Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
How A NASA Scientist Could Trigger The Next Cannabis Boom - 17th Dec 18
iShares Russell 2000 IWM Leading Stock Market Decline - 17th Dec 18
Where is the Dow Stock Market Santa Rally? - 17th Dec 18
With Weaker Climate Consensus, Expect Elevated Climate Change - 16th Dec 18
SMIGGLE Advent Calendar 2018 UK Contents - What You Get Look Inside Review - 16th Dec 18
Is there a Lump of Coal in Santa's Stock Market Bag? - 16th Dec 18
This Market Will Drive Gold in 2019… - 16th Dec 18
Gerald Celente:Central Banks Can’t Stop a 2019 Debt Disaster - 16th Dec 18
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Barack Hoover Obama, The Audacity of Failure

Politics / US Politics Nov 15, 2009 - 10:58 AM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleBarack Obama is on his way to becoming a one-term president. According to Politico: "President Barack Obama plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.


The president’s plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House." (www.politico.com)

Er, now who exactly is telling Obama that raising taxes or cutting spending in the middle of a severe economic contraction is a good idea?

This clip from Politico tells us more about the people surrounding Obama, than it tells us about Obama himself. Clearly, his chief lieutenants are just as committed to savaging Medicare, Medicaid and Social Security as their GOP counterparts. This is obvious by the way they've handled the fiscal stimulus. Where are the jobs programs, the boost to Green Technology, the massive infrastructure rebuild?

Nowhere. Because the industry-reps and bank lobbyists who fill out the Obama roster adhere to the same pro-business credo as the members of Team Bush, that is, that all public assets and resources should be strip-mined from their rightful owners and transferred to the robber barons at the top of the economic food-chain. There's no way that Geithner, Summers and the rest of the Wall Street insiders would ever dream of rebuilding the public safety net they've been trying to destroy for the last decade or more. That's not in their interests at all.

The administration's announcement is tantamount to a stealth-attack on Social Security in the name of "fiscal responsibility". It's another public relations ploy intended to enrich the parasite class by stealing crusts of bread from penniless retirees. Surely, there must have been a quid pro quo between the two-year Illinois senator and his political backers about how they planned to deal with "entitlements problem". In other words, Obama must have given the green light to the party bosses who wanted to purloin the last few farthings in the Social Security trust fund.

So, how will Obama'a attack on Social Security etc. effect the so-called "jobless recovery"?

For one thing, it makes a double-dip recession unavoidable. After all, (according to Goldman Sachs) last quarter's surge in GDP to 3.5% was entirely a result of government stimulus. Take away the stimulus, and the economy slips right back into to recession. Is that what Obama wants, another stretch of negative growth, plunging economic activity, lower demand and higher unemployment? Why? To satisfy the GOP "deficit hawks"?

All the handwringing over deficits is just more gibberish from the same people who brought us the Iraq War. The deficits are about as big a problem as the fictional WMD, maybe less. Here's a clip from an article by Marshall Auerback which sheds a bit of light on the deficit fiasco:


"Large deficits are not the problem....Let’s all take a deep breath here: Whilst the dollar index has fallen some 15% from the high sustained earlier this year, it is still above the lows sustained at the height of the credit crisis reached about a year ago. Secondly, there seems to be a fear that the current fall in the dollar could well engender inflation, and create a panicked response from policy makers where the Fed actually does raise rates and the Treasury begins to reduce government spending. Given high prevailing debt levels and the weak state of the consumer’s personal balance sheet, this would be an unmitigated disaster.

It is true that excessive government deficit spending can be inflationary, and could therefore cause some impact on exchange value of dollar. But this can’t be viewed in some sort of vacuum. The size of the deficit is irrelevant in itself. There is no meaning in the terms ‘large deficit’ or ’small deficit.’ You have to relate them to the extent of labor and capital underutilization, which is a human measure of the aggregate demand deficiency. The fact that labor underutilization is now in excess of 16 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message - the deficit is not large enough.

So the correct policy response is to spend until we get to full employment. That is the only consequence of excessive deficits — insolvency is not possible. Your social security check will never bounce in a country issuing debt in its own freely floating non-convertible currency." ( "The US Dollar - Don’t just do something, stand there!" Marshall Auerback, newdeal 2.0)

The best way to restore economic well-being is to increase the fiscal stimulus, expand the deficits and put the country back to work. There's no chance of inflation until unemployment drops to roughly 5%, which could be a decade away. And don't believe the doomsayers about the dollar either. It's a bunch of malarkey. Check this out:

"As I have shown in two recent papers, even very large currency depreciations in developed economies have no effect on inflation unless they are caused by policies that attempt to hold an economy’s unemployment rate below its equilibrium level.  With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term.  Whether inflation rises in the longer run will depend on whether US monetary and fiscal policy stimulus is withdrawn appropriately as the economy recovers (and tighter macroeconomic policies would tend to support the dollar)." ("Who's Afraid of a Falling Dollar", Joseph Gagnon, Baseline Scenario)

The dollar is dropping because the Fed is doing everything in its power to push it downwards.  "It's the policy, stupid." A falling dollar increases exports and speeds up recovery. But once the Fed stops printing money via quantitative easing, (which is set for the end of 1st Q 2010) watch out. The dollar will rebound. Here's an excerpt from an article in the Economist:

"This dollar declinism is overblown. It exaggerates the scale of the slide and misunderstands its cause. Much of the recent weakness simply reverses the earlier safe-haven flight to dollars, a sign of investors’ optimism about riskier assets rather than their fears about America’s currency. On a trade-weighted basis the dollar today is close to where it was before Lehman failed. Yields on Treasuries have not risen and spreads on riskier dollar assets continue to shrink. If investors were growing leerier of dollars, the opposite should have occurred." ("The Diminishing Dollar", The Economist)

When the financial crisis broke out two years ago, investors around the world flocked to the dollar for safety. Now that the crisis has (somewhat) abated, those same investors are less risk-adverse, which means they are putting that money in other assets (stocks, bonds, commodities) Naturally, that is weakening the dollar, but it is not a sign of impending collapse.  And while it is true that the greenback faces stiff headwinds in the long-term--due to the US's deteriorating fiscal situation--the dollar is in no immediate danger of losing its position as the world's reserve currency. That will take a decade or more.

The growing fear about the dollar and the deficits is understandable given the amount of money that is being hurled at the financial system. But that shouldn't dissuade reasonable people from doing what needs to be done.  The dollar and the deficits are NOT the issue. The issue is jobs, jobs, jobs. Here's an excerpt from an article by Henry Liu which sums it up perfectly:

"An economy that has collapsed under the burden of excessive debt cannot recover until such debt has been extinguished. And debt can only be extinguished by wealth creation, not by creating more debt with easy credit. And wealth can only be created by employment and not by financial manipulation." (Federal Reserve Power Unsupported by Credibility; part 1 "No Exit" Henry Liu)

Bingo. The Fed is bailing out unproductive speculators, while tossing the "creators of the nation's wealth", the workers, a few table scraps.  That's why we need a different policy which focuses on jobs programs, fiscal stimulus, and more deficit spending so households can rebuild their tattered balance sheets and the "engine of global growth" (the US middle class) can be re-energized. We don't need more belt-tightening, as Obama seems to think. That is precisely the wrong approach.

Henry Liu again:

"Thus we have financial profit inflation with price deflation in a shrinking economy. What we will have going forward is not Weimar Republic type price hyperinflation, but a financial profit inflation in which zombie financial institutions turning nominally profitable in a collapsing economy."

Right again. The soaring stocks and commodities prices prove that central bank policies can create asset bubbles even during periods of severe deflation. (like now) Fed chair Ben Bernanke's policies have had no material effect on households, consumers or workers. This is why credit contraction is in its 8th straight month and jobless claims continue to mushroom.

Bernanke--a disciple of Milton Friedman--has taken the monetarist "trickle down" approach throughout, which is why stocks are surging even though the broader economy is still flat on its back.  The Fed chief is doing what he's always done, stimulate demand by creating more bubbles. Only this time it's not working because liquidity is unable to flow through the clogged credit system. The administration needs to bypass the credit system altogether and provide direct relief via state aid, tax cuts and jobs programs to jump-start the economy and reduce the widening output gap.  What's needed is more stimulus and an aggressive reform agenda aimed at putting the country back to work. Here's Paul Krugman:

"It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington. The economy remains in deeply dire straits....Yet the respectable thing, all of a sudden, is to claim that we can’t possibly afford to spend any more money on job creation.

History says differently...Other advanced countries have been substantially deeper in debt without either defaulting or having runaway inflation....

I’d be a little more forgiving of the nonsense if all the people screaming about the deficit were sincere. And some are. But many, if not most, are perfectly happy to incur huge unfunded liabilities for the wars they want to fight, and/or to eliminate inheritance taxes for the heirs of multimillionaires. It’s only deficits incurred to help working Americans that get them all moralistic.

The point is that the economy desperately needs more help — and yes, we can afford to provide it." ("Fiscal Perspective" The conscience of a liberal, Paul Krugman, New York Times)

Yes, we can afford it. We just need to shrug off the deficit hawks and the dollar demagogues and provide the necessary resources to get the job done. It's that simple. 

Here's more from Marshall Auerback:

"The Administration ... must free themselves from the discredited dogmas of neo-liberalism and channel the spirit of FDR's bold experimentation. We need less deficit terrorism. Fiscal policy must be much more oriented to personal balance sheets, not bank balance sheets. We need to turn around the private sector and begin to produce more tax revenue, so that the large deficits would be short-lived.

If we continue down the current path, we slow recovery and court large budget deficits for many years to come. Far better to spend now to create jobs and get the private sector growing again.("New Agenda for America: How to Start Anew", Marshall Auerback, newdeal 2.0)

Economists know what it will take to put the country back to work; debt relief, loan modifications, wage growth and full employment. But it will require a fundamental shift in ideology; a rejection of neoliberalism and a strong commitment to rebuild the middle class.  Obama can either help in that process or follow the beggarly path to early retirement. So far, there's no reason to be hopeful.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules