The media has
headlined good economic news: fourth quarter GDP growth of 5.7 percent ("the
recession is over"), January retail sales up, productivity up in 4th quarter,
the dollar is gaining strength. Is any of it true? What does it
The 5.7 percent growth
figure is a guesstimate made in advance of the release of the U.S. trade deficit
statistic. It assumed that the U.S. trade deficit would show an improvement.
When the trade deficit was released a few days later, it showed a deterioration,
knocking the 5.7 percent growth figure down to 4.6 percent. Much of the
remaining GDP growth consists of inventory accumulation.
More than a fourth of
the reported gain in January retail sales is due to higher gasoline and food
prices. Questionable seasonal adjustments account for the rest.
Productivity was up, because labor costs fell 4.4 percent in the fourth
quarter -- the fourth successive decline.Initial claims for jobless benefits
rose. Productivity increases that do not translate into wage gains cannot drive
the consumer economy. Housing is still under pressure, and commercial real estate
is about to become a big problem.
The dollar's gains are
not due to inherent strengths. The dollar is gaining because government deficits
in Greece and other EU countries are causing the dollar carry trade to unwind.
America's low interest rates made it profitable for investors and speculators to
borrow dollars and use them to buy overseas bonds paying higher interest, such
as Greek, Spanish and Portuguese bonds denominated in euros. The deficit
troubles in these countries have caused investors and speculators to sell the
bonds and convert the euros back into dollars in order to pay off their dollar
loans. This unwinding temporarily raises the demand for dollars and boosts the
dollar's exchange value.
The problems of the
American economy are too great to be reached by traditional policies. Large
numbers of middle class American jobs have been moved offshore: manufacturing,
industrial and professional service jobs. When the jobs are moved offshore,
consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad
that there has been no growth in U.S. real incomes in the 21st century, except
for the incomes of the super rich who collect multi-million dollar bonuses for
moving U.S. jobs offshore.
Without growth in
consumer incomes, the economy can go nowhere. Washington policymakers
substituted debt growth for income growth. Instead of growing richer, consumers
grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this
with his low interest rate policy, which drove up housing prices, producing home
equity that consumers could tap and spend by refinancing their homes.
to maintain their accustomed living standards with income alone, Americans spent
their equity in their homes and ran up credit card debts, maxing out credit
cards in anticipation that rising asset prices would cover the debts. When the
bubble burst, the debts strangled consumer demand, and the economy
As I write about the
economic hardships created for Americans by Wall Street and corporate greed and
by indifferent and bribed political representatives, I get many letters from
former middle class families who are being driven into penury. Here is one
that recently arrived:
"Thank you for your continued truthful commentary on
the 'New Economy.' My husband and I could be its poster children. Nine years ago
when we married, we were both working good paying, secure jobs in the
semiconductor manufacturing sector. Our combined income topped $100,000 a year.
We were living the dream. Then the nightmare began. I lost my job in the great
tech bubble of 2003, and decided to leave the labor force to care for our infant
son. Fine, we tightened the belt. Then we started getting squeezed. Expenses
rose, we downsized, yet my husband's job stagnated. After several years of no
pay raises, he finally lost his job a year and a half ago. But he didn't just
lose a job, he lost a career. The semiconductor industry is virtually gone here
in Arizona. Three months later, my husband, with a technical degree and 20-plus
years of solid work experience, received one job offer for an entry level
corrections officer. He had to take it, at an almost 40-percent reduction in
pay. Bankruptcy followed when our savings were depleted. We lost our house, a
car, and any assets we had left. His salary last year, less than $40,000, to
support a family of four. A year and a half later, we are still struggling to
get by. I can't find a job that would cover the cost of daycare. We are
stuck. Every jump in gas and food prices hits us hard. Without help from my
family, we wouldn't have made it. So, I could tell you just how that 'New
Economy' has worked for us, but I'd really rather not use that kind of
language."Policymakers who are banking on stimulus programs
are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed
Federal Reserve policy. When the economy heated up and inflation became a
problem, the Federal Reserve would raise interest rates and reduce the growth of
money and credit. Sales would fall. Inventories would build up. Companies would
lay off workers. Inflation cooled, and unemployment became the problem.
the Federal Reserve would reverse course. Interest rates would fall, and money
and credit would expand.As the jobs were still there, the work force would be
called back, and the process would continue.
It is a different
situation today. Layoffs result from the jobs being moved offshore and from
corporations replacing their domestic work forces with foreigners brought in on
H-1B, L-1 and other work visas. The U.S. labor force is being separated from the
incomes associated with the goods and services that it consumes.
With the rise
of offshoring, layoffs are not only due to restrictive monetary policy and
inventory buildup. They are also the result of the substitution of cheaper
foreign labor for U.S. labor by American corporations. Americans cannot be
called back to work to jobs that have been moved abroad. In the New Economy,
layoffs can continue despite low interest rates and government stimulus
To the extent that
monetary and fiscal policy can stimulate U.S. consumer demand, much of the
demand flows to the goods and services that are produced offshore for U.S.
markets. China, for example, benefits from the stimulation of U.S. consumer
demand. The rise in China's GDP is financed by a rise in the U.S. public debt
burden. Another barrier to the success of stimulus programs is the high debt
levels of Americans. The banks are being criticized for a failure to lend, but
much of the problem is that there are no consumers to whom to lend. Most
Americans already have more debt than they can handle.
unrepresented and betrayed, are in store for a greater crisis to come. President
Bush's war deficits were financed by America's trade deficit. China, Japan, and
OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to
purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.
problem now is that the U.S. budget deficits have suddenly grown immensely from
wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a
result of the serious recession. Budget deficits are now three times the size of
the trade deficit. Thus, the surpluses of China, Japan, and OPEC are
insufficient to take the newly issued U.S. government debt off the
If the Treasury's
bonds can't be sold to investors, pension funds, banks, and foreign governments,
the Federal Reserve will have to purchase them by creating new money. When the
rest of the world realizes the inflationary implications, the US dollar will
lose its reserve currency role. When that happens, Americans will experience a
large economic shock as their living standards take another big
America is on its way
to becoming a country of serfs ruled by oligarchs.
Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His books, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available (more...)