Monday, June 28, 2010

The Depression with no name

The G-20 is over and President Obama is trying hard to put on a brave face. No decisions are ever really made at these meetings so the announcement that the G-19 (that’s everybody but the US) is going to plunge head long into fiscal conservatism (ala Herbert Hoover) was well thought out ahead of time.

If Europe is serious about austerity this would be bad news for the US in several ways. Much of what the US exports is made by European companies that own a large portion of the remaining manufacturing in the US and they will be cutting jobs here. A decline in Europe would also be a big set back for China who exports more to Europe that they do to the US and this would make them (China) even less likely to revalue their currency in favor of the US. They are already hinting that there will be no movement, there is even wild talk that the Yuan could go the other way if allowed to float.

Although President Obama all but pleaded with the Europeans to keep spending he sent home a completely different message. He said it'll be put-up or shut-up time on cutting deficits soon enough, saying on Sunday that he would deliver serious deficit reduction proposals next year. And when he does, those politicians who talk tough on debt simply to score votes will have to show their hand, he said. "When I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, because I'm calling their bluff,"

So there you have it; the Europeans are afraid to spend money to keep the economy going and Obama is determined to slash the budget here even more. Does the ghost of Hebert Hoover visit Obama at night dragging his chains like the spirit of Depressions past? Or does he sleep the dreamless sleep of the truly clueless?

The stock market fell today on news that although consumer spending was up more than predicted, it was not up by as much as the rise in income which signals increased savings due to consumer caution or maybe they are simply paying down debt. It could also be that he numbers are wrong or otherwise meaningless in the long term which is so often the case these days.

The real numbers that do affect the economy in this neo-Hoover era are that: Congress has cut off unemployment for millions of people who have been unemployed for a long term already. Add to that an increasing number of people who had exceeded the 99 weeks maximum that had been allowed already and millions more (a full third of the unemployed) who were denied eligibility to begin with. Congress in keeping with the fashion of austerity has denied aid to cities and states who can’t meet payroll as local revenue collapses.

Increased savings only cut into the possibility of a recovery and this applies pressure to cause even more job losses in an economy that has continued to lose jobs right along. Now millions will be plunged into poverty as the prospect of ever getting another job evaporates, putting even more strain on government services that couldn‘t cover their budgets already.

Paul Krugman’s column today dealt with his view that we are entering the third American Depression. His opinion is that this one will more resemble the historic Long Depression of the 1870’s as opposed to the severity of the Great Depression of the 1930’s. I personally think Krugman is an optimist. In past depressions much of the economy was able to operate on at least a subsistence level even if no meaningful social safety net existed.

America today is a hollow shell supported by sheets of tissue paper and we import the paper from China. Eighty years ago 60% of the country could feed itself, today that number is near zero. The factory at the edge of town might have been closed but it was still there waiting to be reopened, that is not the case today. The shock of waking up in a country where most people not only don’t know where their next meal is coming from but have no idea how that will ever change can cause things to get out of hand very quickly. The Depression of the 21st century will likely be Great and may go on so Long as to not be remembered with a name.


RobertM said...

Another excellent post Prairie2. I see that Krugman is finally waking up to reality. What makes this even more infuriating is that much of the coming pain could be avoided if we simply ended our debt-backed monetary system.