The Current Great Recession and What to Do About It
It is often said that we are in the greatest recession/depression since the Great Depression of the 1930's. And, that's because we are; however, I believe most people do not believe it is really close to 'that' bad; they do believe that we are in a recession like those of the last 10 to 30 years, just worse. This is wrong. For many reasons; even the structure of the economy is quite different than it was as early as the end of the 1980's and the beginning of the 1990's. The old rules seem not to apply any more.
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More than 25 million able bodied Americans are either unemployed or underemployed. Workers, as a percent of the population, is at a historic low of 58.3%. Plus, business investment continues at historically low levels; and consumption of goods and services are also way down. This consumption down turn is caused, in part, by the massive private debt left by the collapse of the housing and credit bubble from a bit over three years ago.
To make matters worse, the economic downturn has hit the global economy as well. China especially is an economic problem to us. China discounts their currency by an estimated 25% in relation to the US dollar. The value of a currency is reflective of the strength of the economy. As an economy becomes weaker, the value of the dollar goes lower. The value of the dollar has gone down by??????? in the last?????years. But since the value of the yuan is pegged to the dollar the value of the yen has gone down as well.
In addition, China has an extremely high savings rate of nearly 505 OF gross domestic product (GDP); while consumption is only 35%. This means, of course, that China produces and exports a very large amount in relation to what they consume or demand. And since our main problem is low demand, China is working against us in our primary goal, to bolster demand. We spoke earlier that there is a current glut of labor and capital in the global markets; but, if China were to increase it's consumption to a more 'normal' level, the over capacity would disappear, creating jobs and business activity in general, which would then require bank borrowings and on around the cash flow circle.
Another part of the problem is political. And, part of that problem is ignorance of the nature of the problem in the first place. Since the beginning of the recession in late 2007, the federal government, including the Federal Reserve, has taken a host of measures both conventional and unconventional; such as: a) slashing interest rates to near zero; b) three 'stimulus' packages; c) and other measures to lower interest rates.
These measures have helped very little. In my view, there are no good reasons to expect that more of the same will have a much different result. Unfortunately, Congress seems to be talking basically about more of the same; or even worse by transferring more wealth to the rich with more tax breaks for the wealthy. We have already seen that this transfer of wealth does not increase demand; in fact it lowers it because the 'spenders' have less to spend.
This leads to two basic and very important questions: a) WHY have these measures not worked very well?; b) WHAT should we do as an alternative? This is the difficult part, especially because, as I stated above "the old rules seem not to apply any more". But, again, WHY? The answer again, as stated above, lies in the different nature of this 'Great Recession", as I choose to call it. First, the massive credit fueled asset bubble, then burst, is the worst since the Great Depression. The asset side of the bubble can affect those who took out mortgages in the last 10 to 15 years; not merely those of the latter half of the 2000's.
This is far more complicated than just greedy lenders offering 'subprime' loans to risky borrowers; then, seeing the high risk/high yield enterprise blow up in their faces. It is more complicated even than the Great Depression because now we are far more affected by the Global Economy or Economies. Specifically, Japan and Asia in the 1980's and China in the early 2,000's added more than 2 billion workers to the Global work force. This virtually doubled the Global workforce. This process 'stole' jobs from American workers in this country.
But not only that; these new economies, especially China, are high saving and low wage economies. Because they are high saving, they are correspondingly low consumption economies. The savings rate in China is 50 percent compared with around zero the United States.
Because they are low wage economies, they tend to purchase less and especially less of our high wage goods and services; that is less of US goods for the two reasons.
Federal government transfer payments and tax cuts in the last few years helped to some degree; but, like I said earlier, the old rules don't work very well in this Great Recession. Even the massive tax cuts to the wealthy during the Bush Administration not only did not work well; they are more than a small part of the overall problem or cause of our problem. During the huge credit bubble between 2001 - 2009 real average (median) incomes fell as well as Household Net Worth. It must be obvious that if real income is less then spending will be less, and if net worth goes down so does the confidence level and the lower the confidence level the more people want to do nothing; from fear, just keep the status quo.
Earlier I said that the Great Recession is not similar to previous ones since the Great Depression; but, only worse. It is something fundamentally different.
Aside from the Global Economy aspects, let us compare the Credit Bubble of 1982 through 1987(A) versus the Credit Bubble of 2001 through 2009(B). Average Rate of Debt to Gross Domestic Product (GDP) Growth 5.27% during A) versus 3.61% during B); Rate of Real Family Income Change 1.68% in A) vs. -0.55% during B); Average Rate of Real Household Net Worth Growth of 4.96% during A) vs. 0.69% during B); Aggregate Real Median Family Income Change 11.85% (A) vs. -3.52% for B); and Aggregate Real Household Net Worth 30.00% in A) vs. 4.22% in B).
Numbers, numbers, what do they all mean? The last two are the most important. They say the net worth of the average household dropped dramatically and they are earning far less, so the problem is getting worse continually; not very promising. Supply-siders talk about a 'trickle down affect' from the very wealthy to the average American. So, much for that idea! The Real Median Family Income went backwards, minus during the latter period! Massive tax cuts for the wealthy only 'trickle up'. Also, the 'supply-side' economics of the Reagan Administration ran the national debt from around $1 trillion - which took 200 years to accumulate - to nearly $5 trillion in a short eight years.
There are a few more figures I want to discuss to show you that this Great Recession is not like the typical recessions. Debt as a % of Gross Domestic Product was 247% in 1996 but 380% in 2007; Household Debt as a % of Gross Domestic Product went from 65% in 1996 to 99% in 2009. This means the average household increased their debt by about 50%, presumably to keep afloat. And, financial sector debt increased from 59% to 123%. There are a number of ways to look at these figures. One way is to say we can purchase goods and services from earnings or borrowings; and during this period earnings went down dramatically, while borrowings went up dramatically. This is clearly the opposite of what an American citizen wants and opposite of what any administration wants.
"Alright already, you keep talking about the problem; what is the solution?" you say. Well, there is a solution that can be enacted quite easily. It is not a total solution of course because the total problem is Global and we can not deal here with Global solutions. As a lead into the solution, I'd like to mention the word 'efficiency'. Businesses and managers often talk about the efficiency of their operations; or, the lack thereof. The Department of Transportation, for example, reports that freight bottlenecks cost the American economy $200 billion a year. The President and Congress talk about cutting the deficit by $ 1 trillion over ten years. But, take a look; $200 billion a year is $2 trillion in ten years. And the Federal Aviation Administration estimates that air traffic delays cost the economy $32.9 billion a year. That's another $329 billion in ten years. Add just those two together and we come up with $2 trillion, $329 billion just from infrastructure affecting transportation alone.
There are proposals afloat for an extra seven year infrastructure re-construction program at a cost of $1.2 trillion. I say 'extra' because there is already about that much of infrastructure spending planned already. You do the math. Cost of $1.2 trillion for a benefit of $2.329 trillion. But, this is by no means a total measure of the benefit of upgrading our infrastructure. Get this; an investment of $1.2 trillion, over seven years are estimated to generate 5.52 million jobs in each year of the seven year program. That is nearly 50 million new jobs in seven years. Again, you do the math. The new jobs created by this program on a monthly basis far exceeds the monthly increase in employees from all sources in the United States in the recent past. Again, from ALL SOURCES!
How can this be you say? For a number of reasons; as said before, there is a Global glut of labor, capital goods and liquid capital. New money provided to financial institutions does not/will not result in much new lending because most businesses do not want or need new borrowings due to the existing glut of labor and capital. There are currently trillions of idle funds in the money markets. Likewise, tax breaks given to businesses will do little to expand the economy for the same reasons; since unemployment is high, the demand is low, so there is no need for the business sector to expand unless and until there is new demand to be met.
However, every dollar used to re build the infrastructure will be spent on labor, materials and capital goods as needed to complete the jobs. There is no better use of funds to expand the labor force and to make the economy stronger and more efficient.
David Sires
New America Marketing
1600 So Weller St #301-A
Seattle, WA 98144
877.534.4503 Cell 206.387.5626
davids@NewAmericaMarketing.com
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