US Chronic Problems

Optimists argue that the global economy has merely hit a “soft patch.” Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation. As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again.

Factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.*

The financial crisis was driven by the multi-TRILLION dollar housing bust - until that is resolved (i.e. prices start increasing); this process of de-leveraging cannot complete. Banks must keep taking write downs (I would avoid bank stocks completely); the Fannie Mae/Freddie Mac issue needs to be addressed (billions/qtr in loses, still); and US consumers need to pay off their debts (a problem exacerbated by short sales).

Looking at post-housing bust Japan; the US is looking at the same medium-term issues that caused the Lost Decades. While the US stock market has recovered much more quickly and US banks were forced to write-down loses much, much sooner the comparison is still fair. We cannot rebuild trillions of dollars in lost wealth overnight.

With a $14 trillion GDP and 3% growth, we are adding $420 billion in wealth a year. Estimates vary, but loses from the financial crisis near $4.5 trillion, so even at 3% growth (higher than 1.8% in Q1 2011), it will take 10 years to rebuild the lost wealth.

The US economy is now larger than pre-crisis, which is a positive sign, but factoring in growth in the labour supply and population we are still well away from producing enough wealth to reduce the unemployment rate. We also need to understand that the debt, even at 2.96% rate, is a skim off the economy. Those interest payments (on $14 trillion), essentially wipe out the wealth creation and transfer to the foreign lenders. This is the danger of large deficits - it can turn into a vicious cycle.

*Credit to Nouriel Roubini for the initial insight.

Aristocrats tax peasants: Top 1% at it again

Goldman Sachs: Your tax dollars, their big profits

The structure of our modern democracy is currently at risk and this economic panic has succeeded in assisting the largest transfer of wealth from the middle class to the ruling elite in the history of human civilization. The $70 trillion dollars the U.S. Federal Reserve/Treasury (debt machine) have produced to bailout the financial services industry has been used by the elites to buy up all the depreciated assets that the middle class can no longer afford.

History could read that banks (aided by consumers and the federal government) made billions of dollars worth of loans to over-inflate the housing market. They made billions off of the interest and transaction fees and then sold the mortgages at a profit. The banks traded these on a "secret market" of OTC transactions in a game of musical chairs - betting on who'd get caught using derivatives. When they all got caught (Mar.-Sept. 2008), the American taxpayer was left with the gambling debts.

Now that we have bailed them out, they are using the liquidity and investment, that the taxpayers provided them, to make money by taking advantage of the distressed finances of the middle income households that makeup the primary spending power of the U.S. consumer economy. The U.S. taxpayer may end up making back $0.60-.80 on the dollar for our investment, while Goldman Sachs pulled in $3 billion in profit in 3 mos. and saw its stock value increase 150% since March 2009. Secondly, the inflationary pressure that will have to be worked through the system to absorb the trillions of dollars of liquidity poured in through new U.S. debt will be a drain on purchasing power for decades.

Goldman Sachs

The current and previous U.S. treasury secretaries are Goldman Sachs alumni, and Goldman Sachs is one of the largest political contributors to both parties ($994,795 to Obama, his #2 contributor). The lines between the government and the banks have blurred, and this poses and issue for the U.S. taxpayer because the government needs the banks to be profitable to earn the billions invested back over the coming decades, however the banks become profitable through interest and fees that are essentially a tax on citizens. Also, the most profitable parts of banks are the ones that citizens want to regulate most. Right now it seems that the Goldman Sachs lobby is winning over the finances and futures of the American taxpayers. Our democracy is in jeopardy if the interest of business takes precedence over the interests of constituents. ~GK