The Status of the U.S. Economy

by PIM of SPAIN | October 13, 2009 at 07:10 am

710 views | 75 Recommendations | 25 comments

Once upon a time earnings were a reliable performance measure to judge a company’s financial health, whether being good or poor. It helped to make proper business decisions.

If the company was making money, it was doing something right. So investors kept buying. If companies weren’t making money, investors would lose faith and sell-off their shares.

But nowadays, earnings are a joke. What Enron and other corporate scandals have proved is that the managers of a company often do what is in their own best interest. Sometimes, they even cook the books to protect their ass.

For example back in March, every major bank reported huge, billion dollar profits. But those profits didn’t exist because the banks were lending in a risk free trade the stimulus money went back to the government, or because people decided to pay off their mortgages early. All these movements were marked ‘profits’ after being shaped and molded until they looked perfect. It made everybody happy, and provided the impression that the financial sector was making money again.

So the banks could make believe their assets were worth more than the market would buy them for, pretending the problem was over. Had the banks actually marked their assets to market value, there is no doubt that otherwise the banks would have gone bankrupt.

All these manipulations, by cooking the books, radiate a much rosier status of the economy than it actually is.
How is all this possible? Companies are seeing better earnings on the back of record government stimuli entering the economy. Not only has the government engaged in good old-fashioned money giveaways like Cash for Clunkers, but also over $100 billion of the $787 billion stimulus packages have poured into the economy. In that situation it isn’t anymore a wonder why earnings are beating expectations.

It is of great importance to keep focused on the “endgame” when the stimulus packages run out. What will happen to the economy; will the temporary government stimuli turn into a self-sustaining recovery or not? So far the indicators are not encouraging. Look for example at the cash for clunkers stimulus: The feds in August used taxpayers’ money to help consumers to buy cars they didn’t need. In September sales figures showed that the stimulus didn’t convert in a sustainable boost at all.

Devaluing the US Dollar good or bad? Forbes magazine writes: “The US economy was being wrecked by the low dollar, and that American trading partners were getting fed up with America’s attempts to boost its own economy by devaluating its way into growth.”

The Feds zero interest rate policy for the US Dollar has the consequences that speculators are borrowing US dollars in the short-term money markets at near-zero rates to buy bonds in higher-yielding currencies like the Australian dollar or the Euro. This is further driving down the exchange rate of the US dollar opposite other currencies.

By giving a fake boost to the economy in the short run, the Fed is just delaying the pain Americans will experience when it has to pay back its debts.

Forbes also believes that there is no real benefit to a devalued dollar: “Whatever you gain on exports, you lose on the wreckage you’re doing on the rest of the economy.”

In a Bloomberg interview he was asked: what (Forbes) thought about the Treasury and Fed’s claim that they believe in a strong dollar:

•    “They’ve been saying that for years and the traders know that’s a wink and a nod for ‘just make it weak gradually’”.

Asked about opinion among international traders:

•    “There is very real concern about trade protectionism, that the US is not taking the lead, that these Chinese tariffs (on tires) just weren’t a small sop to domestic concern”.

•    “International trade partners are afraid that the US doesn’t believe in free trade anymore”.

This Economy has to be restructured and not being revived as the Obama team and Feds are doing with their money stimuli. A short recession can be revived by injecting money to restart the economy when it has arrived in a temporarily slump. A recession slump takes usually about 6-8 month. But this time we are not in a slump thus not in a recession either. This financial crisis is going on for over 15 month – double the time a recession takes to recover - it technically is an economic depression that urgently needs restructuring, through creative destruction in eliminating the excesses that were created by the easy money policy of the feds. A policy initiated in 2000 by Greenspan. The industrialized world has about 30 - 40% too much production capacity. This process can take many years, when considered that the built-up took about 50 years. These excesses are not eliminated over night it can take 5 - 10 - 15 or even 20 years before a new equilibrium between demand and supply has been reached. Much depends on the feds, if they continue with injecting money into the economy it will take a great deal longer.

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Roy C

at 07:37 on October 13th, 2009

You describe the wind and imply correctly that we will reap the whirlwind.

sara star

at 07:42 on October 13th, 2009

Are you saying the system is broken, and can't be fixed?

What is the alternative?

Hugh Askew

at 08:10 on October 13th, 2009

Sara, perhaps borrowing money to patch a tire will allow you to drive on it.....until you run over what caused your flat tire the first time.

The problems, excess printed money, excessive and easy credit, incredible hubris, lack of savings, lack of accountability, excessive and unnecessary imports, can all be flushed from the system, if we allow the economy to regulate itself. It would be extremely sharp, disagreeable, and very painful.

The present course sets itself up for sure failure, because the problems remain. The result will be years of slow financial death for businesses, and individuals. The pain will endure for many years, and could well lead to civil unrest - or worse.

sara star

at 08:40 on October 13th, 2009

I agree HA... I hear the problem.

Now what is the solution? Does it have to come down to Civil Unrest?

nanute

at 13:32 on October 13th, 2009

now what's the solution? does it have to come down to civil unrest? No sara star it doesn't. But mark my words, if proponents of pulling the plug, so to speak, get their way we'll have not only civil unrest right here in the USA. This phenomenon will reach globally. PIM is a very smart guy and I respect and admire his opinions. Having said that, I can't agree with his premise that a systemic failure is the answer. It isn't stated, but it seems implicated. If I am wrong in my assumption, apologies to PIM.

I've commented on previous stories here and have noted that I don't like the fact that there were no penalties or tightening of regulations by the government as a condition of the "bailout."The same "masters of the universe" that created this nightmare are left at the switch and it seems like full speed ahead. Someone noted down thread, and I made the point the other day as well, that corporate interests are in charge of the economy and have co opted the political system by "buying" it. If this weren't the case, heads would have rolled, and Congress would have enacted serious regulations with regard to speculation and allowing traditional banking to engage in investment banking. (The repeal of Glass Stegal.) In spite of these reservations and disappointments, inaction by the Fed would have been much worse than what we are experiencing right now. Granted it is speculative in nature, but if history is any indicator a situation similar, and possibly,much worse than the Great Depression was the likely outcome of inaction. Are we prolonging the invertible? Time will tell.

I'm not holding out much hope for our ability to take back control of the government by peaceful measures. These corporate and political bastards have got citizens that should be united in a common goal, fighting with one another. And there is a fringe element out there being fueled by demagogues, that don't see the danger of playing with "matches." If there is a god, I hope its listening. Or maybe this is just another "invisible hand" that will let things run the course.

Corporations enjoy the same Constitutional protections under the 14th Amendments due process clause as living, breathing individuals do. (See Santa Clara v. Southern Pacific Railroad), for the railroading of the rest of us. There I feel much better now. Anyone else?

Rory Cripps

at 14:08 on October 13th, 2009

Nanute:

The same "masters of the universe" that created this nightmare are left at the switch and it seems like full speed ahead.

YES! I wonder why that is? I don't believe that capitalism per se has failed. What I believe is that the "capitalists" have failed the system. The "too big to fail" bunch couldn't keep their hands out of the cookie jar, as it were. And the politicians (on both sides) failed to keep them in check. But the joke is on the American people and the pigs continue to feed at humanity's trough and live high on the hog while unemployment throughout many areas of the country is at depression levels. HA! HA! HA!

Hugh Askew

at 15:06 on October 13th, 2009

nanute, I certainly know your frustration. Okay, maybe not your frustration, but frustration about the same things you mention. Government intervention, however, is almost universally acknowledged as the reason the Depression of the 1930's lasted as long as it did, and was as painful as it was. It is also the main reason that it hit other countries - notably Canada & Great Britain - as hard as it did.

Inaction would be the best case scenario for governments , altho the actions by the developed countries in the last year, show that that is not going to happen.

PIM is very correct about the danger of inflation. It will happen.....cannot NOT happen. Way too much money in circulation, with more added daily, and the ruling party talking of additional "stimulus" money.

The "spend all you want, we'll print more" routine doesn't work for long. Ask Argentina or Zimbabwe. Allende gave it a go in Chile, the Chinese Nationalists tried, even the Weimar Republic gave it go.....it has never failed to fail.

René

at 08:47 on October 13th, 2009

Yeah, but if you did save, what happens to that?

excessive and unnecessary imports? blame the corporations that moved way too many US jobs to China, et al.

C'mon, Dr. Scholls? now made in China, now falling apart before a month is up. You can't tell me the American people wanted this.

Anonymously Given (not verified)

at 10:12 on October 13th, 2009

The wallets of the members of the gang of "bad ol boys" who now have monopoly level control over all of American non-industry and non-service alike received a short term boost. Meanwhile, these same folks continue to rig the political system in order to quench the unrest that their actions inspired -- including the enactment of all manner of "just in case" legislation prepared as a matter of last-ditch defense (for the monopolists) (READ: FEMA camps)

albertacowpoke

at 10:13 on October 13th, 2009

I agree until the financial system is fixed, this could turn into a major disaster once the stimuli runs out.

PIM of SPAIN

at 11:05 on October 13th, 2009

My compliments to all of you with yr to the point comments, conclusions and explanation.

An encouragement to continue, because all of us responsible people have to come in action spreading the message to be prepared once the bubble is blown-off again for the second time. It is not a matter whether if that, but only when!

Don't count on a quick fix of the financial system. Bartering is one of the future options. Savers are wiped out, the moment (hyper)inflation is roaring its head. Be alert. It can take a while, but surely it will happen.

158

at 13:53 on October 13th, 2009

Lots of good information.

sara star

at 14:09 on October 13th, 2009

These corporate and political bastards have got citizens that should be united in a common goal, fighting with one another.

Savers are wiped out, the moment (hyper)inflation is roaring its head

Good points. Now wait until the unemployment benefits dry up too. Money really is only paper. Not as important as air, water and shelter. Oh, and maybe a sharp knife.... My dad always had a pocket knife, came in handy.

Hugh Askew

at 14:36 on October 13th, 2009

Yep, a pocket knife is handy, but it won't fix this economy.

sara star

at 15:52 on October 13th, 2009

I hear you HA, but if nothing can fix the economy, we will have to fend for ourselves. My bet is on the pocket knife.

Hugh Askew

at 16:08 on October 13th, 2009

Stock up the TP, too. It is the first thing grocery stores run out of in an emergency. :)

nanute

at 02:52 on October 14th, 2009

i hear you HA, but if nothing can fix the economy.....

Look. At the end of the day this is an ideological issue. And I don't say this with malice.The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama’s economists lean left. This is a quote from James K. Gailbraith in this article from Washington Monthly:James K. Galbraith If you or anyone else are interested it will give you a good argument for why government intervention can and should be utilized it times of crisis.

Contrary to what some have said here, policies instituted by the Roosevelt administration did not in fact prolong the recovery from the Great Depression. There has been a bit of revisionist "history" going on in this debate, but if you look at the hard data, unemployment numbers in particular, you will see that the stimulus type programs from the New Deal were positive in nature. In fact there was a period during the mid thirties, when owing to political pressure, and fears of inflation, monetary policy was tightened, and unemployment spiked. In 1933 the unemployment rate was approximately 25%. By 1937 unemployment was down to around 14%. (Some argue the number was lower because people working through WPA programs were not counted as employed.) Concerns of inflation as a result of increasing the money supply, led the administration to pull back on programs and money supply. By the end of 38' as a result of tightening, unemployment jumped back up to around 19.5%. Once we started preparing for War in 39' unemployment was no longer an issue. Interestingly, now as then, no one was expressing concern of the inflationary effects of borrowing large amounts of money to fund the war effort.

We can have an honest debate about policy and the role of government, but I think history shows that overall ,the intervention by the government during the Depression was a positive force towards a gradual economic recovery.

Hugh Askew

at 06:37 on October 14th, 2009

nanute .

The crash came in '29, bottomed in the summer of '32, and then, in spite of, or because of, government intervention, come 1937 - FIVE YEARS later, unemployment was still at 14%.

From my comment above regarding current government meddling: "The result will be years of slow financial death for businesses, and individuals."

It seems to me that the fact that unemployment was still very high in 1937, indicates that the fixes were of a temporary nature. It was further government intervention that drove unemployment numbers back up, in 1938, was it not? If not for the war, it may have - likely would have - continued it's climb.

nanute

at 10:20 on October 14th, 2009

hugh,

thanks for the comments. I think you misread my comment regarding unemployment in 38'. Political pressure and concerns of inflation as a result of "too much government spending," (sound familiar) forced the administration to pull back on intervention. Once it became apparent that more, not less, stimulus was needed the economy revitalized and unemployment came back down precipitously. Furthermore, between 38' and 41' further declines brought the rate down to approximately 9.9%, where the rate remained until we entered the war in 42.

FIVE YEARS later, unemployment was still at 14%. Would you have rather it remain at 25% or higher, for oh let's guess, 2 or 3 years? People were literally starving In fact the election of Roosevelt in 32' was a demand by the public for the government to intervene in the economy.If this were not the case, Hoover should have been re-elected.

What you call government meddling others would argue is sound economic policy. Concerns about inflation are valid. Right now, as discussed the other day in PIM's forum, deflationary pressure is more of a concern. It would seem counter-intuitive, just as the injection of large amounts of "new money" into the system might be.

I would much rather see a gradual unwinding of massive debt and overcapacity of consumer goods, than a total withdrawal to the "free market." In the current condition I don't think the system could handle it, just as in 29'.

Babel-Fish

at 19:30 on October 13th, 2009

Stimulate the economy was in fact a global move, the idea was not to save the world or to fix every thing but to create confidence in the banks and the stock exchanges. It was not the real problem that caused the biggest loses of jobs etc. It was the panic caused by the Media and the lose of confidence in the market place by the investors. Down sizing cooperates and stopping all expanse ended up causing high unemployment not just in US but its become a global problem.

It then caused a big cut in consumer spending not just because of job losses but because of the threat of more job losses. The hype caused 70% of the global economic damage, the stimulating economies was seen as the away to stop the panic caused by the hype and to cool down the hype. Bail outs where I think a very bad idea band aid patches to stop the inevitable, it only worked where business and banks just needed a little cash to tied them over till confidence gets back.

Yes businesses and banks will and do falsify there final accounts to evade tax or look to be in better shape than they are. The executives normal try to milk off as much cash as they can before the business or bank goes bust. That capitalism is nasty, dirty but its what makes the world go round when the system has people confident in it.

As for USA looking like it does not like free trade well unfortunately free trade has to go out the window and cheap goods need to be taxed so that a new more powerful manufacturing base can be created as Americans need jobs. This is also the case in most nations in the West. The development of the third world needs investment within the developing countries own consumer market. Free trade has to become sensible trade for this world of our to have some sense of harmony and a more balance set of economies.

Its been said the China can not do with out USA and the USA can not do without China, that my friends is not true as China is now proving it can do without China and investing in China's future within the Third world making new consumer markets through development.

Old Economic planning has been out dated and the west needs to come up with new ideas to protect their own economies and also create consumer markets and not manufacturing bases in the third world to compete or work hand in hand with the dynamic China Family.

Of course the stimulating and bailing out is not a perfect answer and does not solve much other than most of the doom and gloom hype. Confidence in the market and creating new jobs so consumers can afford to consume and invest is the only solution. Giving the dollar its correct worth could be see as being honest and a government that wants its banks and businesses to be honest should be relating to the correct value of its currency.

USA is in a mess and one can see the simple solution is the need to create new jobs that means investing in and protecting home manufacturing. One does not need to be an economist to come to such a logical sensible conclusion.

PIM of SPAIN

at 23:50 on October 13th, 2009

BF interesting to read yr thought and opinion. With some we do agree, but that the media hype created this crisis is too far fetched. 50 year of credit build-up from which the last ten with easy money policy have caused the economic damage. I was already at the front of condeming this in the 90s, but everything went fine, nobody listened. Credit was necessay to stimulate the economy, 'pay as you go' became the slogan instead 'save first and then buy yr stuff you really need'. That is the source of this economic crisis which cannot as above commented be wiped-out overnight. It can take up to 20 years, and even longer as the fed and the Obama team don't come to realistic senses. Look at Japan where the same mistakes were made and that since 1989 is in an economic slump, and still haven't made any improvement on it!

Iffy (not verified)

at 03:20 on October 14th, 2009

I used to have a pocket knife, until it was taken off me at an airport. And that is a metaphor for our times: you may think you are self-reliant, but the government will come and take whatever it is you are using for that self-reliance: your home (higher property taxes), your gold (confiscation), your weapon (confiscation), your job (outlawed). Don't kid yourself: when the crap hits the fan, governments will take what they need. In the Depression, they grabbed gold, in the 70s they jacked taxes so people had to sell their homes.

PIM of SPAIN

at 06:38 on October 14th, 2009

Iffy a wise lesson you explained. People have to be very careful in planning their survival indeed.

Branko

at 11:21 on October 14th, 2009

Let's not forget that this is also a hidden energy problem. The US oil production peaked in 1972, the global oil production in 2004. The major driving force behind the economical growth of the last century is cheap energy. It is sad to see politicians wasting their time and (our) money on a problem politics alone cannot solve. I guess people will continue to listen to politicians as long as there is enough energy to keep the television set beaming their lies into the living room.

If you come to think about it: How long will the money presses run before their energy consumption exceeds the value of the fiat currency they produce....

@iffy: Arm yourself with knowledge, it weights nothing at it cannot be taxed or taken away.

PIM of SPAIN

at 11:48 on October 14th, 2009

That's very good comment Branko, and realistically expressed. Hope that many politicians will take this at heart. Probably not many, but after the bust they have no other choice than to do it.

Economical long-lasting energy is feasible, but old customs have to change for that, and that will happen the day people get cold.:)