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The American Pipe Dream & Why Obama Will Fail

By EuroYank - Virginia Hoge On Friday, February 06, 2009 At 9:22 PM


Obama The American Prayer Song

Prediction - Failed Economy Under Obama

The current crisis is not just a passing storm, but the prelude to a dramatic sea change in economic conditions. That is the new normal.

With the bursting of history’s biggest credit bubble — one that spans the far reaches of the globe — has come a deflationary tsunami that is moving much faster than authorities attempts to fight back through reflationary sandbagging.


Moreover, because the surge is hitting so many countries at once, even if the U.S. government (and others) are throwing around cheap credit and taxpayer bailouts like its Halloween candy, it’s still no match for aggregate level of wealth destruction taking place in a globalized world.

See
*Fear of Deflation Lurks as Global Demand Drops

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years. The word for this is deflation, or declining prices, a term that gives economists chills.

World Wide Deflation

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.

With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. But prices have yet to decline noticeably for most goods and services, with one conspicuous exception — houses. Still, reduced demand is beginning to soften prices for a few products, like furniture and bedding, which are down slightly since the beginning of 2007, according to government data. Prices are also falling for some appliances, tools and hardware.

Only a few months ago, American policy makers were worried about the reverse problem — rising prices, or inflation — as then-soaring costs for oil and food filtered through the economy. In July, average prices were 5.6 percent higher than a year earlier — the fastest pace of inflation since 1991. But by the end of September, annual inflation had dipped to 4.9 percent and was widely expected to go lower.

The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.

The danger of this is the difficulty of a cure. Policy makers can generally choke off inflation by raising interest rates, dampening economic activity and reducing demand for goods. But as Japan discovered, an economy may remain ensnared by deflation for many years, even when interest rates are dropped to zero: falling prices make companies reluctant to invest even when credit is free.

Through much of the 1990s, prices for property and many goods kept falling in Japan. As layoffs increased and purchasing power declined, prices fell lower still, in a downward spiral of diminishing fortunes. Some fear the American economy could be sinking toward a similar fate, if a recession is deep and prolonged, as consumers lose spending power just as much of Europe, Asia and Latin America succumb to a slowdown.

American policy makers have tools to avert the sort of deflationary black hole that captured Japan. Deflation fears last broke out in the United States in 2003, but the Federal Reserve defeated the menace with low interest rates that kept the economy growing. This time, the Fed is again being aggressive, dropping its target rate to 1 percent this week. And the government’s various bailout plans have also pumped money into the economy.

If you print enough money, you create inflation.

But even as American authorities unleash credit, the threat has intensified. Not since the Depression have so many countries faced so much trouble at once. The financial crisis has gone global, like a virus mutating in the face of every experimental cure. From South Korea to Iceland to Brazil, the pandemic has spread, bringing with it a tightening of credit that has starved even healthy companies of finance.

We’re entering a really fierce global recession.

A significant financial crisis has been allowed to morph into a full-fledged global panic. It’s a very dangerous situation. The danger is that instead of having a few bad years, we’ll have another lost decade.

Global economic growth has flourished in recent years, much of it fertilized with borrowed investment. This raised kingdoms of houses in Florida and California, steel mills in Ukraine, slaughterhouses in Brazil and shopping malls in Turkey.

That tide is now moving in reverse. Banks and other financial institutions are reckoning with hundreds of billions of dollars worth of disastrous investments. As they struggle to rebuild their capital, they are halting loans to many customers, demanding swift repayment from others and dumping assets — homes sold out of foreclosure, investments linked to mortgages and corporate loans. Selling is pushing prices down further, making the assets left on balance sheets worth less, in some cases prompting another round of sales.

You get this adverse feedback loop where assets keep falling in value. You’re essentially putting big downward pressure on the global economy.

In past crises, like those that devastated Mexico in 1994 and much of Asia in 1997 and 1998, weak economies managed to recover by exporting aggressively, not least to the United States.

But American consumers are battered this time. After years of borrowing against homes and tapping credit cards, consumers are pulling back.

Global Appetite Shrinks

From Asia to Latin America, exports are slowing and should continue to do so as the global appetite shrinks. This is spawning fears that major producers like China and India — which vastly expanded production capacity in recent years — will have to dump products on world markets to keep factories running and stave off unemployment, pressing prices lower.

Earlier this year, some analysts suggested that American businesses might continue to prosper, even as consumers pulled back at home, by selling into foreign markets. Caterpillar, the construction equipment manufacturer, might suffer declining sales in the United States, the argument went, but huge projects from Russia to Dubai required front-end loaders. Australia and Brazil needed earth-movers to expand mining operations as they sent iron ore toward smelters in Northeast Asia.

China has long been at the center of claims that the world could keep growing regardless of American troubles. China has been importing cotton from India and the United States; electronics components from South Korea, Malaysia and Taiwan; timber from Russia and Africa; and oil from the Middle East.

But many of the finished goods China produces with these materials have ultimately landed in the United States, Europe and Japan. When consumers pull back in those countries, Chinese factories feel the impact, along with their suppliers around the globe.

Fewer laptop computers shipped from China spells less demand for chips. Last week, Toshiba — Japan’s largest chip maker — said it lost $275 million from July to September, blaming its troubles on a world glut.

Lower demand for flat-screen televisions means less need for flat-panel glass displays. This month, Samsung, the Korean electronics giant, said a global oversupply in that item caused its biggest dip in quarterly profits in three years.

Now, a glut of products may be building in the United States. Orders for trucks used by business have plummeted. Investments in industrial equipment are declining. Yet inventories have grown.

The Mother of All Budget Deficits

Obama is betting heavily that massive government spending will create millions of new jobs. Still, it must be asked: Why does Obama prefer a fiscal policy geared toward increased spending rather than the tax cuts he promised ad nauseam during his campaign?

The answer is painfully simple – and illustrates the Bush-crafted box Obama finds himself in. Beleaguered consumers would probably not spend any new tax cuts but rather pay off debts – or stuff them under the figurative mattress.

That’s why Obama is taking a cue from Franklin Roosevelt and planning to invest massively in public-works projects, such as repairing the nation’s crumbling roads and bridges, expanding broadband access, and creating “green” jobs.

Yet even this ambitious plan – a product of the Keynesian belief in government efforts to induce spending and investment – may not achieve its intended result.

First, and foremost, there is the matter of how Obama’s mother of all budget deficits will be financed; there’s talk now of a Trillion dollars or more in new spending over the next two years. There are only two politically feasible ways: sell bonds or print money (raising taxes is off the table.)

The government cannot spend the economy into prosperity because all government spending is a burden on the economy. The only thing the government can do is empower individuals to become prosperous on their own.

Obama often points to the public works projects started by FDR and Eisenhower as examples of how his policy could work. In those instances government spending was still a burden on the economy, but it was a burden that resulted in a net gain for the country as a whole. Essentially, new infrastructure that increased mobility and the availability of goods and services. Better roads. More power plants. These things are what stimulated the economy under FDR and Eisenhower (Eisenhower more so than FDR), not the spending itself.

"... The old metro design was based on a hub-and-spoke system — a series of highways that converged on an urban core. But in an age of multiple downtown nodes and complicated travel routes, it’s better to have a complex web of roads and rail systems.

It’s also before the spending drought that is bound to follow the spending binge. Because we’re going to be spending $1 trillion now on existing structures and fading industries, there will be less or nothing in 2010 or 2011 for innovative transport systems, innovative social programs or anything else.

Before the recession hit, we were enjoying a period of urban and suburban innovation. We could have been on the verge of a transportation revolution. It looks as if the Obama infrastructure plan may freeze that change, not fuel it. "

Read more ...
*This Old House


Ultimately, whether we like it or not, we’re just going to have to bite the bullet, and admit that the only thing we can do is let the economy take its course.

Businesses are going to fail. People are going to be out of work. But if during that time government lightens its tax and regulatory burden on the country, the rocky economic times will be a lot more short-lived than they could be.

But there is no way to avoid those rocks altogether, however much politicians may wish they could sell Americans on that pipe dream.


- 01/03/09: President-elect Obama's Weekly Address - Join the Discussion: Economy -



Leave Obama Alone Video





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Better

I'm adding you to my Entrecard drop-list too.

God bless

Tom Usher
Real Liberal Christian Church

 
 
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Ron Paul! Why not you...?

 
 
Blogger Unknown Says:

Yes, glad to find this blog... nice stuff.

 

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Euro Yank is an internationally famous blogger, an American born in Germany that left for the USA with family at age six and has lived in Luxembourg for the past ten years. He is a committed anti-fascist and a student of history who is politically progressive and believes in the ideals of the American Constitution and the Bill of Rights for all Americans. He is also an American war veteran. He was active on American Talk Radio, and has been prominent online with 26 blogs with over 25 million hits. His investigative journalism has exposed top international news stories no one else has reported on. He is also a well-known political commentator. He has been repeatedly censored and banned, but despite these setback continues nonstop. Virginia Olive Hoge is an artist and writer living in Pasadena, California. As a progressive whistle-blower, she conducts investigations into corrupt media and outs the harm it causes to the poor and important social services. She is has been conducting an 11-month investigation of Topix.com, she is the first one in the nation to do so.

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