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October 7, 2009

Spengler: Obama's permanent depression

Topics: Political News and commentaries

Spengler writes at Asia Times today that President Barack Obama may be remembered for permanent depression, the way that Leon Trotsky's name is linked with permanent revolution (I find the analogy to be very appropriate for obvious reasons, given Obama's Marxism), and that the crisis Barack Obama inherited is being made much worse by his Keynesian economic policies and their effect of pushing the productive side of the economy ever-deeper into the hole.

Here's a couple of enticing excerpts:

[...] Fiscal stimulus combined with near-zero interest rates have proven to be a toxic cocktail for the United States, the macroeconomic equivalent of barbiturates and alcohol. Keynesian spending creates a deficit that sucks all the available capital out of the grassroots economy and transfers it to the Treasury market. Easy funding terms from the Federal Reserve allow financial institutions to make money in government bonds while shutting off credit to the rest of the economy. It's classic crowding out, in which the government's misguided effort to spend its way out of recession pushes the productive economy deeper into the hole.

Panic is starting to take hold at the Obama White House over the relentless deterioration of the job market. US jobs in September declined by about 263,000 jobs, worse than the 175,000 drop expected by Wall Street economists. To the 15.1 million on the official unemployment count, add 9.2 million "involuntary part-time workers" and 2.2 million who were dropped from the tally because they had not sought work in the past month, and the unemployment rate would rise to 17.1 million.

That doesn't include another three million long-term discouraged workers - those who want to work but who have long since stopped looking. That would take the number up to 20%. In past recoveries, a number of economists observed, all the job growth came from small business, but small business is lagging in the present crisis. The financial crisis crushed the entrepreneurs, as surely as Joseph Stalin crushed the kulaks, the relatively affluent peasants.

Obama inherited a crisis, to be sure, but he has made it much worse. America is in the kind of trap into which Japan fell during the "lost decade" of the 1990s, whence it never really emerged. In the Keynesian world of Larry Summers, director of the White House's National Economic Council, and the Obama economics team, the problem is that Americans save too much and spend too little. To restart the economy, the government has to spend money for them - hence the US$800 billion stimulus package.

There are two things terribly wrong with this notion. The first is that it is simply a matter of what John Maynard Keynes called the "marginal propensity to consume". Americans have saved almost nothing during the past 10 years, relying instead on home equity that now has vaporized. The proportion of Americans over 60 will jump to 25% from 19% during the next 10 years, an unprecedented shift. Americans must save to compensate for past profligacy, from a lower starting point after the destruction of so much wealth, and with lower prospective returns. The demand for savings is bottomless.

The second problem is that even if the government borrows money, the money has to come from somewhere. Right now it's coming from households who choose to save rather than borrow, and from the balance sheet of the Federal Reserve or the banks, as well as foreign investors.

[...] The parallels between America in 2009 and Japan in 1989 are uncanny. An asset price bubble has collapsed, just before a tsunami of prospective retirements that the asset bubble was supposed to fund. Demand for savings is bottomless, and the government satisfies demands for savings by running a huge deficit and issuing debt. The crippled banking system borrows at an interest rate of zero and buys government securities. And the economy shrivels up and dies.

Continue reading: Obama's permanent depression

As a commenter at the Spengler blog aptly noted:

Where the Obama people are screwing up is that they are pursuing both monetary, fiscal, and regulatory policies that are destructive to entrepreneurs and small business owners. These are where all of the new jobs and new wealth is created. Policies contrary to entrepreneurs and small to medium business will only prolong the agony.

For those living in the world of reality and common sense, and who've refrained from being blinded by the "Obama cult fog," this is stating the obvious and they realize that Barack Obama's economic policies are destroying the economy rather than saving it. As for those who see a glimmer of hope in rising stock prices, they're deluding themselves, for as Spengler points out in his piece, the rise in US stock prices has less to do with economic recovery than with the drop in the global price of American assets. The dollar can only fall so far, however, because other currencies can only rise so far before a rising currency parity damages competitiveness.

Posted by Richard at October 7, 2009 7:14 AM

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