live in a majority African American city where the politicians
> deem any criticism of their policies to be racist. Most of the criticism
> is grounded in anti corruption and anti socialism but politicians
> will use any disingenuous argument at their disposal. The debate
> should be centered on the merits of the proposal, of course, but
> it shall never be thus. The problem with capitalism is the losers
> it leaves behind. The problem with socialism is it makes us all losers.

Aug 17 04:21 PM

[Annie 1:]

The problem is our administration - they are too busy playing politics to help us get our Nation back on its once strong foundation. We know now that they misused our stimulus monies and the balance need to be returned, unless they have nerve enough to place on frontpage headlines on all news channels exactly where our money has been spent, who the beneficiaries are, when we will be re-imbursed and at what interest rate.

Mr. Obama must think we're crazy to consider a second stimulus package - he needs to do his homework and fulfill all of his promises. Jobs, real homeowners assistance, downsize government, total transparency in government, remove the "pig," return the new jets and quit lying to the American people.

As Always, Annie

Aug 17 04:31 PM

[conceptwizard:]

Credit is not flowing. In fact, credit is contracting. That means things aren’t getting better; they’re getting worse. When credit contracts in a consumer-driven economy, bad things happen. Business investment drops, unemployment soars, earnings plunge, and GDP shrinks. The Fed has spent more than a trillion dollars trying to get consumers to start borrowing again, but without success. The country’s credit engines are grinding to a halt.

Bernanke has pulled out all the stops.

Bernanke has increased excess reserves in the banking system by $800 billion, but lending is still slow. The banks are hoarding capital in order to deal with the losses from toxic assets, non performing loans, and a $3.5 trillion commercial real estate bubble that’s following housing into the toilet. That’s why the rate of bank failures is accelerating. 2010 will be even worse; the list is growing. It’s a bloodbath.

The standards for conventional loans have gotten tougher while the pool of qualified credit-worthy borrowers has shrunk. That means less credit flowing into the system. The shadow banking system has been hobbled by the freeze in securitization and only provides a trifling portion of the credit needed to grow the economy. Bernanke’s initiatives haven’t made a bit of difference. Credit continues to shrivel.

The S&P 500 is up 50 percent from its March lows. The financials, retail, materials and industrials are leading the pack. It’s a “Green Shoots” Bear market rally fueled by the Fed’s Quantitative Easing (QE) which is forcing liquidity into the financial system and lifting equities. The same thing happened during the Great Depression. Stocks surged after 1929. Then the prevailing trend took hold and dragged the Dow down 89 percent from its earlier highs. The S&P’s March lows will be tested before the recession is over. Systemwide deleveraging is ongoing. That won’t change.

Aug 17 09:43 PM