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President Narcissus and the Faux Debt Crisis

Reading From Wall Street’s Script

by MIKE WHITNEY

“The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.”

“Recovering From a Balance-Sheet Recession”, Laura D’Andrea Tyson, New York Times

Friday Morning: Just hours before Fed chairman Ben Bernanke delivered his much-anticipated speech on the state of the economy, 2nd Quarter GDP was revised down to 1.0 percent, lower than analysts expectations. The world’s biggest economy is now growing at less than 1 percent for the first 6 months of 2011, not nearly enough to produce jobs for the new entrants into the workforce or to narrow the gaping output gap which will cost trillions in lost production.

GDP –which has been progressively sliding since President Barack Obama’s $787 fiscal stimulus (American Recovery and Reinvestment Act) wound down in late 2010–is now dependent on organic growth in consumer demand. But demand remains weak because consumers and households are still recovering from the $11 trillion that was shaved from their balance sheets following the financial meltdown of ’08. Experts believe that household delveraging will go on for years ahead leading to long-term high unemployment, slow growth and widespread economic stagnation. Bernanke is expected to go over many of these things today in his speech. He’ll also discuss the limits of monetary policy absent a commitment from Congress and the White House to add a fiscal component.

It is now generally accepted that the Fed’s 2nd round of Quantitative Easing (QE2) failed to achieve its objectives. While the bond buying program did raise inflation expectations short-term and buoy stock prices, thus, enhancing the “wealth effect”; it also boosted gas and food prices which turned out to be a drag on consumer spending and sentiment. All the equities gains achieved through Bernanke’s misguided program, have long-since been wiped out by increased volatility, dissipating demand, and deepening pessimism. The US economy is now dead-in-the-water. The Fed’s unconventional experiments have only added to the growing sense of malaise.

This is from a speech by President Franklin Delano Roosevelt:

“Our basic trouble was not an insufficiency of capital. It was an insufficient distribution of buying power coupled with an over-sufficient speculation in production. While wages rose in many of our industries, they did not as a whole rise proportionately to the reward to capital, and at the same time the purchasing power of other great groups of our population was permitted to shrink. We accumulated such a superabundance of capital that our great bankers were vying with each other, some of them employing questionable methods, in their efforts to lend this capital at home and abroad. I believe that we are at the threshold of a fundamental change in our popular economic thought, that in the future we are going to think less about the producer and more about the consumer. Do what we may have to do to inject life into our ailing economic order, we cannot make it endure for long unless we can bring about a wiser, more equitable distribution of the national income.”

(“FDR Explains the Crisis: Why it feels like 1932″ Pam Martens, CounterPunch)

Big business is now sitting on nearly $2 trillion with no profitable outlets for investment. Why?

Because unemployment is high, wages are flat, and consumers are still digging out from the financial crisis. So, demand remains weak. As FDR states; it has nothing to do with “an insufficiency of capital”. There’s plenty of money around; it’s just in all the wrong places. For the economy to function at maximum efficiency, there has to be a balance between supply and demand, which means that gross inequality inhibits the performance of the economy. This is not a value judgment or an appeal for socialist government. It is a merely an acknowledgement of how the system works. If consumers don’t have enough money to spend–and GDP is 70% consumer spending–then the economy will tank. This is science not philosophy.

This is why Bernanke’s bond buying splurge was doomed from the get-go, because monetary policy always involves creating incentives for spending via an ever-weakening dollar. Now we know that Keynes was right, that there are times when people will not spend no matter how cheap money is. That’s when fiscal policy becomes necessary, when the only way to maintain economic activity is to put money into the pockets of the people who will spend it. Businesses won’t spend, because there’s nothing to invest in when people are broke; there’s no demand for their products. And, this condition can last for a very long time, because the market is not self-equilibriating, that’s another myth. If the market had the capacity to rebalance  itself, than unemployment would not still be hovering at 9 percent 3 years after Lehman Brothers collapsed. But markets do not rebalance. They are unthinking systems that respond to input, that’s all.

So, unemployment can stay high indefinitely, which is another thing that Keynes figured out. Here’s a quote from Keynes that illustrates his thinking on the matter:

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years. The objections which are raised are mostly not the objections of experience or of practical men. They are based on highly abstract theories – venerable, academic inventions, half misunderstood by those who are applying them today, and based on assumptions which are contrary to the facts…Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense.”

(John Maynard Keynes)

Doesn’t it seem like Keynes is talking about Barack Obama? After all, isn’t Obama one of those men who has based his economic policy “on highly abstract theories… on assumptions which are contrary to the facts…”  If not, then how do we explain why he’s put “deficit reduction” above unemployment? As we’ve seen, unemployment is key to increasing demand, beefing up GDP, and putting money in the hands of people who will spend it. But Obama has given deficit reduction priority. Why?

It’s because Obama is reading from a script that was written by Wall Street. That’s why the recovery has failed and why 70 percent of the American people now feel the country is headed in the “wrong direction”, because deficit reduction doesn’t address the central problem, the unemployment crisis. In fact, the Budget Control Act of 2011 (which is the so-called budget ceiling agreement) effectively ties Obama’s hands as far as initiating fiscal stimulus bills that would lower unemployment and put the economy back on track. The president is now legally bound to keep the economy in a protracted state of depression. “Hurrah” for the progressive executive who achieved in just 3 years what the farthest-right wing loony never could hoped for, the statutory strangulation of state. Booyah, Obama.

“4 more years! 4 more years!…”

Here’s a clip from someone who knows a thing-or-two about how the economy actually works. This is from an article by economist James Galbraith:

“…Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion….But there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate….

The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid.”

(“Stop Panicking About Our Long-Term Deficit problem. We don’t have one”, James Galbraith, Truthout)

Right on. “Pure propaganda” promoted by an unprincipled phony who’d rather kowtow to the Wall Street oligarchy than lift a finger for the poor slob standing in an unemployment line.

“Yer doin’ a heckuva job, Barry!”

Obama uses the fictitious “debt crisis” the same way that George W Bush used the “War on Terror”, as a public relations ploy to undermine the institutions that protect the old, the sick, and the elderly, Wall Street’s “last frontier” for exploitation.

And, here’s more about the faux debt crisis from former Labor Secretary Robert Reich:

“Every time you hear an American politician analogize the nation’s budget to a family budget (as, sadly, President Obama has done), you should know the politician is not telling the truth. The truth is just the opposite. Our national budget can and should counteract the shrinkage of family budgets by running larger deficits when families cannot….

Despite what Standard & Poor’s says… our current crisis is jobs, wages, and growth. We do not now have a debt crisis.”

(“Slouching Toward a Double Dip, For No Good Reason”,  Robert Reich’s blog)

The debt crisis is a PR scam designed to foreclose on Progressive Era reforms that lifted working people from squalor and provided them with a decent living. Now those policies are under-fire from financial elites who want to turn back the clock, crush the middle class, and return us all to the Dark Ages.

And President Narcissus is leading the charge.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com.