Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Will Gold Price Breakout? 3 Things to Watch… - 24th Mar 18
Gold Junior Mining Stocks GDXJ Fundamentals - 23rd Mar 18
Global Trade War Fears See Precious Metals Gain And Stocks Fall - 23rd Mar 18
Stocks Recovering from a "deep dive" Overnight - 23rd Mar 18
Blaming the Fed for Weaker Greenback US Dollar - 23rd Mar 18
Watch This Group Signal Stock Market Trend Changes - 22nd Mar 18
Stocks are Gapping Beneath the Trendline Support - 22nd Mar 18
Fed Action Casts Shadow on Bullish Case for Stocks - 22nd Mar 18
A Strong Economy and Weak Stock Market is Bullish for Stocks - 22nd Mar 18
Fed Raises US Interest Rates 25bp – Where Are We In The Stock Market Cycle? - 22nd Mar 18
Why Spotify Will Likely Surge During Its IPO - 22nd Mar 18
SY Police Arrest Woman for Blowing Trumpet at Sheffield Tree Felling Protest - 22nd Mar 18
Facebook: The Anti-Social Network Covert Data Gathering - 21st Mar 18
Additional Signs for Gold and Silver Amid Increasing FOMC Tension - 21st Mar 18
Credit Concerns In U.S. Growing As LIBOR OIS Surges to 2009 High - 21st Mar 18
Stock Markets Are Flat-to-lower Before the FOMC - 21st Mar 18
Will Powell’s Actions Pop Stock Market Perfection - 21st Mar 18
Economic Moral Hazards of the International Criminal Court - and Philippines Withdrawal - 21st Mar 18
Larry Kudlow vs. Vladimir Putin on Gold - 21st Mar 18
Trump Builds Economy and War Machine - 21st Mar 18
This Stock Market "Illusion" Can Destroy Once-Vibrant Portfolios - 21st Mar 18
Gold Short-term Pull Back in Progress - 20th Mar 18
Stocks Appear to be Under Pressure - 20th Mar 18
Time To Eliminate Your Wall Street Tax? - 20th Mar 18
The Beast from the East Snow, UK Roads Driving Car Accidents - 20th Mar 18
Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - 19th Mar 18
2018 Reversal Dates for Gold, Silver and Gold Stocks - 19th Mar 18
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

U.S. Economy Failure to Recover Triggers Economic Armageddon

Politics / Great Depression II Jul 31, 2011 - 03:02 PM GMT

By: Paul_Craig_Roberts


Best Financial Markets Analysis ArticleAs the second decade of the 21st century began, the US economy had not recovered from the Great Recession that began in December 2007.

The economy’s failure to recover was despite the largest fiscal and monetary stimulus in the country’s history. There was a $700 billion bank bailout, a $700 billion stimulus program, a couple of trillion in “quantitative easing,” that is, in debt monetization or the printing of money to finance the government’s expenditures. In addition the Federal Reserve’s balance sheet had expanded by trillions of dollars as the Fed purchased troubled mortgage bonds and derivatives in its effort to keep the financial system solvent and functioning. According to the Government Accountability Office’s audit of the Federal Reserve released by Senator Bernie Sanders, the Federal Reserve provided secret loans to US and foreign banks totaling $16.1 trillion, a sum larger than US Gross Domestic Product (GDP).

Despite the enormous fiscal and monetary stimulus, the economy remained dead in the water.

In 2011 the deficit in the federal government’s annual expenditures was 43 percent of the budget. In other words, the US government had to borrow, or the Fed had to monetize, 43 percent of federal expenditures during fiscal year 2011. Despite this unprecedented fiscal and monetary stimulus, the economy did not recover.

At the end of the first decade of the 21st century, the economy’s decline was temporarily halted by federal subsidies for car and home purchases. The $8,000 housing subsidy helped newlyweds purchase starter homes as the subsidy was a big chunk of the down payment in a depressed housing market. The car purchase subsidy moved future demand into the present. When these subsidies expired, the economy’s life support was turned off.

Problems with the statistical reporting of unemployment, inflation, and GDP disguised the worsening economy. Seasonal adjustments used to smooth the data over the course of the year were not designed for prolonged recession. Neither was the “birth-death” model used by the US Bureau of Labor Statistics (BLS) to estimate non-reported jobs from new start-up companies and losses from companies that have gone out of business. The birth-death model was designed for a growing economy and during downturns overestimates the number of new jobs created.

The “substitution effect” used in the consumer price index (CPI) underestimates inflation by assuming that consumers substitute cheaper foods for those that rise in price. For example, if the price of New York strip steak rises, this does not show up in the CPI, because of the assumption that people shift their purchases to a less expensive cut such as round steak.


The widely used “core inflation” measure does not include food or energy. Core inflation is a useful measure for those who want to put an optimistic spin on the outlook.

By underestimating inflation, the government can overestimate real GDP growth, thus creating a fictional rosy outlook. Similarly, by using the employment measure known as U.3, the government underestimates unemployment.

The “headline” unemployment rate, the one emphasized by the media and the financial press, stood at 9.2 percent in June, 2011. But this rate does not include any discouraged workers. A discouraged worker is a person who has ceased looking for a job, because there are no jobs to be found. A discouraged worker is not considered to be in the work force and is not counted among the U.3 unemployed.

The federal government knows that this is phony and has a U.6 measure of unemployment that counts the short- term discouraged. This measure, seldom reported by the media, stood at 16.2 percent in June, 2011.

Statistician John Williams ( continues to count also the long-term discouraged workers according to the way it was officially done in 1980. In June, 2011, this full measure of the US unemployment rate was 22.7 percent.

In other words, by 2011 between one-fifth and one-fourth of the US work force were without jobs.

As 2011 progressed, the United States faced three simultaneous economic crises. One crisis arose from the loss of US jobs, GDP, consumer income, and tax base caused by corporations offshoring their production for the US market. Instead of making their products at home with American labor and providing Americans with jobs and states and localities with tax revenues, US corporations provided countries such as China, India, and Indonesia with GDP, jobs, consumer income and a tax base. This practice meant that economic stimulus was unable to revive the US economy as Americans cannot be called back to work jobs that have been moved abroad.

Another crisis was the financial crisis resulting from deregulation, fraud, and greed. Securitization of mortgages meant that issuers of mortgages no longer had any incentive to ascertain the credit worthiness of the borrower, because the issuers sold the mortgages to third parties who combined the mortgages with others and sold them to investors.

As mortgages were issued for fees, the more mortgages issued, the higher the income from fees. In order to collect fee income, some issuers faked credit reports for borrowers. With the housing market booming, many people took mortgages in order to make money on the resale of the properties. With housing prices rising rapidly, down payments and credit worthiness became concerns of the past. The financial crisis was made worse by the ability of investment banks to get around capital requirements and, thereby, leverage their equity by incurring enormous debt. When all the bubbles burst, the house of cards collapsed.


The third crisis was the $1.5+ trillion annual federal budget deficits, which were too large to be financed without the Federal Reserve buying the Treasury’s new debt issues. Known as monetizing debt, the Federal Reserve purchased the Treasury’s bills, notes, and bonds by creating a checking account, which the Treasury would then draw upon to pay the government’s bills. The outpouring of Treasury debt raised concerns about the dollar’s exchange value and role as reserve currency, and it raised fears of inflation. Gold and silver prices rose as the dollar declined in foreign exchange markets.

Any one of these crises was serious. All together, they implied economic armageddon.

There was no obvious way out, but even if one could be found, the government was focused elsewhere — on wars.

In addition to ongoing military operations in Iraq, Afghanistan, Pakistan, Yemen and Somalia, the US and NATO began military operations against Libya on March 19, 2011. As with the existing wars, the real purpose of the aggression against Libya was not acknowledged, but it became clear that the war’s purpose was to evict China from its oil investments in eastern Libya. Unlike the previous Arab protests, the Libyan rebellion was an armed uprising in which some saw the CIA’s hand.

The Libyan war upped the risk, because although hiding behind the veil of Arab protest, the US was actually confronting China. Similarly, in the US-supported armed rebellion in Syria, Washington’s target was the Russian naval base at Tartus. Overthrowing the Assad government in Syria and installing a US friendly regime would put paid to Russia’s naval presence in the Mediterranean.

By hiding its purposes behind Arab protests in Libya and Syria that it might have initiated, Washington avoided face-to-face conflicts with China and Russia, but nevertheless the two powers understood that Washington was striking at their interests. This elevated the recklessness of Washington’s aggressive policies by initiating confrontation with two nuclear powers, one of which held financial power over the US as America’s largest foreign creditor.

China’s oil investments in Angola and Nigeria were another target. To counter China’s economic penetration of Africa, the US created the American African Command in the closing years of the first decade of the 21st century. Disturbed by China’s rise, the US undertook to prevent China from having independent sources of energy. The great game that in the past has always led to war is being played out once again.

September 11, 2001, provided Washington with a new “threat” to replace the Soviet threat, which had expired in 1991. Despite the absence of the Soviet threat, the military/ security budget had been kept alive for a decade. September 11, 2001, injected rapid growth into the military/security bud- get. A decade later the budget stood at approximately $1.1 trillion annually, or approximately 70 percent of the federal deficit which was crippling the dollar and threatening the US Treasury’s credit rating.

Focused on Middle Eastern wars, Washington was losing the war for the US economy.

As the expectation of economic recovery evaporated over the course of 2011, the need for war became more imperative. (See, “Sen. Graham ‘Very Close’ to War.”)

Paul Craig Roberts [ email him ] was Assistant Secretary of the Treasury during President Reagan's first term.  He was Associate Editor of the Wall Street Journal .  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington ; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy , and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice . Click here for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

© 2011 Copyright Paul Craig Roberts - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


02 Aug 11, 14:37

We're all Greeks now. That global economy has morphed into a global trainwreck. Time for a global response?

Post Comment

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

6 Critical Money Making Rules