Headed to recession?

from Peter Radford

Well it didn’t take long for the stock and credit markets to vote on the efficacy of American economic policy. Judging by last week’s massive stock market sell off, coupled with the steady decline of bond rates, the vote is clearly a negative one. The markets are giving us the collective thumbs down. Evidently sentiment is gathering behind the notion that the economy is weak, that we have no leadership, that we have no corrective policy, and that the risk of another recession is rising by the hour. To make matters worse there is an epidemic of economic incompetence worldwide, not least in Europe where the leadership seems determined that we need a re-run of 1937. Because, presumably, the first time through was such a thrill.

I cannot locate a positive sign at the moment. The news is that bad.

What I find most extraordinary is that people seem only now to be waking up to this realization. For those of us not blinded by ideological faith based judgements, the signs have been legion for months that the economy was headed into stagnation. The malaise set in a while back. That only now analysts are pointing to income inequality as a problem amazes me. Anyone looking at personal consumption to drive the economy was deluding themselves. First, most households never experienced the upside which was asymmetrically distributed towards the top wage earners. Second, most households used debt to maintain the illusion of progress. Third that debt was often secured against a home that is now no longer worth anywhere near what it was. Fourth, wages are stagnant, stagnant, stagnant. Fifth, most households are, therefore, forced to save in order to retrench their balance sheets. So, sixth, most households are not going to spend until they feel safely beyond the debt crisis. Thus there is no broad based upswell to be seen in consumption. It existed only in the minds of those analysts who ignored the nature and depth of the crisis. That small part of our economy inhabited by the better off is humming along. Those bonuses are back. Banking and its feeder system is alive and well. But the real economy is rotting.

Inequality has come home to roost. Welcome to the new economy.

Meanwhile no one is doing anything to stop the rot. So we should be under no illusions.

Clearly the markets aren’t.

  1. August 8, 2011 at 4:46 pm

    The markets are hysterical matrons, not rational actors. They are seduced by happy talk and taken advantage of by traders and speculators. When things go bad, they don’t notice. The ship has been sinking for years. Only when the water touches their feet do they want a better boat.

  2. Pandora
    August 8, 2011 at 4:52 pm

    How soon till “that small part of our economy inhabited by the better off” starts to rot as well? Or is that segment somewhat self-sustaining under current policy?

  3. Podargus
    August 8, 2011 at 7:15 pm

    If we rely on growth to sustain our economy then we are flogging a dead horse.This is because infinite growth is not sustainable in a finite system.

    Will this developing mother of all crises in an unstable and crisis prone system prompt a fundamental rethink of how we are to survive as a civilization?

    And how Planet Earth is to survive in something like its present state?

    No rethinking of any sort will be done by the present oligarchy,that’s for sure.Maybe it’s time for less talk and more pitchfork.

  4. Alice
    August 9, 2011 at 10:37 am

    Ok it really is time to acknowledge the gargantuan errors. We let the banks get sooo big and do anything anywhere. We let the rich and corporartions off their taxes over three decades…and they spent too much time in the Wall street casino blowing bubbles with all their excess money they couldnt find a good productive idea for (too much money – we gave them other peoples captive super as well to play with), We saw regulation as something evil you privatised and handed over to standard and poors.

    The government got even lazier and lost its regulation skillset.

    Cruel cruel world – its teaching us where we went wrong – that what we thought was so right (poor Friedman – his policies were only good for recovering oppressed command economies, not economies that already had little command)… failed the majority, us all.

    Economics – it aint the real world.

  5. Dave Taylor
    August 9, 2011 at 7:51 pm

    Gargantuan errors indeed, Alice. But Podargus is even more to the point: there is need for a fundamental rethink. Since the present infantile oligarchies are incapable of rethinking anything, we’re going to have to do it for them – this initially meaning less pitchfork and more willingness to reflect on and build on other people’s conclusions. Or what’s beginning to happen in Britain, as the devil finds work for desperate minds and idle hands, will only be a starter.

    My own fundamental conclusion is that money represents not debt but credit. The debt arises when we spend it, and is to the community which sells us things in the expectation that we have or will attempt to earn them, not to the banks. There is a Copernican revolution involved here, for on this interpretation of the facts those who have more are not thereby enriched but simply owe more to the community. This creates a Gesellian disincentive to greed. Governments will need to replace its present narcissistic ethic of self-glorification with a hitch-hiker’s ethic – of gratitude to and emulation of our benefactors. Before the Reformation society had surplus enough to thank God for it by building fine churches; since the Bank of England was created bankers and land-grabbers have built palaces at public expense – with fairy-tale money – to glorify themselves.

    Governments don’t need banks to give speculators credit in proportion to their ability to puff stock market prices. They do need them to provide a banking service through which government can authorise statutory increments of credit for individuals (including bankers) to live on. They are needed to do what they do now when authorising justifiable credit limits for housing and businesses (but not speculation), writing off debts insofar as credit is used for its intended purpose or given back to the community which supplied it.

    Do the sums on this and it is amazing what useless work can be dispensed with, leaving time to do what needs doing and to explore ways the next generation might do it better. The exportation of ownership and jobs, the problems of taxation and financing education, health care, pensions, technical development and economic growth, simply go away just so long as enough of us identify and do what needs doing: which with nothing better to do and with all the technology at mankind’s disposal is not really going to be a problem.

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