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Thursday, January 13, 2011

Deepening crisis traps America's have-nots

The US is drifting from a financial crisis to a deeper and more
insidious social crisis.

Self-congratulation by the US authorities that they have this
time avoided a repeat of the 1930s is premature.

By Ambrose Evans-Pritchard
7:39PM GMT 09 Jan 2011

There is a telling detail in the US retail chain store data for
December.

Stephen Lewis from Monument Securities points out that luxury
outlets saw an 8.1pc rise from a year ago, but discount stores
catering to America’s poorer half rose just 1.2pc.

Tiffany’s, Nordstrom, and Saks Fifth Avenue are booming. Sales
of Cadillac cars have jumped 35pc, while Porsche’s US sales are
up 29pc.

Cartier and Louis Vuitton have helped boost the luxury goods
stock index by almost 50pc since October. Yet Best Buy, Target,
and Walmart have languished.

Such is the blighted fruit of Federal Reserve policy.

The Fed no longer even denies that the purpose of its latest blast of
bond purchases, or QE2, is to drive up Wall Street, perhaps because
it has so signally failed to achieve its other purpose of driving down
borrowing costs.

Yet surely Ben Bernanke’s `trickle down’ strategy risks corroding
America’s ethic of solidarity long before it does much to help
America’s poor.

The retail data can be quirky but it fits in with everything else we
know.

The numbers of people on food stamps have reached 43.2m, an all
time-high of 14pc of the population. Recipients receive debit cards
– not stamps -- currently worth about $140 a month under President
Obama’s stimulus package.

The US Conference of Mayors said visits to soup kitchens are up
24pc this year. There are 643,000 people needing shelter each night.

Jobs data released on Friday was again shocking.

The only the reason that headline unemployment fell to 9.4pc
was that so many people dropped out of the system altogether.

The actual number of jobs contracted by 260,000 to 153,690,000.

The “labour participation rate” for working-age men over 20
dropped to 73.6pc, the lowest the since the data series began
in 1948.

My guess is that this figure exceeds the average for the Great
Depression (minus the cruellest year of 1932).

“Corporate America is in a V-shaped recovery,” said Robert Reich,
a former labour secretary.

“That’s great news for investors whose savings are mainly in
stocks and bonds, and for executives and Wall Street traders.
But most American workers are trapped in an L-shaped recovery.”

It is no surprise that America’s armed dissident movement has
resurfaced. For a glimpse into this sub-culture, read Time
Magazine’s “Locked and Loaded: The Secret World of Extreme
Militias”.

Time's reporters went underground with the 300-strong `Ohio
Defence Force’, an eclectic posse of citizens who spend weekends
with M16 assault rifles and an M60 machine gun training to defend
their constitutional rights by guerrilla warfare.

As it happens, I spent some time with militia groups across the US
at the tail end of the recession in the early 1990s.

While the rallying cry then was gun control and encroachments on
freedom, the movement was at root a primordial scream by blue-
collar Americans left behind in the new global dispensation.

That grievance is surely worse today.

The long-term unemployed (more than six months) have reached
42pc of the total, twice the peak of the early 1990s. Nothing like
this has been seen since the World War Two.

The Gini Coefficient used to measure income inequality has risen
from the mid-30s to 46.8 over the last quarter century, touching
the same extremes reached in the Roaring Twenties just before
the Slump.

It has also been ratcheting up in Britain and Europe.

Raghuram Rajan, the IMF’s former chief economist, argues that the
subprime debt build-up was an attempt – “whether carefully planned
or the path of least resistance” – to disguise stagnating incomes and
to buy off the poor.

“The inevitable bill could be postponed into the future. Cynical as
it might seem, easy credit has been used throughout history as a
palliative by governments that are unable to address the deeper
anxieties of the middle class directly,” he said.

Bank failures in the Depression were in part caused by expansion
of credit to struggling farmers in response to the US Populist
movement.

Extreme inequalities are toxic for societies, but there is also a
body of scholarship suggesting that they cause depressions as
well by upsetting the economic balance.

They create a bias towards asset bubbles and overinvestment, while
holding down consumption, until the system becomes top-heavy and
tips over, as happened in the 1930s.

The switch from brawn to brain in the internet age has obviously
pushed up the Gini count, but so has globalization.

Multinationals are exploiting “labour arbitrage” by moving plant
to low-wage countries, playing off workers in China and the West
against each other.

The profit share of corporations is at record highs across in America
and Europe.

More subtly, Asia’s mercantilist powers have flooded the world
with excess capacity, holding down their currencies to lock in
trade surpluses.

The effect is to create a black hole in the global system.

Yes, we can still hope that this is a passing phase until rising wages
in Asia restore balance to East and West, but what it if it proves to
be permanent, a structural incompatibility of the Confucian model
with our own Ricardian trade doctrine?

There is no easy solution to creeping depression in America and
swathes of the Old World.

A Keynesian `New Deal’ of borrowing on the bond markets to build
roads, bridges, solar farms, or nuclear power stations to soak up
the army of unemployed is not a credible option in our new age of
sovereign debt jitters.

The fiscal card is played out.

So we limp on, with very large numbers of people in the West
trapped on the wrong side of globalization, and nobody doing
much about it.

Would Franklin Roosevelt have tolerated such a lamentable state of
affairs, or would he have ripped up and reshaped the global system
until it answered the needs of his citizens?

http://www.telegraph.co.uk/finance/comment/ambroseevans_
pritchard/8249181/Deepening-crisis-traps-Americas-have-nots
.html?sms_ss=email&at_xt=4d2adc967ac700ea,0

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