Friday, January 25, 2008

Up in Flames

Guest post by redbedhead:

When the US Federal Reserve Bank decides to cut interest rates by three-quarters of a percentage point, between meetings, that’s what you call the smoke that tells you there’s a fire. This is the first time that the Fed has cut rates at an emergency meeting since September 2001, after the World Trade Center attacks. And it’s the biggest single cut in interest rates since 1982. And word is that there will be another half percentage point cut by the end of the month if this adrenaline shot to the heart attack patient doesn’t revive it. But a lot of folks are worried it’s too little too late and that the economy is already in a self-reinforcing downward spiral.

A look at the numbers certainly would indicate that things are not good:

“U.S. payrolls rose by 18,000 in December, capping the worst year for job creation since 2003, and unemployment jumped to a two-year high of 5 percent, according to Labor Department figures released Jan. 4.
“The housing slump also deepened last month, with home construction falling 14 percent. Starts were down 25 percent for all of last year, concluding the worst year for the industry since Jimmy Carter was president. Sales of previously owned homes also slid in December, as single-family property prices posted their first annual decline since the Great Depression, the National Association of Realtors said today.”


Claims that the US isn’t already in recession are belied by these kinds of numbers and the panic that’s setting in on stock markets and in government. The degree of slowdown isn’t known yet but what is known is that it is greater than they’re saying. The stats for the third quarter in the US indicated that growth had “rebounded” to 3.9% but once inflation and population were factored in, it was actually closer to 1.5%. The fourth quarter numbers haven’t been released yet but don’t be surprised if we’re already in a contraction. In the face of this unfolding debacle the US government has also stepped in with its own $150 billion economic stimulus package. However, that package is entirely in the form of tax rebates of up to $600 per head, plus $300 per child. In other words a family of four that earns a household income of less than $75,000 would get a cheque for $1,800.

Now, $1,800 is nothing to sneeze at and it shows what bogus are the claims of from politicians and economists that the market should rule. $150 billion dollars is a big interference in the market. But the package specifically doesn’t include extending unemployment benefits or granting more food stamps. US rulers live in fear that workers in the US will get uppity or decide that the poverty of unemployment insurance is better than their shitty, soul-destroying and/or dangerous job.

There’s a problem here though and it is two-fold. The basis for restoring the US economy is consumer spending, which makes up 70% of GDP. But the trouble is that consumers have no more cash. In fact, they are drowning in debt, which has been increasing at a rate of 7.5% per year since 1997. In that time the amount of household debt has increased from $8 to $14 trillion dollars. In other words household debt as a percentage of GDP has rocketed from 66% to around 95%.

And not surprisingly, debt servicing payments are now at record highs. I haven’t even gotten into the massive and ballooning US government debt, which is headed towards $10 trillion. The point of all this is that the $1,800 that family of four is about to get in the mail is probably going to go on paying down the credit card to ease the interest burden. This is especially the case since some see house prices declining by 20 to 30 percent, which means that any further credit against home value will have dried up for a lot of Americans.

And credit card payments are not an economic stimulus – that’s just paying for old growth, not creating new growth. So, the layoffs will continue, which will reduce demand and create more layoffs. Giving out money is also stupid economics. $150 billion dollars that is dedicated towards specific employment projects, such as they had in the 1930s is a much more efficient way to spend money than to just throw it in the air. Economic enterprises have multiplier effects on the economy – building the Hoover dam gave jobs to thousands of workers, those workers spent money, the project bought equipment and raw materials, those materials had to be shipped, etc. Of course, other than in the field of military spending, this doesn’t fit with the neo-liberal consensus. What does that mean – the shithouse is going up in flames and they’ve locked us inside.