In this colour, below.
Ed
----- Original Message -----
From: Keith Hudson
To: Ed Weick
Sent: Thursday, June 02, 2011 8:23 PM
Subject: Re: [Futurework] American economy
Ed,
At 21:44 02/06/2011, you wrote:
Keith, I'll just have to take you at your word on the actual rate of US GDP
growth. It may well be higher than the 1.8% Reich claims it is. However, many
of the other things he mentions, and which others have mentioned, suggest an
economy in decline and perhaps in severe decline. Everything seemed to be
looking up until about the 1970s and then ever so many things started going
down hill after that.
Yes, and what happened then (1971) is that President Nixon took the US dollar
off the gold standard. From then on the American government became even more
profligate in the way that it printed dollars and inflated its currency. By
1981, inflation had become so rampant (14%) that it threatened to become
Weimar-type hyperinflation and Volcker had to slap a 20% interest on the bank
rate. It then took years to bring inflation (and the bank rate) down to normal
levels.
I recall reading that Nixon took the US dollar off the gold standard
because the US had to meet the heavy costs of the Vietnam War. Under the gold
standard the dollar was fixed in both quantity and value and there was no way
that the high expenditures the war generated could be met. So, the US
government pretty well had to abandon the gold standard, print money and pay
its bills. And its creditors pretty well had to accept payments even though
the dollars they were being paid in were worth (increasingly) less than they
would have been under the gold standard.
But then, in the 1980s, the US government (and the UK and several more) took
its eye off the ball yet again and allowed a whole new slew of derivatives
(concocted by Goldman Sachs and the like) to take off which, by 2007, rose in
nominal value to 10 times what they were originally intended to cover. Just
like bank credits, this wasn't new real money but it had the same effect --
that is, of diminishing bank reserves to vanishing point (in fact, into
negativity where most big banks' still remain and can only operate by grace of
the taxpayer).
Initially, everyone seemed happy about the derivatives. They were based on
a huge wave of housing construction and the sale of those houses to anyone who
wanted them whether they could afford them or not. The mortgages, prime and
sub-prime were then packaged and repackaged into securities and were widely
distributed. The fact that the securities did not hold their value because
many of the sub-prime mortgages could not be paid led to a huge crisis,
stagnation and the need for bank bailouts. Who paid for the bank bailouts is a
question that has no clear answer. It may have been the taxpayer, but it may
have been paid for out of the rising US government debt and perhaps funded by
bonds purchased by the Chinese or Japanese.
The best book I have on the reasons for it is Hacker's and Pierson's
"Winner Take All Politics" which lays out how the rich got very much richer,
the middle class became eroded and the poor became poorer from the mid-1970s to
the present. I should take another look at the book, but some of the most
significant trends H&P (and Riech) mention relate to changing political power,
enabling the rich to control politicians to make decisions to their advantage
(e.g. Bush tax cuts, financial donations to politicians making them, in effect,
lobbyists for finance and industry) and the politically fostered decline of
unions.
Yes, because, as I've written above, the government took its eye off the ball
as regarding necessary levels of bank reserves. There's nothing wrong with
derivatives in principle. They all balance up sooner or later -- unless they're
caught out by an intermediate shock. But, from 1980, they wouldn't have grown
to anywhere near the level they did if the US Fed and the Treasury had kept the
banks to levels of reserves that have been found prudent over centuries
(between about 10-20%). Because of this irresponsibility, the financial sector
grew from something like 3-5% of US GDP in 1980 to something like 15% today. No
wonder bankers' incomes and bonuses rose to astronomical levels, and no wonder
they have been able to twist politicians and their economic advisors round
their fingers. For years past, individuals have been passing through revolving
doors backwards and forwards between Goldman Sachs (etc), the White House and
the Treasury.
The 2008/9 experience has still not produced any thoroughgoing reforms. Nor
will the situation change until we go into the double dip -- as Moody's is now
hinting is imminent. Then and only then will the system stand a chance of being
thoroughly sanitized and the bankers' beerfest brought down to normality.
As well, the US government and many state governments have become hugely
indebted and therefore greatly constrained with regard to the kinds of stimulus
programs they can launch. All in all, whether the rate of growth is as Reich
says or a little higher, the US does not appear to have much of a chance of a
return to the kind of growth, hope and prosperity we witnessed in the decades
following WWII.
One of the most important changes in the US and perhaps wider economy
during the past few decades is the growth of the FIRE sector -- Finance,
Insurance and Real Estate. I seem to recall that it is the most rapidly
growing economic sector in the US. A problem it poses is that while it has a
large impact on the economy, it is very hard to keep track of because it
operates behind the scenes in the tall buildings of major cities, especially
New York. Testimony with regard to its economic impact is provided by the
sub-prime mortgage crisis, dot.com and other bubbles, bank bailouts, the
cancellation of Glass-Steagall, etc.
Yes.
Keith
Ed
----- Original Message -----
From: Keith Hudson
To: RE-DESIGNING WORK, INCOME DISTRIBUTION, EDUCATION ; Ed Weick
Sent: Thursday, June 02, 2011 3:02 PM
Subject: Re: [Futurework] American economy
Ed,
At 15:09 02/06/2011, you wrote:
Robert Reich's take on what has happened to the USA since world war II.
http://truthout.org/truth-about-american-economy/1306953884
This is a pretty accurate account of the American economy since '45.
However, towards the end he writes:
<<<<
Democrats, meanwhile, are behaving as if they're powerless to affect the
economy even though a Democrat occupies the White House and his appointees run
the federal government.
>>>>
. . . and then gives no hint of what policy the Democrats should be
advocating! OK, it's true enough that they don't have a policy (except more
public spending which would only make the deficit worse) but that he -- one of
the most articulate economists on the left -- hasn't been able to sketch out
something that's anywhere near relevant is eloquent enough.
But there's another point that intrigues me for which Reich is not to
blame. This is the figure of 1.8% that's officially quoted for present GDP
growth. This cannot be so. In America, as in the UK and Europe, the average
income and well being of ordinary folk has actually been declining for decades.
And yet GDP has supposedly been tanking along at anything between 3% and 5%
p.a. for year after year! There's clearly a discrepancy here of at least 2%.
Far from being 1.8% today, it ought to be 0% or even a negative figure. This
is pure spin by government statisticians and economists.
Much the same applies in the case of official figures for inflation --
except the fix is in the opposite direction. To be realistic, at least 2% or 3%
should be added to the officially quoted rate. This is why Bernanke is so
ambiguous as to know what he's going to do next. He knows that America is not
far away from galloping inflation. "Can I get away with yet another dose of
QE", he must be asking himself. He must be very fearful that if he does so he
might go down in the history books as the person who transformed the Great
Recession into the Great Depression Mark II.
Keith
Keith Hudson, Saltford, England
http://allisstatus.wordpress.com/2011/06/
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/06/
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