Robert Brenner: Devastating Crisis Unfolds

This is a fairly extensive analysis of some of the factors behind the current crisis. I would think that many foreign corporations must be sharing in the growth and profiting from increased production in areas such as China and India.
With military spedning already providing an artificial stimulus to the US economy I just wonder what effect further stimulus through tax cats will have. The US dollar is already being abandoned to some degree. Further decline will create inflated prices for all goods imported and that is quite a few goods! Even those goods made in the USA may have a number of imported components.


http://www.solidarity-us.org/node/1297
Devastating Crisis Unfolds
— Bob Brenner, for the ATC editors

THE CURRENT CRISIS could well turn out to be the most devastating since

the Great Depression. It manifests profound, unresolved problems in the

real economy that have been — literally — papered over by debt for
decades, as well as a shorter term financial crunch of a depth unseen
since World War II. The combination of the weakness of underlying
capital accumulation and the meltdown of the banking system is what’s

made the downward slide so intractable for policymakers and its
potential for disaster so serious. The plague of foreclosures and
abandoned homes — often broken into and stripped clean of everything,

including copper wiring — stalks Detroit in particular, and other
Midwest cities.

The human disaster this represents for hundreds of thousands of
families
and their communities may be only the first signal of what such a
capitalist crisis means. Historic bull runs of the financial markets in

the 1980s, 1990s and 2000s — with their epoch-making transfer of
income
and wealth to the richest one per cent of the population — have
distracted attention from the actual longterm weakening of the advanced

capitalist economies. Economic performance in the United States,
western
Europe and Japan, by virtually every standard indicator — the growth
of
output, investment, employment and wages — has deteriorated, decade
by
decade, business cycle by business cycle, since 1973.

The years since the start of the current cycle, which originated in
early 2001, have been worst of all. GDP (Gross Domestic Product) growth

in the United States has been the slowest for any comparable interval
since the end of the 1940s, while the increase of new plant and
equipment and the creation of jobs have been one third and two thirds,
respectively, below postwar averages. Real hourly wages for production
and non supervisory workers, about 80% of the labor force, have stayed
roughly flat, languishing at about their level of 1979.

Nor has the economic expansion been significantly stronger in either
western Europe or Japan. The declining economic dynamism of the
advanced
capitalist world is rooted in a major drop in profitability, caused
primarily by a chronic tendency to overcapacity in the world
manufacturing sector, going back to the late 1960s and early 1970s. By
2000, in the United States, Japan and Germany, the rate of profit in
the
private economy had yet to make a comeback, rising no higher in the
1990s cycle than in that of the 1970s.

With reduced profitability, firms had smaller profits to add to their
plant and equipment, as well as smaller incentives to expand. The
perpetuation of reduced profitability since the 1970s led to a steady
falloff in investment, as a proportion of GDP, across the advanced
capitalist economies, as well as step-by-step reductions in the growth
of output, means of production, and employment.

The long slowdown in capital accumulation, as well as corporations’
repression of wages to restore their rates of return, along with
governments’ cuts in social spending to buttress capitalist profits,
have resulted in a slowdown in the growth of investment, consumer and
government demand, and thus in the growth of demand as a whole. The
weakness in aggregate demand, ultimately the consequence of the
reduction in profitability, has long constituted the main barrier to
growth in advanced capitalist economies.

To counter the persistent weakness of aggregate demand, governments,
led
by the United States, have seen little choice but to underwrite ever
greater volumes of debt, through ever more varied and baroque channels,

to keep the economy turning over. Initially, during the 1970s and
1980s,
states were obliged to incur ever larger public deficits to sustain
growth. But while keeping the economy relatively stable, these deficits

also rendered it increasingly stagnant: In the parlance of that era,
governments were getting progressively less bang for their buck, less
growth of GDP for any given increase in borrowing.
From Budget-Cutting to Bubblenomics

In the early 1990s, therefore, in both the United States and Europe,
led
by Bill Clinton, Robert Rubin and Alan Greenspan, governments moving to

the right and guided by neoliberal thinking (privatization and slashing

of social programs) sought to overcome stagnation by attempting to move

to balanced budgets. But although this fact does not loom large in most

accounts of the period, this dramatic shift radically backfired.

Because profitability had still failed to recover, the deficit
reductions brought about by budget balancing resulted in a huge hit to
aggregate demand, with the result that during the first half of the
1990s, both Europe and Japan experienced devastating recessions, the
worst of the postwar period, and the U.S. economy experienced the
so-called jobless recovery. Since the middle 1990s, the United States
has consequently been obliged to resort to more powerful and risky
forms
of stimulus to counter the tendency to stagnation. In particular, it
replaced the public deficits of traditional Keynesianism with the
private deficits and asset inflation of what might be called asset
price
Keynesianism, or simply Bubblenomics.

In the great stock market runup of the 1990s, corporations and wealthy
households saw their wealth on paper massively expand. They were
therefore enabled to embark upon a record-breaking increase in
borrowing
and, on this basis, to sustain a powerful expansion of investment and
consumption. The so-called New Economy boom was the direct expression
of
the historic equity price bubble of the years 1995-2000. But since
equity prices rose in defiance of falling profit rates and since new
investment exacerbated industrial overcapacity, there quickly ensued
the
stock market crash and recession of 2000-2001, depressing profitability

in the non-financial sector to its lowest level since 1980.

Undeterred, Greenspan and the Federal Reserve, aided by the other major

Central Banks, countered the new cyclical downturn with another round
in
the inflation of asset prices, and this has essentially brought us to
where we are today. By reducing real short-term interest rates to zero
for three years, they facilitated an historically unprecedented
explosion of household borrowing, which contributed to and fed on
rocketing house prices and household wealth.

According to The Economist,, the world housing bubble between 2000 and
2005 was the biggest of all time, outrunning even that of 1929. It made

possible a steady rise in consumer spending and residential investment,

which together drove the expansion. Personal consumption plus housing
construction accounted for 90-100% of the growth of U.S. GDP in the
first five years of the current business cycle. During the same
interval, the housing sector alone, according to Moody’s Economy.com,

was responsible for raising the growth of GDP by almost 50% above what
it would otherwise been — 2.3% rather than 1.6%.

Thus, along with G. W. Bush’s Reaganesque budget deficits, record
household deficits succeeded in obscuring just how weak the underlying
economic recovery actually was. The rise in debt-supported consumer
demand, as well as super-cheap credit more generally, not only revived
the American economy but, especially by driving a new surge in imports
and the increase of the current account (balance of payments and trade)

deficit to record levels, powered what has appeared to be an impressive

global economic expansion.
Brutal Corporate Offensive

But if consumers did their part, the same cannot be said for private
business, despite the record economic stimulus. Greenspan and the Fed
had blown up the housing bubble to give the corporations time to work
off their excess capital and resume investing. But instead, focusing on

restoring their profit rates, corporations unleashed a brutal offensive

against workers. They raised productivity growth, not so much by
increasing investment in advanced plant and equipment as by radically
cutting back on jobs and compelling the employees who remained to take
up the slack. Holding down wages as they squeezed more output per
person, they appropriated to themselves in the form of profits an
historically unprecedented share of the increase that took place in
non-financial GDP.

Non-financial corporations, during this expansion, have raised their
profit rates significantly, but still not back to the already reduced
levels of the 1990s. Moreover, in view of the degree to which the
ascent
of the profit rate was achieved simply by way of raising the rate of
exploitation — making workers work more and paying them less per hour
—
there has been reason to doubt how long it could continue. But above
all, in improving profitability by holding down job creation,
investment
and wages, U.S. businesses have held down the growth of aggregate
demand
and thereby undermined their own incentive to expand.

Simultaneously, instead of increasing investment, productiveness and
employment to increase profits, firms have sought to exploit the
hyper-low cost of borrowing to improve their own and their
shareholders’
position by way of financial manipulation — paying off their debts,
paying out dividends, and buying their own stocks to drive up their
value, particularly in the form of an enormous wave of mergers and
acquisitions. In the United States, over the last four or five years,
both dividends and stock repurchases as a share of retained earnings
have exploded to their highest levels of the postwar epoch. The same
sorts of things have been happening throughout the world economy — in

Europe, Japan and Korea.
Bursting Bubbles

The bottom line is that, in the United States and across the advanced
capitalist world since 2000, we have witnessed the slowest growth in
the real economy since World War II and the greatest expansion of the
financial or paper economy in U.S. history. You don’t need a Marxist
to
tell you that this can’t go on.

Of course, just as the stock market bubble of the 1990s eventually
burst, the housing bubble eventually crashed. As a consequence, the
film
of housing-driven expansion that we viewed during the cyclical upturn
is
now running in reverse. Today, house prices have already fallen by 5%
from their 2005 peak, but this has only just begun. It is estimated by
Moody’s that by the time the housing bubble has fully deflated in
early
2009, house prices will have fallen by 20% in nominal terms — even
more
in real terms — by far the greatest decline in postwar U.S. history.

Just as the positive wealth effect of the housing bubble drove the
economy forward, the negative effect of the housing crash is driving it

backward. With the value of their residences declining, households can
no longer treat their houses like ATM machines, and household borrowing

is collapsing, and thus households are having to consume less.

The underlying danger is that, no longer able to putatively “save”
through their rising housing values, U.S. households will suddenly
begin
to actually save, driving up the rate of personal savings, now at the
lowest level in history, and pulling down consumption. Understanding
how
the end of the housing bubble would affect consumers’ purchasing
power,
firms cut back on their hiring, with the result that employment growth
fell significantly from early in 2007.

Thanks to the mounting housing crisis and the deceleration of
employment, already in the second quarter of 2007, real total cash
flowing into households, which had increased at an annual rate of about

4.4% in 2005 and 2006, had fallen near zero. In other words, if you add

up households’ real disposable income, plus their home equity
withdrawals, plus their consumer credit borrowing, plus their capital
gains realization, you find that the money that households actually had

to spend had stopped growing. Well before the financial crisis hit last

summer, the expansion was on its last legs.

Vastly complicating the downturn and making it so very dangerous is, of

course, the sub-prime debacle which arose as direct extension of the
housing bubble. The mechanisms linking unscrupulous mortgage lending on

a titanic scale, mass housing foreclosures, the collapse of the market
in securities backed up by sub-prime mortgages, and the crisis of the
great banks who directly held such huge quantities of these securities,

require a separate discussion.

One can simply say by way of conclusion, because banks’ losses are so

real, already enormous, and likely to grow much greater as the downturn

gets worse, that the economy faces the prospect, unprecedented in the
postwar period, of a freezing up of credit at the very moment of
sliding
into recession — and that governments face a problem of unparalleled
difficulty in preventing this outcome.

[This statement was written by Robert Brenner, a member of the ATC
editorial board and author of The Economics of Global Turbulence.
References for all data cited here can be found in this book,
especially
in the Afterword.]

from ATC 132 (January/February 2008)

It's Official : The Crash of the US Economy has begun!

The big crash has been announced regularly it seems for several years now. One of these times the announcement will probably be right! I have been wondering how the economy keeps going so well. I just wonder how huge defence and war on terror expenditures can keep up as well as people buying homes that cost more and more with mortgages that must require astronomical payments each month.
The decline in the US dollar must help fuel inflation since many consumer goods are now imported and the US dollar will be purchasing less. However US export companies should profit from the decline.


It's Official: The Crash of the U.S. Economy has begun

Saturday, 16 June 2007
by Richard C. Cook

Richard C. Cook is the author of "Challenger Revealed: An
Insider's Account of How the Reagan Administration Caused the Greatest
Tragedy of the Space Age." A retired federal analyst, his career
included work with the U.S. Civil Service Commission, the Food and
Drug Administration, the Carter White House, and NASA, followed by
twenty-one years with the U.S. Treasury Department. He is now a
Washington, D.C.-based writer and consultant. His book "We Hold These
Truths: The Hope of Monetary Reform," will be published later this
year. His website is at www.richardccook.com.


It's official. Mark your calendars. The crash of the U.S. economy has
begun. It was announced the morning of Wednesday, June 13, 2007, by
economic writers Steven Pearlstein and Robert Samuelson in the pages
of the Washington Post, one of the foremost house organs of the U.S.
monetary elite.

Pearlstein's column was titled, "The Takeover Boom, About to Go Bust"
and concerned the extraordinary amount of debt vs. operating profits
of companies currently subject to leveraged buyouts.

In language remarkably alarmist for the usually ultra-bland pages of
the Post, Pearlstein wrote, "It is impossible to predict when the
magic moment will be reached and everyone finally realizes that the
prices being paid for these companies, and the debt taken on to
support the acquisitions, are unsustainable. When that happens, it
won't be pretty. Across the board, stock prices and company valuations
will fall. Banks will announce painful write-offs, some hedge funds
will close their doors, and private-equity funds will report
disappointing returns. Some companies will be forced into bankruptcy
or restructuring."

Further, "Falling stock prices will cause companies to reduce their
hiring and capital spending while governments will be forced to raise
taxes or reduce services, as revenue from capital gains taxes
declines. And the combination of reduced wealth and higher interest
rates will finally cause consumers to pull back on their debt-financed
consumption. It happened after the junk-bond and savings-and-loan
collapses of the late 1980s. It happened after the tech and telecom
bust of the late '90s. And it will happen this time."

Samuelson's column, "The End of Cheap Credit," left the door slightly
ajar in case the collapse is not quite so severe. He wrote of rising
interest rates, "As the price of money increases, borrowing and the
economy might weaken. The deep slump in housing could worsen. We could
also discover that the long period of cheap credit has left a nasty
residue."

Other writers with less prestigious platforms than the Post have been
talking about an approaching financial bust for a couple of years.
Among them has been economist Michael Hudson, author of an article on
the housing bubble titled, "The New Road to Serdom" in the May 2006
issue of Harper's. Hudson has been speaking in interviews of a "break
in the chain" of debt payments leading to a "long, slow economic
crash," with "asset deflation," "mass defaults on mortgages," and a
"huge asset grab" by the rich who are able to protect their cash
through money laundering and hedging with foreign currency bonds.

Among those poised to profit from the crash is the Carlyle Group, the
equity fund that includes the Bush family and other high-profile
investors with insider government connections. A January 2007
memorandum to company managers from founding partner William E.
Conway, Jr., recently appeared which stated that, when the current
"liquidity environment"—i.e., cheap credit—ends, "the buying
opportunity will be a once in a lifetime chance."

The fact that the crash is now being announced by the Post shows that
it is a done deal. The Bilderbergers, or whomever it is that the Post
reports to, have decided. It lets everyone know loud and clear that
it's time to batten down the hatches, run for cover, lay in two years
of canned food, shield your assets, whatever.

Those left holding the bag will be the ordinary people whose assets
are loaded with debt, such as tens of millions of mortgagees, millions
of young people with student loans that can never be written off due
to the "reformed" 2005 bankruptcy law, or vast numbers of workers with
401(k)s or other pension plans that are locked into the stock market.

In other words, it sounds eerily like 2000-2002 except maybe on a much
larger scale. Then it was "only" the tenth worse bear market in
history, but over a trillion dollars in wealth simply vanished. What
makes today's instance seem particularly unfair is that the preceding
recovery that is now ending—the "jobless" one—was so anemic.

Neither Perlstein nor Samuelson gets to the bottom of the crisis,
though they, like Conway of the Carlyle Group, point to the end of
cheap credit. But interest rates are set by people who run central
banks and financial institutions. They may be influenced by "the
market," but the market is controlled by people with money who want to
maximize their profits.

Key to what is going on is that the Federal Reserve is refusing to
follow the pattern set during the long reign of Fed Chairman Alan
Greenspan in responding to shaky economic trends with lengthy
infusions of credit as he did during the dot.com bubble of the 1990s
and the housing bubble of 2001-2005.

This time around, Greenspan's successor, Ben Bernanke, is sitting
tight. With the economy teetering on the brink, the Fed is allowing
rates to remain steady. The Fed claims their policy is due to the
danger of rising "core inflation." But this cannot be true. The
biggest consumer item, houses and real estate, is tanking. Officially,
unemployment is low, but mainly due to low-paying service jobs.
Commodities have edged up, including food and gasoline, but that's no
reason to allow the entire national economy to be submerged.

So what is really happening? Actually, it's simple. The difference
today is that China and other large investors from abroad, including
Middle Eastern oil magnates, are telling the U.S. that if interest
rates come down, thereby devaluing their already-sliding dollar
portfolios further, they will no longer support with their investments
the bloated U.S. trade and fiscal deficits.

Of course we got ourselves into this quandary by shipping our
manufacturing to China and other cheap-labor markets over the last
generation. "Dollar hegemony" is backfiring. In fact China is using
its American dollars to replace the International Monetary Fund as a
lender to developing nations in Africa and elsewhere. As an additional
insult, China now may be dictating a new generation of economic
decline for the American people who are forced to buy their products
at Wal-Mart by maxing out what is left of our available credit card
debt.

About a year ago, a former Reagan Treasury official, now a well-known
cable TV commentator, said that China had become "America's bank" and
commented approvingly that "it's cheaper to print money than make cars
anymore." Ha ha.

It is truly staggering that none of the "mainstream" political
candidates from either party has attacked this subject on the campaign
trail. All are heavily funded by the financier elite who will profit
no matter how bad the U.S. economy suffers. Every candidate except Ron
Paul and Dennis Kucinich treats the Federal Reserve like the fifth
graven image on Mount Rushmore. And even the so-called progressives
are silent. The weekend before the Perlstein/ Samuelson articles came
out, there was a huge progressive conference in Washington, D.C.,
called "Taming the Corporate Giant." Not a single session was devoted
to financial issues.

What is likely to happen? I'd suggest four possible scenarios:

1.
Acceptance by the U.S. population of diminished prosperity and a
declining role in the world. Grin and bear it. Live with your parents
into your 40s instead of your 30s. Work two or three part-time jobs on
the side, if you can find them. Die young if you lose your health
care. Declare bankruptcy if you can, or just walk away from your debts
until they bring back debtor's prison like they've done in Dubai.
Meanwhile, China buys more and more U.S. properties, homes, and
businesses, as economists close to the Federal Reserve have suggested.
If you're an enterprising illegal immigrant, have fun continuing to
jack up the underground economy, avoid business licenses and taxes,
and rent out group houses to your friends.
2.
Times of economic crisis produce international tension and
politicians tend to go to war rather than face the economic music. The
classic example is the worldwide depression of the 1930s leading to
World War II. Conditions in the coming years could be as bad as they
were then. We could have a really big war if the U.S. decides once and
for all to haul off and let China, or whomever, have it in the chops.
If they don't want our dollars or our debt any more, how about a few
nukes?
3.
Maybe we'll finally have a revolution either from the right or
the center involving martial law, suspension of the Bill of Rights,
etc., combined with some kind of military or forced-labor
dictatorship. We're halfway there anyway. Forget about a revolution
from the left. They wouldn't want to make anyone mad at them for being
too radical.
4.
Could there ever be a real try at reform, maybe even an attempt
just to get back to the New Deal? Since the causes of the crisis are
monetary, so would be the solutions. The first step would be for the
Federal Reserve System to be abolished as a bank of issue and a
transformation of the nation's credit system into a genuine public
utility by the federal government. This way we could rebuild our
manufacturing and public infrastructure and develop an income
assurance policy that would benefit everyone.

The latter is the only sensible solution. There are monetary reformers
who know how to do it if anyone gave them half a chance.