The Best Column Ever Written About Our Current Economy

This column explains everything in a nutshell about our current economy and where it's heading. This explains everything from A to Z. It's a must read for anyone that wants to know the truth about where this economy really is and where it's heading:

http://www.thestreet.com/markets/detox/10134346.html

Excerpt:
Higher government and personal spending is what has kept the economy afloat over the past three years. But the logical question to ask is: How did these spenders get the extra dollars to blow? Well, they borrowed them, something that would've been impossible without the low interest rates engineered by the Fed. Debt may feel like wealth when it is being spent. And through the gunning of bank reserves, the Fed can inflate an economy by underwriting higher levels of debt.

But at some point the explosion in credit has to be paid back. The Fed's crazy bet is that the spending will lead to a recovery that will in turn increase personal incomes and taxes to the point where the extra debt taken on over the past five years becomes manageable. But the debt is too high to make this work.

Please, please, please read this column.

eom

My impression is he helped Clinton to some extent, but not to this extent. What say, ye, o econ majors?

This should answer your question. Scroll down the page and look at the chart of Fed moves since 1990. Greenspan has never held interest rates this low for this long:

http://www.federalreserve.gov/fomc/fundsrate.htm

12 months before the 2000 election should have clued you in. This is approximately times to slow the economy 6 months before the election. Just in time to sour the economy.
:kick:

Led by the Federal Reserve, the world's central banks have spent five years pursuing some of the most reckless monetary policies ever seen in the developed world. Next year, though, their barmy bets will finally start to come undone.

The crackup won't start happening until the end of 2004 -- after George Bush, the market's favorite for president, has been safely re-elected -- but the coming deluge will usher in a period of global economic malaise and dire losses in financial markets.

Not happening until late 04 may be a bit of wishful thinking on their part, as they also seem to be claiming a victory for Shrub.

From what I've been following in the world financial sector, the Dems aren't the only ones Shrub needs to be wary of. Most of the world despises him deeply and would like nothing better than to see the Boy King dethrowned. The central banks of the world seem to have us by the balls right now. It will be interesting to see when they decide the time is right to give a good hard squeeze.

As of late,this has been my thinking exactly. Better for the EU in particular to play hard ball now.

The column touches on the same things I harp on here endlessly. Particularly the manic money and credit creation.

However it has a fatal flaw. Trying to predict when things will happen. That is unknowable. In fact any collapse of the system in not certain, by a long shot. Classical economics says the gigantic global inbalances and the relentless debasing of all currencies should lead to some sort of collapse. That does not make it so. The current system could continue on and grow. Classical economics has been overthrown in my opinion.

For that to happen then corporatism, which some call facism, would have to prevail. I think the chances are that it will. That opinon is clouded by recent history so I am probably making an error of extrapolating from that current history. THe devil is that if things do go bad the sufrering will be horrendous, and even then it is quite probable that the forces of reaction and oppression will still rule.

Sorry to be so grim but that is how I see it.

I don't understand why you say corporatism would have to prevail for the current system to continue. What is it about corporatism that would prevent any of the impending pressures that threaten the system to subside?

What form of corporatism do you foresee? I think we are already dancing with a kind of consumerist corporatism. Since consumption has been driving the circulation of dollars throughout the system, I can only see the consummation of the marriage between government and business as being destructive of those ends.

Big questions, and the terms themselves are fuzzy. If you read other of my posts here you might get a feeling for how to conseptualize these things.

The article leading this thread berates what I do, the manic rush by the Fed create massive amounts of new money by the endlessly accellerating creation of new credit. This ties into 'corporatism' as I called it because to a huge extent that money creation has gone into inflating the value of financial assets, particularly stocks. That inflation has in turn led to the shift in the asset and income distribution to the top, and along with it the corporation's co-optation of the political realm. Whew.

THe massive amounts of debt underlying the system cannot be easily or painlessly worked off. Particularly I am speaking here of the debt that dominates corporate balance sheets. My theory is that the debt binge, the credit bubbles continuation, is contingent upon an ever expanding volume of credit creation. That is because there is a Ponzi scheme built into the system in that new credit is paying off old debt. I therefore maintain that all the wonders of modern accounting that have made corporate assets THE asset above all others to hold would collapse if the credit/money creation system reverses. Along with it would be huge swaths of the service economy and of course the retail one. Furthermore most 'savings', now in IRA's would disappear. Again I say, all are dependent upon an ever increased credit creation.

since the article, Bush lifted the steel trade tariffs, no doubt as payment for France, etc. agreeing to forgive some of the Iraqi debt (both announced when Baker was in France, and when Wolfowitz-man was trying to undercut by announcing no contracts for France, etc.)

the fall of the dollar (both the amount and how fast it falls) is key to whether or not we see a huge, huge correction sooner rather than later...combined with our European allies' willingness to support Bush's folly...which, since their populations do not support Bush, I cannot see them doing with real enthusiasm to the point that it would do more than prolong or soften the slide... those are my speculations, but since the writer of your article admitted he was wrong on 03 predictions, I guess I can enter the fray on that one too, without the credentials to embarrass me if I'm wrong.

Maybe Bush, like Reagan, will end up raising taxes surreptiously. But with ideologues like Norquist wanting to strangle our govt, I don't know if he'd have the guts to do the right thing. Maybe if his daddy's cronies win the battle for Bush's soul that's going on right now, he won't totally screw us up, or maybe he's just "playing at moderation" in order to win another election, and then we'll really, really be screwed.


http://www.monthlyreview.org/1203duboff.htm
Volume 55, Number 7

U.S. Hegemony: Continuing Decline, Enduring Danger

by Richard B. Du Boff
Professor Emeritus of Economics, Bryn Mawr College.

(good intro and lots of data before this..)

...In global finance, the United States is not only less dominant, but vulnerable. The weak link is the dollar, whose status as the world’s key currency has been eroding since the 1970s, irregularly and with periodic revivals. Between 1981 and 1995, the share of private world savings held in European currencies increased from 13 percent to 37 percent, while the dollar’s share fell from 67 to 40 percent. Forty-four percent of new bonds have been issued in euros since the new currency was introduced in 1999, closing in on the 48 percent issued in dollars. Half the foreign exchange reserves held by the world’s central banks were composed of dollars in 1990 compared to 76 percent in 1976; the proportion rose back to 68 percent in 2001 because of the phasing out of ecus (reserves issued to European banks by the European Monetary Institute) to make way for the euro.2 For the first time since the Second World War there is another source of universally acceptable payment and liquidity in the world economy—at a moment when the U.S. balance of international payments is chalking up record deficits.

Since 1971, when the United States had a deficit in its trade in goods (merchandise) for the first time in seventy-eight years, exports have exceeded imports only in 1973 and 1975. A nation can run deficits in its trade in goods and still be in overall balance in its dealings with foreign countries. Deficits in trade in goods can be offset by having a positive balance in sales of services abroad (financial, insurance, telecommunications, advertising and other business services) and/or income from overseas investments (profits, dividends, interest, royalties, and the like). But the U.S. merchandise deficit has become too big to be paid for by services sold to foreigners plus remittances on investments. The U.S. current account (the sum of the balances in trade in goods and services plus net income from overseas investment), almost constantly in surplus from 1895 to 1977, is now deteriorating sharply; the merchandise deficit has become too big to be paid for by services sold to foreigners. And since 1990, the positive balance on investment income has been shriveling as foreign investment in the United States has grown faster than U.S. investment abroad. In 2002, the balance turned negative: for the first time the United States is paying foreigners more investment income from their holdings here than it receives from its own investments abroad.

Like most gaps between income and expenses, the current account deficit is covered by borrowing. In 2002, the United States borrowed $503 billion from abroad, a record 4.8 percent of GDP. When foreigners receive dollars from transactions with U.S. residents (individuals, companies, governments), they can use them to buy American assets (U.S. Treasury bonds, corporate bonds and stocks, companies, and real estate). This is how the United States turned into a debtor nation in 1986; foreign-owned assets in the United States are now worth $2.5 trillion more than U.S.-owned assets abroad. By mid-2003, foreigners owned 41 percent of U.S. Treasury marketable debt, 24 percent of all U.S. corporate bonds, and 13 percent of corporate stock. U.S. companies are continuing to invest abroad, but unlike the British Empire in the decades before the First World War, the United States is unable to finance those investments from its current account. By contrast, Great Britain’s current account was in surplus, averaging 3 to 4 percent of GDP every year from 1850 to 1913, when income from services and foreign investment was larger than its merchandise trade deficits.3

So far the global investor class has seemed willing to finance America’s external deficits, but it may not be forever. The deficits are exerting a downward drag on the dollar, arousing suspicion that the United States favors a cheaper dollar to help pay off its ballooning trade deficit. As the dollar declines in value, the return to foreign investors on dollar-denominated assets falls. German investments in choice office properties in New York, San Francisco, and elsewhere were cut back sharply in 2003. While the buildings were becoming cheaper in euros, rents were shrinking when converted from dollars back home. “We can get the same return in Britain and the Nordic countries, so why go to the United States, where the currency risk is greater?” asked the chief investment officer of a Munich-based property fund.4

Until recently all Organization of Petroleum Exporting Countries (OPEC) sold their oil for dollars only; Iraq switched to the euro in 2000 (presumably terminated with extreme prejudice in March 2003), and Iran has considered a conversion since 1999. In a speech in Spain in April 2002, the head of OPEC’s Market Analysis Department, Javad Yarjani, saw little chance of change “in the near future... in the long run the euro is not at such a disadvantage versus the dollar. The Euro-zone has a bigger share of global trade than the US and...a more balanced external accounts position.” Adoption of the euro by Europe’s principal oil producers, Norway and Britain, could create “a momentum to shift the oil pricing system to euros.” Thus, concluded Yarjani, “OPEC will not discount entirely the possibility of adopting euro pricing and payments in the future.”5

If foreign investors get cold feet, ceasing to invest in U.S. industries or selling off their dollar holdings, the dollar would start falling faster. Interest rates in the United States might surge, borrowing money would become harder, and consumers would pay more for imported goods, draining income from other purchases and dampening the economy. A dollar rout could cause skittish investors to dump U.S. stocks and bonds, sending Wall Street into a dive. In any event the dollar is now perceived to be as risky an asset as the euro and possibly two or three other currencies (yen, sterling, Swiss franc).

...and more...

In the second quarter, nonfinancial domestic debt was $21.6 trillion, or 199% of GDP. That's up $3.1 trillion from three years earlier, when the ratio was 181%. There has never been such a rapid rise in that ratio since the mid-80s, and we know what happened at the end of that decade. Some two-thirds of that increase -- over $2 trillion -- occurred among households or individuals. As a result, debt service ratios have climbed to historic highs for individuals, even with extremely low interest rates. It would take only small increases in rates to tip many people into real hardship or default.

:wow:

Thx for the link... As scary as it is, this needs to be shared
far and wide...

Certainly voices many of my concerns! Thanks for posting.

Julie

On the McLaughlin Group, Pat Buchanan predicted that Russia would follow southeast Asia into the currency and debt collapse of 1997-1998.

He was right.

Recently, he has said that by the mid 2000s, Japan will defalut on their debt.

Can panic be far off?

Considering the trend in payrolls (down-to-flat), and the fact that most of those jobs are never coming back (shipped overseas), and if they are "replaced", it will be with lower-paying "McJobs"...

The collapse in our current debt bubble may come before the elections.

(We can only hope.)

Well, we can do more than hope. We can adopt a strategy of making the nearly inevitable collapse of our economy a main talking point.

That way, when it happens, people will turn to us for answers.

On a related topic, I noticed that this thestreet.com column is usually available only to subscibers, but the editors made it available to all.

thestreet.com is the baby of James J. Cramer, one of the few avowed Democrats in the financial world.

Be careful what you wish for. The collapse of the credit bubble would, if the analysis of it's critics is correct, lead to a depression. A turn to progressive politics is hardly likely in that event. First there are only a handfull of progressive politicians and even they have no real coneception of the massive macro economic issues in play nor any alternative to the current system save some diddling with the tax code.

The only thing I fear more than the current trend to corporatism and its attendent corruption and the willfull starving of rights and benefits for citizens is an economic collapse or panic which I think might bring on an even more repressive era.

Analogies with the past are usually silly or weak but I cannot get over the differences between Germany and the US in the 30's, how we may have gone down a differnt road, the one towards facism then, and how another severe economic dislocation may well take us down that road this time. Do not forget that there was a strong corps of overt Nazi supporters here, including leaders from Ford to Lindburg. Behind them was a huge group of mostly GOP people and politicians who despised the New Deal so much that they were willing to do almost anything to defeat it, which they couldn't because of the huge electoral advantage the Dems had.


Cramer is a hyperactive jerk. Very occasionally he gives a hint that he understands the folly of our financial system dominated by speculation, corruption and hype but then his job is to participate and encourage those same things so what good is he to us or anyone but our opponents.

is extremely DANGEROUS.
There are literally DOZENS of presidential executive orders that
will kick in under such a scenario, including the activation of
FEMA as the government's "strong arm".

The last thing we need are 1) another staged terrorist event, 2)
economic meltdown or 3) a failed assassination attempt against
shrub.

All these events would cause an immediate clamp down of our remaining
freedoms, martial law and the suspension of the elections.

What I prefer to see is a gradual economic decline (its happening
already) that will eat away at shrub's credibility. Unfortunately,
the dem that manages to win....long shot IMHO, will be extremely
hard pressed to pull the economy from the nosedive.

2004 is going to suck balls anyway you look at it... :eyes:

kalian wrote:

"Wishing for an economic collapse PRIOR to the elections...."
is extremely DANGEROUS.
There are literally DOZENS of presidential executive orders that will kick in under such a scenario, including the activation of FEMA as the government's "strong arm".

Yes, that is my way of thinking too. The prevailing "it's the economy stupid" way of thinking, assumes that if things go catastrophically bad economically, Bush will lose. I, OTOH, fear Bush's Mayberry Machiavellis may be just the sort of people who might manage to get lemonade out of that particular lemon and use it to retain their power.

People and leaders might think like this:

• We must stand behind the president at times like this. It is in these troubled times that we need Bush's great leadership skills the most.
  
• Understandably, the peasants are getting restless. Let's declare martial law so as to make sure things don't get out of hand with all those rabble rousing commies that are causing all this trouble. Also, make use of a Miami model on steroids for riot control (think occasional Kent State style incidents) and ensure that detainees stay detained indefinitely (I reckon they might make a nice captive labor pool to help rebuild the country).
  
• A war on terrah going on and economic and economic devastation and an election? I think not! Let's postpone the nasty divisiveness of an election half a dozen years.

When it truly matters, people don't want to see that we are being led by the grossly incompetent (remember, nobody expected 2000-2004 to provide a great challenge to whoever got elected --many people truly thought we could afford to have an idiot at the helm because "what could go wrong?"). Thus, when 9/11 happened, Bush became a great leader in the eyes of many, not because previously less apparent great leadership qualities came to the forefront in response to crisis; but, rather, because the grim reality of his incompetence became something that people simply could not accept and they thus chose to supplant this reality with the myth of his great leadership, his rising to the occassion. Had we had incidents resulting in 500 or so deaths a few at a time (for instance, from many separate terorist attacks on American interests and troops abroad) rather than 3000 in one blow, no one would be talking about the overriding need to "stand behind the president" right now and many would be condemning his incompetence.

My fear is that the collective mind might react this way regardless of the nature of the crisis. Thus, while a moderate economic downturn might lessen support for Bush, a catastrophic economic collapse could just as well strengthen Bush or give him the tools needed to retain power despite opposition.

Under the circumstance of economic catastrophe, I would even expect some people to express their great relief regarding the 2000 presidential selection because "what if Al Gore had been president through these troubled times" (imagine the horror of horrors).

kalian wrote:

The last thing we need are 1) another staged terrorist event, 2) economic meltdown or 3) a failed assassination attempt against shrub.Wishing for an economic collapse PRIOR to the elections....

I'd add a number 4 which would be a succesful assassination attempt against the Shrub. Nothing would help the implementation of the PNAC agenda more than a dead Shrub (particularly if it happens at a point when things start going obviously downhill for their agenda). Whether the Shrub truly is a puppet or not, he is not indispensable to the PNAC agenda.

Here is more grist for the mill. They guy is a noted international 'investor', speculator if you will. Hardly an outsider or enemy of capitalism. He summarizes pretty well the alternative consensus that I subscribe to.

http://www.ameinfo.com/news/Detailed/32991.html

very good read and pretty much right on the money (pun not intended...).
Well, I always had a bad feeling about 2004...guess its going to
become reality. Sigh...

The key point in the above article.

"So where does all that leave us? Consumption could also be increased, if not through income growth, then through a further decline in the national saving rate (see above) and additional consumer borrowings. But for households' borrowings to keep on expanding at their recent strong pace, asset prices, including housing and equities, must continue to appreciate or interest rates will have to decline much further!

In other words, rising asset prices, which supported additional borrowings, have been largely the driver of the US recovery. (The government also made a small contribution by boosting spending.) This is particularly true of the housing sector, where rising home prices allowed households to increase their mortgage and provided them with additional spending power.

I hope the reader appreciates the precarious nature of this state of affairs. The entire US economy is depending on high 'asset inflation' in order to stay afloat! Only if asset prices continue to rise at high rates can consumers maintain their borrowing binge...."

Exactly a point I have been harping on. Nothing is more impoertant to udnerstanding where we are than understanding that inflation of financial assets, ie. stock and bonds and the myriad flavors of derivatives, ie. paper, and real estate is now the be all and end all of the economy.

The trend is why income and assets have been swinging relentlessly to the top, and of course why the benficiaries want to keep it that way. It is why those with inflating assets are able to continue to consume madly. Their increased 'wealth' and spending make up for the bottom 80%, or 50% depending upon how you want to look at it, whose income is dropping and whose spending is based upon borrowing.

There is a strong meme going about among 'conservative' economic triumpalists who suggest that, and I am not making this up, that Americans will no longer have to work in the future, as we will all be rich because of, you guessed it, the endless appreciation of stocks and real estate. They see nothing wrong about this.

Now more than ever you are a fool to work. Working is for suckers. If everyone in the country would just go out tomorrow and borrow their credit cards to the limit and buy stocks then stocks would soar and they would all be rich. See how easy it could all be.

rapier wrote

There is a strong meme going about among 'conservative' economic triumpalists who suggest that, and I am not making this up, that Americans will no longer have to work in the future, as we will all be rich because of, you guessed it, the endless appreciation of stocks and real estate. They see nothing wrong about this.

Is that where this "ownership society" Bush & co. keep talking about is supposed to ultimately lead? Do most people realize this? Why do I immediately see something wrong with this scenario (it strikes me as an absurd fantasy) while these conservative economic triumphalists (as you call them) see no trouble in believing in this free lunch? Are they so completely divorced from reality (or am I?)?

Do you have any specific examples of this sort of thinking?

I can't give any cites and probably won't, don't have the time. By the time I come accross one again it will be too late.

Not specifically related, that old Laffer is back with a column in Barron's this week saying that the PE ratio of the S&P is 3.3 to one. Even the run of the mill Wall St. touts say it is around 19 to 1. Using accounting from the ancient past, let's say 1990, it is probably about 30 to 1.

Yes, the Ownership Society thing is part of this. If everyone buys stocks then they will continue to rise and we will all be rich. It is so damn easy.

I like to repeat that the IRA, 401K thing was one of the prime mechanisms for this whole thing. Getting Jane and Joe Doe to hope for a bull market , forever. ANYTHING the government or anyone can do now to boost stock prices has broad political support. Never mind that this 'investment' is malinvestment and doesn't create jobs or much of anything but higher stock prices and the attendent ability of corporate insiders to cash in.

THe Ownership Society thing will of course include more perks for dumping money into stocks. The new SS plan being readied will have the option of taking 50% of your FICA tax and putting it into a private account. $100 billion extra a year for stocks, to start, more later. Guess what this will do to stocks. As an added bonus it will bankrupt SS a decade or more earlier than now seen. The zhakier SS looks the more will go into stocks. It is a beautiful thing.



By the way. When you own a stock you own nothing. In the past you used to get a nice certificate. Now you get a blip on your screen.


Stocks are not an investment, they are a speculation, always have been always will be. It should be called the Speculation Society. Speculaters win, workers.......well workers are sucker and fools.