The U.S's Permanent Depression

Permanent depression is the subject of my essay today at Asia Times. I review the sources of funding for Treasury deficit and show how it is choking off credit to the productive economy. The conclusion:

The parallels between America in 2009 and Japan in 1989 are uncanny. An asset price bubble has collapsed, just before a tsunami of prospective retirements that the asset bubble was supposed to fund. Demand for savings is bottomless, and the government satisfies demands for savings by running a huge deficit and issuing debt. The crippled banking system borrows at an interest rate of zero and buys government securities. And the economy shrivels up and dies.

Japan, though, had one advantage: it knew how to export. There is only one way to drastically increase savings while maintaining full employment, and that is to export. America has neither the export capacity nor the customers. It could get them, but that is a different story. Francesco Sisci and I told it here.

Comments

[Leftfield:]

To me, your overview of how cooperation between China and the US could be beneficial and necessary looks plausible. The part where you mention transfer of technology gives me some pause, though. I believe we have given away the store too much in trade already with the outsourcing of good jobs, investment and unequal trade terms, to say the least.
You mention that there is local oversight and a federal system here that corrects excesses. The way out of that has been mandates from on high that have largely obliterated the competition amongst localities that should be our strength. That, coupled with subsidies, has caused countless costly local/state projects and increases in government pay/size, to go ahead whose cost has been diffused, which wouldn't be approved otherwise. The consequences of this is now coming home to roost along with many other abuses in our system.
I still think your ideas show a constructive way ahead, but I am far more pessimistic about decisionmaking in this country whose excellent design has been circumvented and which has become very corrupt to benefit some at the expense of all.

Oct 05 09:19 AM

[The Hammer:]

Simply the US financial system is floating in debt. The consumer and banking system are levered up to the eyeballs. Now the federal govt is issuing debt like an addict.
Solving a debt issue by issuing more debt is not the solution.
Recessions serve a purpose to correct all the malinvestment of a past economic cycle. Let this one play out for once.

Oct 05 09:24 AM

[sheila:]

Sorry, I meant to give you a thumbs up! Pressed wrong icon.
Excellent comment and I agree.


On Oct 05 09:19 AM Leftfield wrote:

> To me, your overview of how cooperation between China and the US
> could be beneficial and necessary looks plausible. The part where
> you mention transfer of technology gives me some pause, though.
> I believe we have given away the store too much in trade already
> with the outsourcing of good jobs, investment and unequal trade terms,
> to say the least.
> You mention that there is local oversight and a federal system here
> that corrects excesses. The way out of that has been mandates from
> on high that have largely obliterated the competition amongst localities
> that should be our strength. That, coupled with subsidies, has caused
> countless costly local/state projects and increases in government
> pay/size, to go ahead whose cost has been diffused, which wouldn't
> be approved otherwise. The consequences of this is now coming home
> to roost along with many other abuses in our system.
> I still think your ideas show a constructive way ahead, but I am
> far more pessimistic about decisionmaking in this country whose excellent
> design has been circumvented and which has become very corrupt to
> benefit some at the expense of all.

Oct 05 09:41 AM

[chap08:]

I liked your solution - sell the US financial industry to China and get them to adopt US banking practices. That should bring them down to our level pretty quickly.

You are right to focus on exports as key to the solution. You then fail to realize that the key to this is a lower dollar.

Oct 05 10:04 AM

[User 353732:]

It may be helpful to recall that a depression is a multi year structural mal-allocation of resources that results in a deep reduction in the capacity of the economy to generate wealth. The tangible manifestation of this structural perversion is lower economic activity which results in notably less net worth, employment and access to credit. These combine to deeply depress income for 95 % of the citizens.....the top 5% benefit hugely from the mal-allocation of resources and structural distortions.
An economic depression is rarely a natural occurence. It is fashioned by bad and mad public policy and financial engineering responses to a normal wave of creative destruction and a desired sharp but brief re-setting of the productive economy. The Bosses turn necessary but highly visible (and to many most frightening) economic readjustments into prolonged national nightmares for the great majority of citizens----- and invariably expand the parasitic economy at the expense of the productive economy, precisely when the latter is ailing and injured and needs nurturing not oppressing.

The current and apparently deepening economic compression is following the usual trajectory of bad Govt-Wall ST strategies and behavior turning mad , mendacious and malevolent . The trajectory is a result of serial willed choices and cascading deceits. There is nothing inevitable or irreversible about this trajectory.

When sane and good policies and strategies that are Middle class/small business and useful innovation- centered, accompanied by a major reformation ordrastic change in the current Regime, are adopted as conscious choices by the American people(who can tell when), the compression will cease and the rebounding expansion will occur.

Oct 05 10:05 AM

[Leftfield:]

Sheila, thanks; I've done that too. (Just gave you thumbs up).

Oct 05 10:06 AM

[CautiousInv...:]

State capitalism which became anchored in the economy during the Depression and expanded during the Great Society era has reached its limits. Through taxing and mulcting of productive sectors it has accumulated and transferred wealth and income to an unprecedented extent; through irresponsible fiscal policies and borrowing policies, it's left us little room to experiment with thoughtfully designed fiscal programs. In fact, spending must be reduced.

The conceptual model of the 30's in which the state would spend money to expand incomes and employment cannot be applied to today's circumstances; the private sector is enervated and the system saturated with public spending. The first stimulus was guided by constituency politics; further efforts will flow from fear, confusion and panic. Fiscal multipliers are proving to be about 1/3 of that planned.

Government has so depleted the energies of enterprise that it must give back some of what it has taken over through theft, appropriations and other predations. For change, we must look to the intellectual models of the early 80's in which government assisted private enterprise through providing stability, reduced taxation and less regulation.

Left to its own and in a nurturing environment, private enterprise can identify private investment and export opportunities........both sorely needed to expand wealth and employment amid the current crisis. It is also best positioned to match surplus labor and capital, matching, combining and harnessing both to new opportunities.
This must be accompanied by responsible Fed actions that do more than simply amplify the policies that got us into this quagmire.

Oct 05 10:10 AM

[Tom E.:]

The US could tighten up trade into its market. We could sell to ourselves.

Oct 05 10:16 AM

[Joseph L. S...:]

Whether you call a statist, centrally-planned, top-down economy the Soviet Union, the People's Republic of China, Sweden, or the United States of America, it's still a statist, centrally-planned, top-down economy. How is it that the first three nations here learned that lesson and moved on while the greatest capitalist entrepreneurial nation the world has ever known has chosen to embrace cronyism with Wall Street and excessive debt that chains us to mediocrity?

The principles that govern individual financial responsibility are the same as those that -- should -- govern nations. As Dickens said so very long ago, : "Annual income, 20 pounds; annual expenditure, 19 pounds; result happiness. Annual income, 20 pounds; annual expenditure, 21 pounds; result misery."

Oct 05 10:56 AM

[conceptwizard:]

Dr. Quigley was Professor of History at Georgetown University, where he was President Bill Clinton’s mentor. He was also an insider, groomed by the powerful clique he called “the international bankers.” His credibility is heightened by the fact that he actually espoused their goals. He wrote:

“I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960's, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments. . . . In general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known.”

Quigley wrote of this international banking network:

“The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.”

The key to their success, said Quigley, was that the international bankers would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The statement echoed one made in the eighteenth century by the patriarch of what would become the most powerful banking dynasty in the world.

This explains much of the direction the FED, Treasury and Admin's monetary policy in relation to the BIg Banks.

Oct 05 11:49 AM

[Thomas J. G...:]

I think this phrase is key: " The crippled banking system borrows at an interest rate of zero and buys government securities". Many of us felt that the fed gov't borrowing and printing money for expenses in excess of tax revenue would drive interest rates up. This explains why interest rates didn't rise. I guess this is saying all treasuries have further to rise in values. Treasuy rates continue to fall until the marginal cost of borrowing equals the marginal revenue of treasury investments. Strange result. Makes the current party in power look good. Low borrowing costs, correspondingly stable real estate prices, and stable consumer prices.

Oct 05 11:50 AM

[Graham and ...:]

So the top 5% have a double incentive to mis-allocate resources; make themselves rich, and make the rest of us poorer by comparison; as they, in fact, have done.

Oct 05 12:11 PM

[six:]

Love the post, hate the comments... Why does everyone blame the rich? The rest of us (I am not wealthy by any standard) seem to line up to give their money to the rich. Who in their right mind took out a mortgage with a reset they could not afford? Who in their right mind runs up tons of consumer debt? Who in their right mind does not save a few bucks for a rainy day? That's right- the average American. Remember, if the middle class simply made the payments they agreed to, their would not have been a crisis. Who do you blame- the man who makes the gun or the man that shoots someone with it? The average American gets what they deserve. Don't blame the bankers. Blame the morons that borrowed the money and then could not pay it back.

Oct 05 12:54 PM

[Thomas J. G...:]

six: I agree with you. I think the main cause of this problem was half the people in the u.s/u.k. have borrowed money out the wazoo. When you were sitting in a nice restuaruant 2 years ago half the people there really couldn't "afford" to be eating there, they were just piling up more money on their credit card to be eating out that night. Somehow the financial system improved it's ability to lend money and all these people borrowed it. Roubini and people like him, predicted the big problems, becuase when a large class of people can transfer bad debt to financial companies, look out below. ps: my post wasn't bashng banks, i'm just trying to figure out the mechanism that is driving down interest rates with trillion plus gov't deficits.

Oct 05 02:01 PM

[sod:]

It's naive to think that giving away our technology to China would somehow help our economy to recover. To begin with, there is no need for China to cooperate to improve our economy, our technology will gladly be given to them by the multi-nationals, just for the opportunity to be in their market. Further more, China sees the United States as an economic and military rival, and their political/economic agenda is based on that view. It is for China, a zero sum game. And so far, and into the future, it's sums for China and zeros for the US.

Oct 05 02:10 PM

[Michael Clark:]

Actually the bankers were the morons who loaned money to people who weren't really qualified for loans and then, when this pyramid scheme, fell apart, the bankers ran to Congress demanding their money back. The difference is the middle-class 'morons' who borrowed too much money can't get bailed out by the government but the 'morons' who loaned the money (who seduced the middle class 'morons' with too-good-to-be-true loans) get bailed out and get to still receive their billions in bonuses.

The difference is the moron bankers own the government and the 'moron' middle class doesn't.


On Oct 05 12:54 PM six wrote:

> Remember, if the middle class simply made the payments they agreed
> to, their would not have been a crisis. Who do you blame- the man
> who makes the gun or the man that shoots someone with it? The average
> American gets what they deserve. Don't blame the bankers. Blame the
> morons that borrowed the money and then could not pay it back.

Oct 05 02:12 PM

[ryanclarke:]

Every government action taken suggest to me that the game plan is to continue to weaken the dollar and export Uncle Sam's supreme "technology." For example, Dell has to be licking his lips with all the money he's gonna make in China peddling smart phones no one wants in the states. BUT the truth is the technology was already exported years ago. China, via Taiwan, already has VIA technologies which produces low grade x86 processors suitable for everyday websurfing. They also own the PC motherboard manufacturing industry in Taiwan. The Koreans own the TV industry even though most boob tubes are assembled in Tijuana by Sony. Woops, Sony just sold that plant in Tijuana to a Taiwan, ooops I mean Chineese, company. Maybe, the U.S. can sell some airplanes to China. Nope, China is going to build those planes with a new company they just created. Without a cheap dollar Harvard won't be able to find any good Chineese students to attend Harvard's and MIT's engineering schools. Soon, American children will dream of going to engineering school in China. Same goes for India. The computer industry was exported years ago to these countries via work visas.

Oct 05 08:34 PM

[Zell:]

User 353732:
Another multi-disciplined well though out article. This is why I follow you.


On Oct 05 10:05 AM User 353732 wrote:

> It may be helpful to recall that a depression is a multi year structural
> mal-allocation of resources that results in a deep reduction in the
> capacity of the economy to generate wealth. The tangible manifestation
> of this structural perversion is lower economic activity which results
> in notably less net worth, employment and access to credit. These
> combine to deeply depress income for 95 % of the citizens.....the
> top 5% benefit hugely from the mal-allocation of resources and structural
> distortions.
> An economic depression is rarely a natural occurence. It is fashioned
> by bad and mad public policy and financial engineering responses
> to a normal wave of creative destruction and a desired sharp but
> brief re-setting of the productive economy. The Bosses turn necessary
> but highly visible (and to many most frightening) economic readjustments
> into prolonged national nightmares for the great majority of citizens-----
> and invariably expand the parasitic economy at the expense of the
> productive economy, precisely when the latter is ailing and injured
> and needs nurturing not oppressing.
>
> The current and apparently deepening economic compression is following
> the usual trajectory of bad Govt-Wall ST strategies and behavior
> turning mad , mendacious and malevolent . The trajectory is a result
> of serial willed choices and cascading deceits. There is nothing
> inevitable or irreversible about this trajectory.
>
> When sane and good policies and strategies that are Middle class/small
> business and useful innovation- centered, accompanied by a major
> reformation ordrastic change in the current Regime, are adopted
> as conscious choices by the American people(who can tell when), the
> compression will cease and the rebounding expansion will occur.

Oct 05 09:30 PM

[TeresaE:]

If this was truly the problem, then can you explain why that MORE foreclosures now is no problem, but FEWER last year caused catastrophe?

This argument does not make sense when laid over the facts. And the facts are the banks are taking free government cash and keeping it - which has nothing to do with foreclosures or the average American not paying their debts.


On Oct 05 12:54 PM six wrote:

> Love the post, hate the comments... Why does everyone blame the rich?
> The rest of us (I am not wealthy by any standard) seem to line up
> to give their money to the rich. Who in their right mind took out
> a mortgage with a reset they could not afford? Who in their right
> mind runs up tons of consumer debt? Who in their right mind does
> not save a few bucks for a rainy day? That's right- the average American.
> Remember, if the middle class simply made the payments they agreed
> to, their would not have been a crisis. Who do you blame- the man
> who makes the gun or the man that shoots someone with it? The average
> American gets what they deserve. Don't blame the bankers. Blame the
> morons that borrowed the money and then could not pay it back.

Oct 06 08:21 AM