FacebookTwitterRedditEmail

The Backward Slide Into Recession

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

More articles by:

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.

March 20, 2019
Elliot Sperber
Empedocles and You and Me 
March 19, 2019
Paul Street
Socialism Curiously Trumps Fascism in U.S. Political Threat Reporting
Jonah Raskin
Guy Standing on Anxiety, Anger and Alienation: an Interview About “The Precariat”
Patrick Cockburn
The Brutal Legacy of Bloody Sunday is a Powerful Warning to Those Hoping to Save Brexit
Robert Fisk
Turning Algeria Into a Necrocracy
John Steppling
Day of Wrath
Robin Philpot
Truth, Freedom and Peace Will Prevail in Rwanda
Victor Grossman
Women Marchers and Absentees
Binoy Kampmark
The Dangers of Values: Brenton Tarrant, Fraser Anning and the Christchurch Shootings
Jeff Sher
Let Big Pharma Build the Wall
Jimmy Centeno
Venezuela Beneath the Skin of Imperialism
Jeffrey Sommers – Christopher Fons
Scott Walker’s Failure, Progressive Wisconsin’s Win: Milwaukee’s 2020 Democratic Party Convention
Steve Early
Time for Change at NewsGuild?
March 18, 2019
Scott Poynting
Terrorism Has No Religion
Ipek S. Burnett
Black Lives on Trial
John Feffer
The World’s Most Dangerous Divide
Paul Cochrane
On the Ground in Venezuela vs. the Media Spectacle
Dean Baker
The Fed and the 3.8 Percent Unemployment Rate
Thomas Knapp
Social Media Companies “Struggle” to Help Censors Keep us in the Dark
Binoy Kampmark
Death in New Zealand: The Christchurch Shootings
Mark Weisbrot
The Reality Behind Trump’s Venezuela Regime Change Coalition
Weekend Edition
March 15, 2019
Friday - Sunday
Andrew Levine
Is Ilhan Omar Wrong…About Anything?
Kenn Orphan
Grieving in the Anthropocene
Jeffrey Kaye
On the Death of Guantanamo Detainee 10028
Stan Cox – Paul Cox
In Salinas, Puerto Rico, Vulnerable Americans Are Still Trapped in the Ruins Left by Hurricane Maria
Ben Debney
Christchurch, the White Victim Complex and Savage Capitalism
Eric Draitser
Did Dallas Police and Local Media Collude to Cover Up Terrorist Threats against Journalist Barrett Brown?
Jeffrey St. Clair
Roaming Charges: Straighten Up and Fly Right
Jack Rasmus
Trump’s $34 Trillion Deficit and Debt Bomb
David Rosen
America’s Puppet: Meet Juan Guaidó
Jason Hirthler
Annexing the Stars: Walcott, Rhodes, and Venezuela
Samantha M. - Angelica Perkins
Our Green New Deal
Mel Gurtov
Trump’s Nightmare Budget
Steven Colatrella
The 18th Brumaire of Just About Everybody: the Rise of Authoritarian Strongmen and How to Prevent and Reverse It
Evaggelos Vallianatos
Riding the Wild Bull of Nuclear Power
Michael K. Smith
Thirty Years Gone: Remembering “Cactus Ed”
Dean Baker
In Praise of Budget Deficits
Howard Lisnoff
Want Your Kids to Make it Big in the World of Elite Education in the U.S.?
Brian Cloughley
Trump’s Foreign Policy is Based on Confrontation and Malevolence
John W. Whitehead
Pity the Nation: War Spending is Bankrupting America
Priti Gulati Cox
“Maria! Maria! It Was Maria That Destroyed Us!” The Human Story
Missy Comley Beattie
On Our Knees
Mike Garrity – Carole King
A Landscape Lewis and Clark Would Recognize is Under Threat
Robert Fantina
The Media-Created Front Runners
Tom Clifford
Bloody Sunday and the Charging of Soldier F
FacebookTwitterRedditEmail