Ed,
At 14:34 03/06/2011, you wrote:
In this colour, below.
Ed
----- Original Message -----
From: <mailto:[email protected]>Keith Hudson
To: <mailto:[email protected]>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.
Well, yes, the post-1971 inflation certainly helped America pay for
the Vietnam war. The main reason, though, was that Europe was getting
back on its feet in the mid and late '60s after WWII, and an
increasing number of firms were exporting goods to America and
parking their dollar profits in their central banks. The latter then
began asking for American gold in exchange (as they were entitled to
do under Bretton Woods). By 1971 the vast quantities of gold profits
America had made through the '30s* and particularly in producing
armaments for the Allies during the war (in total accumulating about
80% of all the bullion gold in the world) were being whittled down at
a pretty rapid rate. Nixon consulted a small ring of bankers and
Treasury people and decided to cut the gold standard completely.
Right now it is believed that America has 8,000 tonnes, but no-one
knows for certain because this is just about the most secret secret
in America today. There has been no attempt at a full audit for 60
years! (*Like now, even though the US was in depression there were
several industries that were still making big profits.)
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.
Yes. But what made it worse is that although house mortgages were
carefully packaged into different risk categories initially, by the
time they were re-sold by the investment banks to the punters (the
retail banks) they were considerably mixed up. The banks didn't
really know what they were buying but were comforted by the mortgages
being wrapped up in derivatives which apparently made them secure and
risk-free. In truth, and as they know now, they had little idea of
what they were buying.
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.
Well, they're not paid for yet by a long chalk. And it's the taxpayer
that's been lumbered with the bail-outs -- and for many years yet.
Altogether, we've been the lucky generation, Ed. It's our children
and grandchildren who are going to have to pay for governments' lack
of oversight of the banks in the last 30 years or so. The latest US
employment data (and Europe's too) suggest very strongly that we're
now on the verge of the double-dip which some economists have been forecasting.
Keith
Keith
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: <mailto:[email protected]>Keith Hudson
To: <mailto:[email protected]>RE-DESIGNING WORK, INCOME
DISTRIBUTION, EDUCATION ; <mailto:[email protected]>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>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/
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/06/
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