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Americans who still harbor the notion that the U.S. economy is "good" should prepare to be disabused.

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At first glance, the economy's role in this year's midterm elections is a puzzle. Economic growth and unemployment are at levels that in past years would have been a clear political asset for the party in power.

Just in time for Labor Day, the federal government released more good news about the economy: It's growing, continuing a five-year trend. Incomes across all households are up, while corporate profits hit their highest point since the 1960s. And to whom do we owe this apparent good news? Why, the American worker. Continuous increases in worker productivity (along with inflated consumer spending financed by credit card debt and mortgage refinancing), has driven economic growth. Recognizing the importance of workers to our economic well-being, the U.S. Department of Labor's Web site says Labor Day allows us ''to pay tribute . . . to the creator of so much of the nation's strength, freedom, and leadership: the American worker.''

What about the fact that average income is growing? That's true enough, but misleading. Average income increased overall solely because incomes at the very top exploded. For 80 percent of workers, incomes actually declined on an inflation-adjusted basis since November 2001. The Center on Budget and Policy Priorities notes this is the only time income for most workers declined during any four-year-long economic recovery, going back 40 years.

Go one layer down in the statistics, the answer is even clearer. Flat wages and rising debt nationally have converged to leave millions of middle-class households feeling acutely vulnerable to bumps in their financial planning. The most visible of these are rising energy prices and a softening housing market.

Just like the federal government has overspent since the Bush administration took office, going from a 200 billion surplus to a 300 billion deficit, Americans have been tempted by cheap credit and have overextended themselves. As a result, the National Debt has continued to increase an average of $1.93 billion per day since September 30, 2005.

Another powerful variable is the interest paid by people carrying credit card debt or mortgages whose monthly payments vary with interest rates. During the low interest years of the Bush Administration, most people took all their equity out of their homes, taking second mortgages and maxing out on their credit cards. Some even used the newly created interest only mortgages that pay no principal.

During the same period, the country went from a positive savings rate to a negative savings rate.

Now that the housing market bubble is deflating, Americans are left with mortgage payments they can't afford, no equity in their homes to stay afloat, and no savings to make ends meet.
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Finally, companies and institutional investors around the globe are holding record amounts of cash an indication that they are growing more pessimistic over the outlook for future economic and profits growth.

According to the latest data from Thomson Financial, the cash on the balance sheets of the world's largest 100 companies has now reached $1,100bn and shows little sign of falling.

Cash holdings have been rising steadily since 1999, first breaking the $1,000bn mark in 2004 and they have remained unusually high since then.

Institutional investors are also holding on to more cash, according to recent surveys.

Last week Merrill Lynch said that a net 33 percent of asset allocators were overweight in cash an all-time high. "You have to go back to the Iraq invasion of March 2003 to see levels of risk appetite this low," said David Bowers, an independent consultant to Merrill Lynch.
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If you add this to the fact that we have had inverted yield curves on the treasuries, my conclusion is that the country is heading for a depression.

All of these factors should play a role in the midterm elections. As President Bush the first was told, "it's the economy stupid".

 

www.carlostmock.com

Travel website: The Pink Agenda. Several Blogs. Weekly newsletter, available upon request. Publications - Fiction: Borrowing Time: A Latino Sexual Odyssey - Floricanto Press 2003. Poetry: The Refined Savage Poetry Review - Refined Savage (more...)
 

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