FacebookTwitterGoogle+RedditEmail

The Backward Slide Into Recession

by MIKE WHITNEY

The economy is sliding backwards into recession. Ongoing deleveraging has slowed personal consumption and trimmed 2nd quarter GDP to a revised 1.6 per cent. As Obama’s fiscal stimulus dries up and the private sector slashes spending,  demand will continue to collapse pushing more businesses and households into default.  The economy is now caught in a reinforcing downward cycle in which dwindling fiscal and monetary support is shrinking the money supply triggering a slowdown in activity in the broader economy.

Far right policymakers have shrugged off increasingly ominous economic data, choosing to pursue their political aims through obstructionism. Their goal is to block countercyclical measures that will boost activity, lower unemployment and narrow the output gap. By torpedoing the recovery,  GOP leaders hope to take advantage of anti-incumbent sentiment and engineer a landslide victory in the midterm elections. But the timing could not be worse. The economy is in greater peril than most realize and badly in need of government intervention. As the current account deficit continues to widen, the global system inches closer to a major currency crisis. Ballooning trade imbalances signal that a disorderly unwinding of the dollar is becoming more probable. If the dollar drops precipitously, US demand for foreign exports will fall and the world will plunge into another deep slump.

The Fed ended its bond purchasing program (quantitative easing) at the end of March, but has promised to reinvest the proceeds from maturing bonds into mortgage-backed securities to keep its balance sheet from shrinking.  But the Fed’s action does not increase the money supply or reverse disinflation which is progressively edging towards outright deflation. The Central Bank is committed to providing additional resources to support the markets, but the Fed’s primary policy tool–short-term interest rates—is already stuck at zero making the task more difficult. Without additional monetary stimulus, asset prices will tumble leading to another round of debt-liquidation and defaults. The housing market is already in full retreat. New and existing home sales have fallen to record levels, clearing the way for steep price declines. Housing cannot recover without an uptick in employment which means that businesses need to see strong demand for their products. But product demand will remain weak until wages grow and struggling consumers dig their way out of the red. With personal consumption and business investment faltering, the government must step up its spending to avoid a return to recession.

The banks are not prepared for another wave of defaults, foreclosures and write-downs. Bank lending continues to shrink and the system is still fragile. A sudden turnaround in the equities markets would expose the banks to severe losses and force the Fed to provide emergency liquidity for wobbly financial institutions. The solvency of the banking system is largely public relations hype.  The fake stress tests merely obfuscated critical details about the true, mark-to-market value of their assets. The nation’s biggest banks are still wards of the state.

Much of the rot at the heart of the financial system remains hidden from view. Accounting sleight-of-hand, gigantic liquidity injections, and regulatory forbearance have all helped to perpetuate the fraud.  The Fed continues to divert capital  into zombie institutions which provide no tangible public benefit. Low interest rates, government guarantees on bonds, interest payments on reserves, the Fed’s discount window, and the myriad lending facilities are some of the perks, subsidies, inducements and corporate welfare given to the banks at taxpayer expense. In return, the banks provide nothing; not even sufficient credit to generate another expansion. In its current configuration, the banking system is a net loss to society and a significant drag on growth.

Last week, 2nd quarter GDP was revised down to 1.6 per cent. First quarter GDP was twice the size at 3.7 per cent, while 4th quarter 2009 was higher still at 5 per cent. The underlying trend is reasserting itself as growth turns to stagnation.

The Fed does not have the tools to fix the ailing economy.  Quantitative easing can lower rates and keep asset prices inflated, but it cannot increase demand, reduce the output gap or lower unemployment. Only fiscal stimulus can do that and policymakers have rejected that option. The US is now facing a protracted period of high unemployment and subpar economic performance punctuated by infrequent stock market rallies and predictable bursts of optimism. The recovery is over.

MIKE WHITNEY lives in Washington state. He can be reached at fergiewhitney@msn.com

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:
June 29, 2016
Diana Johnstone
European Unification Divides Europeans: How Forcing People Together Tears Them Apart
Andrew Smolski
To My Less-Evilism Haters: A Rejoinder to Halle and Chomsky
David Rosen
Birth-Control Wars: Two Centuries of Struggle
Sheldon Richman
Brexit: What Kind of Dependence Now?
Yves Engler
“Canadian” Corporate Capitalism
Lawrence Davidson
Return to the Gilded Age: Paul Ryan’s Deregulated Dystopia
Priti Gulati Cox
All That Glitters is Fearsome: Whatever Happens, Don’t Blame Jill Stein
Franklin Lamb
About the Accusation that Syrian and Russian Troops are Looting Palmyra
Binoy Kampmark
Texas, Abortion and the US Supreme Court
Anhvinh Doanvo
Justice Thomas’s Abortion Dissent Tolerates Discrimination
Victor Grossman
Brexit Pro and Con: the View From Germany
Manuel E. Yepe
Brazil: the Southern Giant Will Have to Fight
Rivera Sun
The Nonviolent History of American Independence
Adjoa Agyeiwaa
Is Western Aid Destroying Nigeria’s Future?
Jesse Jackson
What Clinton Should Learn From Brexit
Mel Gurtov
Is Brexit the End of the World?
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Doug Johnson Hatlem
Alabama Democratic Primary Proves New York Times’ Nate Cohn Wrong about Exit Polling
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
Stephanie Van Hook
The Time for Silence is Over
Ajamu Nangwaya
Toronto’s Bathhouse Raids: Racialized, Queer Solidarity and Police Violence
June 27, 2016
Robin Hahnel
Brexit: Establishment Freak Out
James Bradley
Omar’s Motive
Gregory Wilpert – Michael Hudson
How Western Military Interventions Shaped the Brexit Vote
Leonard Peltier
41 Years Since Jumping Bull (But 500 Years of Trauma)
Rev. William Alberts
Orlando: the Latest Victim of Radicalizing American Imperialism
Patrick Cockburn
Brexiteers Have Much in Common With Arab Spring Protesters
Franklin Lamb
How 100 Syrians, 200 Russians and 11 Dogs Out-Witted ISIS and Saved Palmyra
John Grant
Omar Mateen: The Answers are All Around Us
Dean Baker
In the Wake of Brexit Will the EU Finally Turn Away From Austerity?
Ralph Nader
The IRS and the Self-Minimization of Congressman Jason Chaffetz
Johan Galtung
Goodbye UK, Goodbye Great Britain: What Next?
Martha Pskowski
Detained in Dilley: Deportation and Asylum in Texas
Binoy Kampmark
Headaches of Empire: Brexit’s Effect on the United States
FacebookTwitterGoogle+RedditEmail