After a bailout of Fannie Mae and Freddie Mac, $168-billion of fiscal stimulus measures, a housing-rescue package and three-and-a-quarter percentage points worth of Federal Reserve interest rate cuts, the economy is still struggling and in some ways looks worse than ever.
And while the recent one-two punch of rising joblessness and shrinking payrolls restarted the recession debate, it begs an even bigger question: What will it take to bring the economy back to health, especially in a presidential election year?
Let's back up a bit and rundown everything that has been done to keep the economy going.
1.) We have a Federal Reserve that has cut interest rates to 0% after adjusting for inflation. Here's a chart from the St. Louis Federal Reserve of the effective federal funds rate:
So -- money is cheap. That means we should be seeing lots of lending, right?
Well, no. According to Bloomberg 1-month Libor is still 50 basis points above the effective Fed Funds rate. That means there isn't as much intra-bank lending going on as we would like. That means we are still seeing institutions horde cash.
2.) We've seen the federal government give away money to increase spending. Did that work?
Year-over-year real (inflation-adjusted) retail sales are now negative, and
Year-over-year personal consumption expenditures are still positive but have been dropping for a year.
So people are tightening their belts -- and have been for awhile.
All that has really happened is the US is increasing its budget deficit:
The Congressional Budget Office said the U.S. budget deficit for fiscal 2008 -- $407 billion -- will be more than double the deficit for 2007, hit by the wars and a weak economy, and predicted it is likely to rise further in fiscal 2009.
"The figures make it challenging to avoid playing the dismal economist," said CBO director Peter Orszag in a statement.
The agency foresees an increase to $438 billion by fiscal 2009, which begins Oct. 1, with the government takeover of Fannie Mae and Freddie Mac further complicating budget projections.
The bottom line is we've done pretty much everything we possibly can at this point and we're nowhere near out of the woods. And that is what should scare people the most.
3 comments:
Exactly how did the federal government finance all that infrastructure construction in the 1930's? It seems to me that the only way to generate significant economic activity in the coming Depression will be to replicate that effort. So how did it work, and how can I take advantage of it?
I have not seen much discussion of this, but a Warren Buffet-owned insurance company that provides deposit insurance to banks for deposits over $100,000 has announced that it is getting out of that business altogether. (See link at http://www.kansascity.com/business/story/790055.html )
This says to me that Buffet has just issued a very strong vote of no confidence in the banking system. Or am I not reading this correctly?
Generals are always fighting the last war. Apparently so are economists. I have noted at other forums that the traditional approaches won't work this time. Both the Fed and the Government have their pedals to the floor and the engine is still stalling. The interest rate cuts have gone into the dried sponge of the corrupt financial institutions to make up for their prior crimes. Federal spending is going to maintain the status quo and to enrich the Captains of Corrupt Crony Capitalism. The "stimulus" was a one time phony attempt to pander to voters. It is the same borrow and spend mentality that has brought us to this nadir of the economic cycle.
NO turn around can be accomplished, NO progress can be made on the deficit and NO solution to the fundamental problems facing us can be made until the Foreign Policies of Empire are scrapped. These are the 1 trillion dollar drains that are currently sapping our "true health through the purity and essence of our natural fluids."* Spending will need to be dramatically CUT in these areas.
Our private sector is mostly based on retail, financial and services which are based on now stagnant wages and borrowing. Wages didn't rise during the expansion and certainly won't rise during this contraction. Our prolifigate borrowing has contributed to the overinflated housing bubble that is now losing air. This part of the equation cannot be revived by selling more foreign made stuff to debtors. Middle Class tax cuts will not replace what has been lost and will only exacerbate the Federal Debt.
Once the policies of empire have been eschewed the policies of economic growth can be instituted. Taxes for the upper 5% must be raised and the tax structure for the other 95% must be overhauled. The Social Security account must be divorced from the Federal Government's budget and the surpluses must be sequestered and treated as a separate entity. The Social Security tax must be uncapped and the base broadened to include unearned incomes. Fair and equitable adjustments to the Federal tax rates should be allowed to partially compensate for these increases. A consumption tax on gasoline must be implemented. These monies must be sequestered and targeted for tax credits and other assistance for a massive increase in alternative energy sources. These tax incentives must be long lived to assure investment in these resources. This will produce a substantial increase in domestic economic activity from manufacturing and construction to agricultural production. Add a substantial increase in infrastructure rebuilding that can legitimately be financed through debt and the beginnings of a turnaround can be produced in the 30% of the economy that is not tied to retail and other soft sectors.
So the basic tenets of a turnaround would be a cut in present spending, an increase in taxes, a lowering of the deficit and an increase in spending targeted at domestic energy production and infrastructure.
*General Jack D. Ripper
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