In my last posting, I re-ran a passage from what I wrote on December 2, which was supported by Robert Reich’s observation that, unlike Bill Clinton, Barack Obama is not at the helm of a country with an expanding economy. As I said on December 2:
After establishing an economic advisory team consisting of retreads from the Clinton White House, President Obama has persisted in approaching the 2010 economy as though it were the 1996 economy.
After I posted my April 7 piece, I felt a bit remorseful about repeating a stale theme. Nevertheless, a few days later, Ezra Klein’s widely-acclaimed Washington Post critique of President Obama’s misadventure in “negotiating” the 2011 budget was entitled, “2011 is not 1995”. Ezra Klein validated the point I was trying to make:
Clinton’s success was a function of a roaring economy. The late ‘90s were a boom time like few others — and not just in America. The unemployment rate was less than 6 percent in 1995, and fell to under 5 percent in 1996. Cutting deficits was the right thing to do at that time. Deficits should be low to nonexistent when the economy is strong, and larger when it is weak. The Obama administration’s economists know that full well. They are, after all, the very people who worked to balance the budget in the 1990s, and who fought to expand the deficit in response to the recession.
Right now, the economy is weak. Giving into austerity will weaken it further, or at least delay recovery for longer. And if Obama does not get a recovery, then he will not be a successful president, no matter how hard he works to claim Boehner’s successes as his own.
President Obama’s attempt at spin control with a claim of “bragging rights” for ending the budget stalemate brought similar criticism from economist Brad DeLong:
To reduce federal government spending by $38 billion in the second and third quarters of 2011 when the unemployment rate is 8.9% and the U.S. Treasury can borrow on terms that make pulling spending forward from the future into the present essentially free is not an accomplishment.
It will knock between 0.5% and 1.0% off the growth rate of real GDP in the second half of 2011, and leave us at the start of 2012 with an unemployment rate a couple of tenths of a percent higher than it would have been otherwise.
Robert Reich expressed his disappointment with the President’s handling of the 2011 budget deal by highlighting Mr. Obama’s failure to put the interests of the middle class ahead of the goals of the plutocracy:
He is losing the war of ideas because he won’t tell the American public the truth: That we need more government spending now – not less – in order to get out of the gravitational pull of the Great Recession.
That we got into the Great Recession because Wall Street went bonkers and government failed to do its job at regulating financial markets. And that much of the current deficit comes from the necessary response to that financial crisis.
That the only ways to deal with the long-term budget problem is to demand that the rich pay their fair share of taxes, and to slow down soaring health-care costs.
And that, at a deeper level, the increasingly lopsided distribution of income and wealth has robbed the vast working middle class of the purchasing power they need to keep the economy going at full capacity.
“We preserved the investments we need to win the future,” he said last night. That’s not true.
The idea that a huge portion of our current deficit comes from the response to the financial crisis created by Wall Street banks was explored in more detail by Cullen Roche of Pragmatic Capitalism. The approach of saving the banks, under the misguided notion that relief would “trickle down” to Main Street didn’t work. The second round of quantitative easing (QE 2) has proven to be nothing more than an imprudent decision to follow Japan’s ineffective playbook:
And in 2008 our government was convinced by Timothy Geithner, Hank Paulson and Ben Bernanke that if we just saved the banks we would fix the economy. So we embarked on the “recovery” plan that has led us to one of the weakest recoveries in US economic history. Because of the keen focus on the banking system there is a clear two tier recovery. Wall Street is thriving again and Main Street is still struggling.
Thus far, we have run budget deficits that have been large enough to offset much of the deleveraging of the private sector. And though the spending was poorly targeted it has been persistent enough that we are not repeating the mistakes of Japan – YET. By my estimates the balance sheet recession is likely to persist well into 2013.
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QE2 has truly been a “monetary non-event”. As many of us predicted at its onset, this program has shown absolutely no impact on the US money supply (much to the dismay of the hyperinflationists). And now its damaging psychological impact (via rampant speculation) has altered the options available to combat the continuing balance sheet recession. While more stimulus is almost certainly off the table given the Fed’s misguided QE2 policy, it would be equally misguided to begin cutting the current budget deficit. Sizable cuts before the end of the balance sheet recession will almost guarantee that the US economy suffers a Japan-like relapse. It’s not too late to learn from the mistakes of Japan.
So where is the leader who is going to save us from a Japanese-style “lost decade” recession? It was over two years ago when I posed this question:
Will the Obama administration’s “failure of nerve” – by avoiding bank nationalization – send us into a ten-year, “Japan-style” recession? It’s beginning to look that way.
Two years down – eight years to go.
When the Music Stops
Forget about all that talk concerning the Mayan calendar and December 21, 2012. The date you should be worried about is January 1, 2013. I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear. Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming: January 1, 2013”. The theme of that piece is best summarized in the following passage:
Peter Coy’s take on this impending crisis seemed a bit optimistic to me. My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners. The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”: keeping the stock market inflated. Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd: the Fed is about to introduce another round of quantitative easing (QE 3). Here is Comstock’s dose of common sense:
After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops. Here is Comstock’s admonition:
Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research. He was recently interviewed by Chris Martenson. Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value. Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”. He does not believe this story will have a happy ending:
One of my favorite economists is John Hussman of the Hussman Funds. In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:
Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”? Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar? When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?
Get your “bug-out bag” ready! You still have nine months!