Thread: Is America a failed state?

Is America a failed state?


By Spengler
Asia Times
Jan 20, 2010


Barack Obama won the Democratic nomination and then the presidency by offering the same program that Peter Pan gave the Darling children: Close your eyes, think happy thoughts, and you will be able to fly. "Yes we can" in the meantime has changed to "No he can't," as America lost five million jobs in 2009 and its effective unemployment rate, including so-called long-term discouraged workers, rose to 22%, a level unseen since the Great Depression.

Within 24 hours, the voters of Massachusetts may turn the freshly-baked president into a prematurely lame duck, by electing an obscure Republican to the senate seat held for a generation by Ted Kennedy. If that occurs, Obama's veto-and-filibuster-proof majority in the senate will disappear and faint hearts in his own party will hedge their bets on the proposed public healthcare program. The Republicans should be careful what they wish for: no one is voting for the opposition, for the Republican party has no economic program and no unifying theme except its objection to Obama. The voters are protesting a radical change in their status for the worse, and will penalize whoever has the misfortune to be in power.

During December, more than 600,000 workers disappeared from the official count of the American labor force, erasing the illusion that the employment situation would recover. But the voters knew that before the economists. The most reliable index of economic sentiment is the president's deteriorating approval rating. For a by-the-numbers explanation of why the US economy will not recover, see my October 6, 2009, essay, Obama's permanent depression.

America is the world's most successful state, and the one with the greatest longevity in its present constitutional form. But neither of the major parties is presently capable of governing it. The Republicans have been hoping that rage against Obama's failed economic policies would carry the party through the November congressional elections. But it is entirely conceivable that the Obama presidency will implode as quickly as the Obama campaign metastasized during the 2008 primaries, and that the electorate will call the Republicans' bluff.

Americans understood well enough in early 2008 that the traditional leadership of both parties had led them into a dead-end. As I wrote in January 2008 (Obama bin lottery) after Obama's surprise landslide in the South Carolina Democratic primary:

People of modest means do not understand the stock market, but they are sly: they can read the panic in the eyes of their leaders. After assuring them for months that all was well, Washington last week offered an emergency interest rate cut for the first time since September 11, 2001, and an emergency economic package which will send a small check to every American family earning less than a certain threshold. Both President George W Bush and [Bill] Clinton proposed essentially the same program. If that is "managerial ability", thought the voters of South Carolina, we might as well buy the lottery ticket.

That is why at that time, January 2008, I believed America was going for Obama: "America faces not a dip in the business cycle, but the end of a 25-year run of wealth creation. Rising home prices were supposed to provide America's retirement nest egg, the substitute for the savings that Americans never amassed ... Despite massive evidence to the contrary, they still cling to the delusion that 20 years from now, everyone will retire by selling his home to his neighbor at double the price. It is like the passengers on the Titanic selling each other annuities."

Obama appealed to the voters' bottom-dollar hope that a new face in the White House would reverse the tide of misery. He did not have to offer specific promises: he only needed to give the voters the opportunity to kid themselves, which they were eager to do considering the unpleasant taste of the alternative.

The electorate is like Archilochus' hedgehog, which knows one big thing, rather than the fox, which knows many things, in the classical aphorism cited by Russian-British philosopher and historian, Sir Isaiah Berlin. In 2008, the voters knew that the capital gains and home equity cushion gleaned during the Ronald Reagan boom were at risk, and that the likes of presidential candidate John McCain as well as former candidate, now Secretary of State Hillary Clinton, would not make things different. A vote for Obama under these circumstances had no downside from the vantage point of the ordinary household, and they held out the hope that Obama actually might have a magic wand up his sleeve. The voters were not entirely misguided, for the current economic situation almost certainly would have been just as bad under a McCain administration.

The big thing that the American electorate has learned during 2009 is that Obama is all talk. There are many little things that annoy voters: special treatment for trade-union health plans, a Treasury secretary who seems to have given special treatment to Goldman Sachs in the rescue of the insurance giant AIG, and a confusing foreign policy. But the idling of one-fifth of the population overwhelms every other issue. Tens of millions of families that only two years ago felt affluent and secure are now anxious and impoverished. And Obama can do nothing about it.

When Reagan took office in 1981, the baby boomers were in their 20s and 30s, America had a 10% savings rate, the current account was in surplus, and America was the world's largest net creditor nation. Reagan was able to cut taxes and finance an enormous budget deficit because the world's demand for US Treasury securities was correspondingly large. In 2010, the baby boomers are in their 50s and 60s, America has saved nothing for a decade, the current account remains in severe deficit and the world is choking on the existing supply of Treasury securities. Cutting taxes to stimulate the economy is not as simple this time round.

Professor Reuven Brenner and I argued in the December 2009 issue of First Things that fundamental changes in American economic policy are required to emerge from the Great Recession. We proposed that the United States fix the dollar to the Chinese yuan and other currencies in order to re-orient trade flows to the developing world. We added, "We have been borrowing in order to consume; we need now to save in order to invest. We need to shift the tax burden, moving it away from savings and investment and toward consumption. We should replace individual and corporate income taxes with consumption-based taxes."

Americans need to be told that they will need to invest before they can consume, and that the cure will take years rather than months to take effect. It's not a happy message, and no one in politics is willing to deliver it - if indeed anyone in politics understands it.

Spengler is channeled by David P Goldman, senior editor at First Things (www.firstthings.com).

http://www.atimes.com/atimes/Global_Eco ... 0Dj02.html

a majority of Americans do not understand how bad of shape we are in financially from the last 4 presidents, congress and the senate

we are in deep SHIT .. very deep SHIT

you are not watching a perfect storm .. you are witnessing a Perfect take down

do you really think people that caused this mess ... politicians / Banksters are not in jail by chance .. no .. this Banana republic is just hiding what has already been done ... the time to act was a very long time ago. I don't think there is anything you can do at this point .. and I am just being as honest as I could be right now.

you are in a failed state... Cause & Effect .. go back to sleep America, take the blue pill and go back to sleep. Nothing left to see at the crime scene

It will all be over shortly and the pain will only hurt for a little while; so turn on dancing with the stars, kick the recliner back .. dim the lights and close your eyes

For a by-the-numbers explanation of why the US economy will not recover, see my October 6, 2009, essay, Obama's permanent depression.

See:

http://www.alipac.us/ftopict-173655-oba ... depression

Originally Posted by BetsyRoss

Obama's permanent depression
By Spengler

President Barack Obama may be remembered for permanent depression, the way that Leon Trotsky's name is linked with permanent revolution. Fiscal stimulus combined with near-zero interest rates have proven to be a toxic cocktail for the United States, the macroeconomic equivalent of barbiturates and alcohol.

Keynesian spending creates a deficit that sucks all the available capital out of the grassroots economy and transfers it to the Treasury market. Easy funding terms from the Federal Reserve allow financial institutions to make money in government bonds while shutting off credit to the rest of the economy. It's classic crowding out, in which the government's misguided effort to spend its way out of recession pushes the productive economy deeper into the hole.

Panic is starting to take hold at the Obama White House over the
relentless deterioration of the job market. US jobs in September declined by about 263,000 jobs, worse than the 175,000 drop expected by Wall Street economists. To the 15.1 million on the official unemployment count, add 9.2 million "involuntary part-time workers" and 2.2 million who were dropped from the tally because they had not sought work in the past month, and the unemployment rate would rise to 17.1 million.

That doesn't include another three million long-term discouraged workers - those who want to work but who have long since stopped looking. That would take the number up to 20%. In past recoveries, a number of economists observed, all the job growth came from small business, but small business is lagging in the present crisis. The financial crisis crushed the entrepreneurs, as surely as Joseph Stalin crushed the kulaks, the relatively affluent peasants.

Obama inherited a crisis, to be sure, but he has made it much worse. America is in the kind of trap into which Japan fell during the "lost decade" of the 1990s, whence it never really emerged. In the Keynesian world of Larry Summers, director of the White House's National Economic Council, and the Obama economics team, the problem is that Americans save too much and spend too little. To restart the economy, the government has to spend money for them - hence the US$800 billion stimulus package.

There are two things terribly wrong with this notion. The first is that it is simply a matter of what John Maynard Keynes called the "marginal propensity to consume". Americans have saved almost nothing during the past 10 years, relying instead on home equity that now has vaporized. The proportion of Americans over 60 will jump to 25% from 19% during the next 10 years, an unprecedented shift. Americans must save to compensate for past profligacy, from a lower starting point after the destruction of so much wealth, and with lower prospective returns. The demand for savings is bottomless.

The second problem is that even if the government borrows money, the money has to come from somewhere. Right now it's coming from households who choose to save rather than borrow, and from the balance sheet of the Federal Reserve or the banks, as well as foreign investors.

A quick walk through the numbers puts the problem in context.

Lenders to the US federal government, first half 2009.

All Federal borrowing
(annualized, in $US billions) $1,667.4
Households $709.4
Rest of the world $545.6
Fed balance sheet $368.1
Banks $44.3
Broker dealers $24.4

Obama's government borrowed $1.7 trillion at an annual rate, or about 12% of gross domestic product (GDP). Households coughed up less than half of that as they shifted from spending to savings. Foreigners bought $545 billion, a bit less than a third of the total. The Federal Reserve and the banks bought $400 billion worth, or about a quarter of the total.

Household purchases of Treasuries kept spending low and the economy contracting. Even with this massive shift, though, the central bank still had to print money. Most alarming is that the Federal Reserve's rate of purchase of Treasuries is accelerating:

Federal Reserve monetization of government debt, 2009

Fed purchases of treasuries
(annualized, in $US billions)
First quarter $88.9
Second quarter $647.4
Third quarter est $676.1

The rest of the world doesn't want an additional half-trillion dollars worth of Treasury securities each year; it doesn't want the Treasuries it now has to own. Households can't continue to put a trillion dollars worth of Treasuries away per year - that's 8% of all personal income.

That leaves the Fed and the banking system. The central bank bought Treasuries during the third quarter at an annual rate of nearly $700 billion, and provided nearly zero-interest money to banks and broker-dealers, who bought a good deal more. The Fed is buying much more than Treasury securities, to be sure; during 2009, it bought a remarkable $700 billion of mortgage-backed securities in a fruitless attempt to stimulate the housing market.

Despite the unprecedented largesse of the Federal Reserve, banks are reducing risk and cutting off the small-business sector in particular. During the third quarter, US commercial banks added Treasury securities to their balance sheets at a $350 billion annual rate. But they cut loans to business at a $300 billion annual rate. Extremely cheap funding makes it possible for a bank to finance the purchase of a two-year Treasury note paying 0.86%, or a two-year AAA municipal note yielding 0.75%, with overnight money costing 0.25%. Cheap money turns the commercial banks into an extension of the balance sheet of the Federal Reserve.

The near-zero interest rate allows banks to shift their balance sheets towards nearly riskless assets, and reduce risky commercial and industrial loans.

Cheap money has crushed the dollar, and the sinking dollar has buoyed equity prices, perversely enough.

American assets are cheaper to foreign investors, and as the dollar fell against other major currencies, foreign investors bought more American stocks:

In short, the rise in US stock prices has less to do with economic recovery than with the drop in the global price of American assets. The dollar can only fall so far, however, because other currencies can only rise so far before a rising currency parity damages competitiveness. This game seems to be played out for the moment.

This outcome was perfectly foreseeable a year ago; in fact, I forecast just this result last November (see Who will finance America's deficit?, Asia Times Online, November 13, 200. I reviewed the difficulties attendant on financing America's deficit and concluded:
Monetization of debt remains a possibility, and to some extent would only continue the current trend. Total Federal Reserve Bank credit outstanding has more than doubled in the year to November 6, 2008, rising by $1.2 trillion to $2.06 trillion. This reflects loans, securities purchases, and related actions by the Fed to bail out the financial system. If the deflation persists, the Federal Reserve may be compelled to purchase US government debt ...

The point of lowering the risk-free rate is to push investors towards riskier assets. In a normal business cycle, falling output leads to lower yields on low-risk bonds, which in turn encourages investors to add risk to their portfolios by investing in businesses. If the safest of all investments, namely US Treasuries, suddenly offer much higher real yields, comparable to the boom years of the late 1990s, why should investors take risk? ... If the Treasury tries to spend its way out of recession, the results are likely to be very disappointing.

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 US's road to recovery runs through Beijing (Asia Times Online, November 15, 200.

Spengler is channeled by David P Goldman, Associate Editor of First Things.

http://www.atimes.com/atimes/Global_Eco ... 6Dj04.html

I was going to post the "Failed State" article - you beat me to it. Lots of food for thought in ATimes.