Page 1 of 2 Recession 'shape' points down
By W Joseph Stroupe
We've heard a lot of talk about the shape of this "recession", especially for
the United States. The optimists think it will be V-shaped and that we are even
now seeing the bounce upward toward growth again. Those somewhat more in tune
with the deeply worrying fundamentals think it will be U-shaped, and they think
we've probably hit the bottom, or nearly so, but we have some months to go
before growth begins again. Then there are the pessimists, who insist on being
called realists, who think it will be L-shaped, with America's economy
stagnating perhaps for an entire decade, or even more after it reaches the
bottom of this recession.
Finally, there are those relative handful of so-called "prophets of gloom and
doom", who continue to advise that this isn't merely a severe recession, but is
rather the opening phase of a full-blown
crisis, a financial/economic collapse centered in the US in which the severe
recession is merely one of many repercussions to come.
They predict the crisis will be shaped like a series of steps going downward -
in effect, a series of collapses with deceptive plateaus in between, with
economic growth returning very slowly and painfully in the US and the UK
several years off from today. They insist that we haven't even remotely seen
the bottom yet, but have only experienced the first few steps downward so far,
and that there are several more to come. They also warn that the worst for the
US and the UK, by far, is yet to come.
Obviously, those in this last category of prognosticators aren't very popular,
in spite of the fact that, by and large, they were primarily the ones who
called this present dire crisis correctly, some of them doing so years in
advance. Yours truly is proud to be in this last category.
At present, the optimists generally have the floor, as the media report
multiple developments that are said to signal a turnaround, and the Wall Street
rally that began on March 9, after US Treasury Secretary Timothy Geithner's
US$1 trillion toxic asset removal plan was announced, continues. In the crucial
housing sector, pending sales of previously owned homes jumped 3.2% after a 2%
jump the previous month, for the first back-to-back jump in more than a year.
Foreclosure-driven housing price collapses and Federal Reserve-driven mortgage
rate decreases are putting homes in reach for more first-time buyers, who
accounted for at least 50% of the pending home sales contracts.
However, the continued losses in the weakening job market and soaring
foreclosure rates, with foreclosures reaching a record 803,489 in the first
quarter alone, are likely to overwhelm such "green shoots" of "recovery".
Builders of new homes are struggling as buyers flock to foreclosed properties
at bargain prices. Thus, a genuine recovery of the vital housing sector is not
genuinely being signaled yet.
Bigger trouble looms, regardless of this Wall Street rally and other "green
shoots". Geithner's toxic asset removal plan hasn't worked yet, and it and
other government plans face huge obstacles. Fears over the size of US debt are
swiftly mounting, while China has "cancelled our credit card", according to US
Senator Mark Kirk, referring to the fact that China's investors have radically
slowed their purchase of US Treasury bonds in the past three months.
While Kirk's statement may reflect a significant measure of jumping to
conclusions before all the facts are in, we nonetheless are witnessing a
meaningful deterioration in the quality of foreign financing of the US
Treasury. This extremely important development must not be lost in the fog of
the present crisis. We should not be distracted by fleeting "green shoots" that
appear and then disappear as suddenly, but analyze the condition of the roots,
from whence all else of consequence emerges.
So before we can intelligently choose what the most likely shape of this crisis
will turn out to be for the US, we must first look at its root causes to
determine if these are actually being remedied, and if not, what the impact
will be of a crisis like the present one whose root causes are not adequately
and accurately addressed soon enough.
If we find from our investigation that the present severe recession is indeed
only a symptom of something much more serious, that efforts to deal with the
crisis are not reaching the root causes, that many of these efforts are
actually exacerbating the situation in very dangerous ways, and that the
present global environment in which the US operates as an economic power has
changed so radically that a resumption of US growth anytime soon can no longer
be taken for granted, then our choice of the most likely shape for this crisis
is made far easier, is it not?
Economists often speak about the boom-bust "cycle" and implicitly insinuate or
explicitly state that this bust, though severe, is merely part of the perpetual
boom-bust cycle, and that growth will inevitably (and almost automatically)
return soon, once the bust portion of the cycle runs its course and resets the
financial and economic parameters for a resumption of growth. Thus, a
resumption of growth before long is taken for granted.
Is the present crisis merely part of such a perpetual cycle of growth followed
by downturn followed by growth again? Or has this crisis arisen out of
extraordinary root causes which have actually derailed economic growth for the
foreseeable future, destroyed financial and economic viability and stability,
and severely discredited America's models of capitalism and finance on
fundamental levels? Are you open-minded enough to give fair hearing to the
facts that point unmistakably in the direction of extraordinary root causes
that are producing the present crisis?
Income-based model versus asset-based model
At fundamental issue here is the new asset-based economic/financial model (as
contrasted with a traditional income-based model) which the US and Britain in
particular have progressively adopted over the past couple of decades, and
whether that new model is really workable and revivable in the light of its
massive collapse that began with the emergence of the subprime crisis in late
July of 2007.
The US economy has rapidly converted from a traditional, income-generating
machine to a so-called "new economy", an asset-inflating one. An
income-generating machine derives wealth from the production and sale of goods
and services, while an asset-inflating one derives wealth from accelerated
asset appreciation, or targeted inflation of assets - in other words, by the
creation of serial asset bubbles. In this new model, traditional wealth
generation takes a back seat to "paper" wealth generation via serial asset
bubble creation.
In the traditional income-based economic model, the financial sector serves to
support the real economy, where the vast bulk of real income is generated, by
providing credit and other traditional financing services aimed at sustaining
existing and fostering new income-generating business ventures, and supporting
consumer spending via traditional credit services. The income generated in the
financial sector is not of major proportions, but is a distant second to that
generated in the real economy.
The asset-based model is radically different. In this new model, innovative and
grandiose opportunities arise for the generation of gigantic sums of "paper"
wealth from within the financial sector itself, thanks to what can only be
called the fostering of an incestuous relationship between government and Big
Finance.
It is a relationship in which the state nurtures the negative real interest
rate monetary environment and the "free" (inordinately unrestrained) market
conditions wherein colossal asset bubbles can be grown, nurtured and
capitalized upon by Big Finance, employing what has come to be known as
"securitization" - the "innovative" process of the creation and marketing to
global investors of cleverly packaged, deceptively credit-rated financial
assets based upon, and secured by, the asset bubbles that have been fostered
under the asset-based model.
That being the case, a huge financial services-based industry that is very
tightly coupled to the wealth-generating core of the financial sector, Wall
Street in America's case, proliferates its tentacles far and wide.
In this new model the entire economy takes on a decidedly
finance/investment/asset-oriented complexion, with such ventures and operations
coming to the foreground, while traditional income-based business tends to be
eclipsed. When America's adoption of this new model is considered in
conjunction with the decades-long trend of the withering of America's
once-mighty traditional
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