http://www.vdare.com/roberts/081112_financial.htm

By Paul Craig Roberts

By most accounts the US economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a "mini-depression," and that designation might be optimistic. The Russian economist, Mikhail Khazin says that the "U.S. will soon face a second ‘Great Depression.’" It is possible that even Khazin is optimistic.

I cannot predict the future. However, I can explain what the problems are, how they differ from past times of troubles, and why traditional remedies, such as the public works programs that Reich proposes, are unlikely to succeed in reviving the U.S. economy.

Khazin points out, as have others, such as University of Maryland economist Herman Daly and myself, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible. Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more.

This leaves economists with fiscal policy, which, as Reich realizes, also has problems. Reich is correct that neither a reduction in marginal tax rates nor a tax rebate is likely to be very effective. Reich, a Keynesian, has an uncertain grasp of supply-side economics, but as one who has a firm grasp, I can attest that marginal tax rates today are not the stifling influence they were prior to John F. Kennedy and Ronald Reagan. As Art Laffer said, there are two tax rates, high and low, that will produce the same tax revenues by expanding or contracting economic activity. Marginal tax rates are no longer in the higher ranges. As for a tax rebate, Reich is correct that in the present situation a tax rebate would be dissipated in paying off creditors.

Reich sees the problem as a lack of aggregate demand sufficient to maintain full employment. His solution is for the government to spend "a lot" more on infrastructure projects on top of a trillion dollar budget deficit --"repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy." This spending would boost employment, wages, and aggregate demand.

I have no opposition to infrastructure projects, but who will finance the baseline trillion dollar US budget deficit plus the additional red ink spending on infrastructure? Not Americans. The US savings rate is zero or negative. Home mortgage foreclosures are in the millions. Officially, US unemployment is 10 million, but if measured by pre-Clinton era standards unemployment is much higher. Statistician John Williams, who measures the unemployment rate by the pre-Clinton standards concludes that the rate of US unemployment is about 15 percent. President Clinton "reformed" the unemployment statistics by ceasing to count discouraged workers as unemployed.

For years, the US government’s budget has been dependent on foreigners financing the red ink. Countries such as Japan and China and OPEC suppliers of oil to the US have huge export surpluses with the US. They recycle the dollars by buying US Treasury bonds, thus financing the US government’s red ink budgets.

The open question is: how much longer will they do so?

Foreign portfolios are overweighed in dollar assets. Currently the dollar’s value is benefitting from the financial crisis, as investors flee to the reserve currency. However, sooner or later the huge outpourings of dollar debts will cause foreign creditors to draw back. Already China, America’s largest creditor, has sent a signal that that time might be drawing near. Recently the Chinese government asked, as they do indirectly through third parties, "Why should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?"

Is the rest of the world, which has demanded a financial summit to work toward a new financial order, going to permanently allocate the world’s supply of capital to covering American mistakes?

If not, the bailout and the stimulus package will have to be financed by printing money.

The auto manufactures are begging for bailouts, but I have a growing suspicion that the automobile situation has a closer resemblance to the mortgage melt down than many might suspect. Recent reports of a sea of automobiles are hinting that there is a massive glut, which is bound to force prices down. But the manufacture and sales of automobile is financed through a very similar structure of debt as with the housing industry, with each round of debt from today’s purchases financing tomorrow’s production, the more waste you can build into the system, the larger your profits are tomorrow.

To put it another way, the auto industry may prove to be the second domino falling down in the economic China syndrome.

We now know that the bailout tab is actually at 5.1 trillion dollars (not 700 billion). Most of this has already been spent in low interest loans and other forms of cheep barrowing in order to forestall the inevitable.

But that’s basically the plan, to stall. Eventually, the mythical market place will work every thing out, and America’s debt infrastructure will just reassemble itself, like the Golden Army did in Hellboy II.

But I wonder if Rober’s even has a true grasp of the scope of the problem.

I think he is correct in pointing the finger at the overtaxed consumer. And all the bailouts have done is replaced the exhausted consumer with Uncle Sam in holding up the debt world. And most economists still argue that debt doesn’t mater. It will take China cutting off the life support to prove them wrong.

But I also suspect that there is more at work here than debt.

A hint of the problem can be seen in my next door neighbor’s house, which has four boys. And entire bedroom of his small has is filled with floor to ceiling with plastic toys, much of which are no longer played with. But an astonishing quantity of these toys are disposable in nature, such as those they get from McDonalds, or of a poor design and brake soon after being removed from the box, assuming that they ever worked at all.

Another example can be found in your pocket or purse. Most cell phones are designed, rather obviously, so that the batteries can be replaced with fresh ones once they wear out. But replacement batteries are actually hard to find, largely because most people tend to replace their cell phone well before the battery lifespan has been exhausted. They buy new phones with more features, or are compatible with the latest network protocols.

These are examples of waste. The current US economy is not just financed on debt, but most of what is being purchased is largely waste. It’s a systemic problem found throughout the economy. Public transportation systems were bought up by the automobile industry and intentional dismantled to “build” a marker for new cars, promoting a less efficient system over a more efficient one. And as this system grew, you had to have massive infrastructure in order to support the inherent waste of the system, such as massive roads and bridges.

The solution being floated here is to finance massive public transportation projects such as heavy and light passenger rail. But if you do this, you will no longer need many of those bridges that are also supposed to be rebuilt. Heavy passenger rail will bury the airline industry, exiling it to only transcendental routes, and out of the lucrative intra-city markets that they now dominate.

And maybe just in time. If there is to be any hope to combat global environmental change, the entire geo-economic structure must cut out the fat in a major way. Cutting out waste such as replacing timber harvests with hemp or synthetic fibers for example. To develop true paperless systems for both home and business use and shutting down junk mail would also reduce waste.

But current waste reduction programs place nearly the entire burden of waste reduction on consumers. We are asked to recycle news papers while our mailboxes are stuffed to the gills with credit card applications. I currently get four phone books delivered to my front door a year – four!

This may be part of the economic crises. Most consumers were taught that you keep something like a car only until it costs more than it is worth. But with tuff times, this is an obvious change most households can alter, by keeping the car because it’s still a perfectly good machine with modest maintenance requirements.

A more efficient economy is a certain death to our current corporate infrastructure that depends on “expanding markets” for its growth and profit margins.

The car dealers vocabulary for a customer's car that is owes more on the car than it is worth is upside down. There is a similar situation when maybe 20% of people owe more on their house than its market value. The house is said to be underwater. The thing is when you have a house underwater you have people that are underwater with negative net worths. With the tax structure needed to fund 40% of the economy and the usury loans with their late fees, getting in the whole with one of those wage slaves is hard to get out of. It pulls down whole generations of families

Say a high school student wanted to use the Internet to say how bad things are, the way to do it is with a search for "underwater house" and "underwater person" and "underwater life." Housing prices are still declining and more people are going underwater.

There are 10 million people out of work. Overtime is gone. People are working part-time more and more and now it is time to come up with those property taxes. This isn't some other recession either, because the federal government credit is on the verge of downgrading and facing deficits that cannot be funded without just printing money and bringing on themonetization of the deficit so many of us expect.

The day after Thanksgiving is Black Friday and the biggest shopping day of the year. It will have retailers throwing their sweetest products out at what will have to be some unbelievable prices to many. We will know on Sunday how bad things are and we are as likely to see "Dark Friday" or "Grey Friday" in substitution for the "black" profits that erase the red ink of most of the year.

The new term coming is "ghost malls."

Two words –Wal-Mart.

Wall-Mart just a few years back built a massive commercial plaza as well as one of the biggest box stores in Kansas. The result is that it has literally bleed the local Mall dry for customers, located further into town.

Wichita I suspect is rather typical around here. The city subsidized the construction of small plazas all over town, plazas that are never filed. I know of several that have been build five years ago – never having even one tenant. And still more floor and “window” space is being built every year.

This also complicated the down town revitalization project, which has long suffered the effect of urban flight. Only when you are talking about down town Wichita, you are talking about buildings as tall as 30 stories, and are in such a state that it would take hundreds of millions of dollars to refurbish these buildings, just to be habitable. Ironically, refurbishing is a heck of a lot cheaper than demolition. Some of the abandoned towers used to be the economic nerve center of the mid-west, including one building that still has the words “Central Oil Exchange” built into its façade.

The city has for years maintained “fake windows”. These are shopping windows of abandoned buildings that have manikins and “products” that are displayed. But these displays are visited infrequently. I recall one that had a dead animal that expired from the extreme heat that was there for a month, covering the windows with fat vapor and with maggots climbing every where. It was there for at least a month before the city finally boarded up the window. And that’s down town Wichita before the mortgage melt down.