Friday, August 18, 2006

The US Economy Is In Trouble

The US Economy Is In Trouble

By historical standards, our present economy is being driven by selling the ‘family jewels’ rather than measured consumption commensurate with actual income. In recent years, income growth after inflation has been at or near zero percent. Contributions to economic growth have been largely limited to two factors: (1) rapid increases in asset prices (public equities during the 1990’s and housing equity in the first part of the 2000’s) and (2) inviting cheap overseas imports into the US produced at a fraction of the amount it would cost us to produce. As a result, we are now extremely vulnerable as our industrial infrastructure has almost shut down (as our cost to produce is uncompetitive) or sold out. Now we can no longer produce enough for ourselves to maintain our present strength and living standards and have become dangerously dependent on imports. According to a recent Bloomberg article, household wealth grew six times faster than wages from 2001 to 2005 – the biggest gap of any five year period in history. Meanwhile, trade deficits have sent trillions of dollars of US assets overseas during that time to finance the consumption of foreign oil and other largely perishable goods. Internal US government budget deficits are now for the first time almost 100% financed by foreign lenders. If we were spending what we were actually making, US GDP would likely be stagnant or receding. The personal savings rate has for the first time in decades turned negative meaning that we are consuming every dollar we make plus spending trillions of dollars of accumulated wealth. There is no longer any cushion. At present, this economic ‘joyride’ has claimed the lower classes as victims while leaving middle and upper classes with a false sense of prosperity. Those without significant assets are not able to participate because their consumption and savings are largely composed of income from stagnating wages. They are condemned to live paycheck to paycheck. Cheap imports, offshore outsourcing, foreign insourcing, and the liquidation of US industry are placing tremendous pressure on wages. Goods producing industries (typically the highest paying industries on average) are shrinking rapidly while low-paying service industry positions (waitress, retail, education) are not even creating enough jobs to keep pace with population growth.” False Prosperity Present Economy Driven By Consuming Our Accumulated Wealth Not Income

Despite reports from the Bu$h administration claiming the US economy is on the rebound, yes some corporate revenues are up and compensation for CEOs of the major multinational corporations are through the roof, the US economy is in bad shape. Most of us already know this as we see the purchasing power of our paychecks, pensions and profits failing to keep abreast with inflation and the rising cost of living. AmeriKKKa has gone from being the world creditor nation in the ‘50’s to being the world’s chief debtor nation. This is not a random happenstance; it is the result of policies set by the central banks like the US Federal Reserve System which is system of privately owned banks which have nothing to do with the US federal government, the plutocratic elite and their puppets in the political sphere. These policies are designed by their planners and those who execute them to benefit their class; the ruling class.

These polices created the trade imbalances that are killing US manufacturing. They conspired to ship manufacturing overseas facilitated by legislative initiatives like the North American Free Trade Agreement (NAFTA) which is anything but and its companion legislation the Central American Free Trade Agreement (CAFTA). These two policies in conjunction with their economic arms: the World Bank, the International Monetary Fund (IMF) US AID and other alphabet economic configurations have destabilized the economies of America, Mexico and soon the Central American countries. This is why so many Mexican immigrants are streaming to America; because NAFTA, the IMF and World Bank’s policies have devastated their indigenous infrastructures. Domestically Joe and Jane Sixpack have no clue what is coming down the pike and what is in store for them. They know they are tapped out credit wise, many used their homes as credit cards to live extravagantly, send their children to college and they are losing their homes to foreclosure. Bankruptcies are up despite a new national law which went into effect last October which by the way was written by the banks and credit card companies which was designed to curtain bankruptcies. Quiet as its kept, things are not going well for working class folks.

On the macroeconomic tip, the US government is bankrupt and is borrowing two to almost three billion dollars a day just to keep itself afloat. Much of that is going to pay for imperialist wars around the world. But the saving grace for the US government was the fact the US dollar was the preeminent medium of exchange around the world especially for crude oil. Then came the European Union. The EU created its’ own currency, the Euro in 1999. The Euro is fast becoming the main threat against the falling US dollar and now there is an increasing possibility the Euro will surpass and supplant the US dollar as the world’s primary medium of exchange. “With the US dollar dropping, the potential exists for the Euro's global demand to increase to the point where it replaces the US dollar as the defacto international reserve currency. This would cause enormous repercussions in the United States, driving the dollar down further and increasing the cost of imports in a country that already has a significant foreign debt load. Some analysts have argued that the need to obtain a cheap source of oil, not terrorism, was the main reason behind the United States’ decision to invade Iraq. There is no question that rising energy prices have had an impact on the US economy. However, others believe that the real reason for the invasion was not so much the oil itself, as the need to reassert control over how OPEC oil is bought and paid for.”

The US faced this exact problem in 200 when Saddam Hussein switched from the US dollar to the Euro as his medium of exchange for his country’s oil. The US government responded by invading and occupying Iraq. We are seeing the resulting blowback from that as the rest of the world scrambles to regroup and protect itself from a US military invasion to prop up it’s falling economy and shrinking dollar hegemony. But the US is being forced to live with higher energy costs which are further whittling away on consumer’s purchasing power and the enmity its actions have created around the world. On a macroeconomic level this poses major problems for the US fiscal and trade situation. “The U.S. trade deficit now stands at $460 billion and its current account deficit at over $500 billion (5 per cent of the GDP). This means, as one U.S. economist, David Dapice, recently put it, the U.S. depends on a daily capital inflow from the rest of the world of $1.5 billion to prop up domestic consumption. The value of the dollar is therefore held up by large capital inflows. What if the dollar ceases to be the currency of choice in the global economy or even if the euro becomes a serious contender? What if all the funds parked in the U.S. money are pulled out? What if this flow of capital dries up? The effect on the U.S. economy would be cataclysmic since the amounts involved are huge. Robert Brenner, another U.S. economist, estimated that in end 2000, foreign ownership of the U.S.' gross assets were equivalent to as much as 67 per cent of GDP and argued that ‘any serious attempt to flee these assets would put enormous pressure on the dollar’. More recent data from the U.S. Federal Reserve show that the situation has not changed since then. At the end of 2002, the market value of foreign ownership of just U.S. financial assets (corporate equity and bonds, U.S. Treasury securities and bank deposits) added up to $3,350 billion or more than one-third of the U.S.' GDP” Several nation’s central banks have indeed threatened to sell off some of their US dollar reserves. Others are exploring the possibility of switching to the Euro or creating their own currency!!

The US dollar and by extension, the US economy is in for what economists call a structural readjustment. US workers are facing layoffs. Ford Motors has announced a planned layoff of 30,000 workers. US workers are also feeling the growing impact of outsourcing and severe competition from unskilled eager immigrants willing to work for far less that what businesses pay their US employees. “The point is, the changes we have witnessed in the global economy over the past few years and the phenomenon of globalization matter in that they affect several channels through which both the timing and degree of the impact of monetary policy have been altered. Now, let me bring this closer to home. Price inflation usually does not become entrenched unless accompanied by wage inflation. Until recently, the productivity of U.S. workers was advancing at the same pace as wages and benefits costs. In the last few months, however, the anecdotal evidence picked up through the Fed’s Beige Book—the survey conducted eight times a year by all 12 Federal Reserve Banks of businesses in their districts—and the anecdotal evidence the Bank presidents and their staffs glean from their conversations with CEOs and other business operators all indicate an emerging and widening shortage of skilled and semiskilled workers, along with attendant upward wage pressures. This has finally begun to show up in the wage, productivity and unit labor cost statistics.” Richard Fisher of the Dallas Fed remarks he made on August 16, 2006 This is Fed economic doublespeak for what I’ve said earlier, the US economy and the US dollar are in trouble. Only this time an invasion or expanded wars for energy and dollar hegemony will not save them.



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