Lucian-Nicolae Berba
The United States today faces more challenges than at the beginning of the financial crisis. What started in late 2007, as sub-prime mortgages turned toxic, had ripples through all mortgage-backed securities before continuing to funnel through to the stock markets and wider economy. The imminent danger is not long passed yet still more lies ahead.
The U.S. is in bad shape: the only thing covering the mess is the media’s focus on the European Union. What many people don’t understand is that the European Union is trying to get their mess cleaned by fiscal reforms (increased quantity or efficiency of taxation), by budget reforms (increasing intake and decreasing expenses while stimulating capital investments) and by intervening on the open market to strengthen the Euro.
In the mean time, in the U.S., the budget deficit is growing at a staggering pace, showing no signs of cool-down. The fiscal gap is in worse shape than ever and the trade deficit is slowly and surely lowering the purchasing power of Americans. Furthermore, the main indicators of economic health are painting a bleak image.
Economic crisis or credit crisis?
The U.S. crisis is both an economic crisis and a crisis of credit: it started with the coincidence of 2 major cycles coming to an end:
1. The decade long easy-credit cycle which influenced people into under-saving and overspending their way into mountains of debt. Consumption of credit was encouraged by low interest rates and the easiness of actually obtaining credit, while savings were discouraged by the same low interest rates. The stock-market boomed (and sometimes went bust) due to all the money looking for a quick return.
2. The normal business cycle, which encompasses the capital investment upturns and downturns as it tries to follow the aggregate demand. When companies invest too little in their capacity and the aggregate demand is high the prices will rise (and so will the profits). Due to the rise in profits, companies will invest more and more in capacity until the aggregate demand lags behind and price usually comes down. Due to the decrease in demand, companies have to close down production facilities or invest less in human labor.
The U.S. stands in a difficult position as it has not encouraged a decrease in the overall production capacity. As a matter of fact it did exactly the opposite. Following the teachings of John M. Keynes, America has stimulated the weak aggregate demand by trying to extend the credit cycle.
The Federal Reserve lowered interest rates through open market operations (such as the “Repurchase Agreements”, the “Quantitative Easing” programs (QE1 and QE2) and “Operation Twist 2″) and cleaned the balance sheet of the investment banks by purchasing at par their toxic assets (TARP program). The plan was to end the liquidity crisis to allow the banks, now effectively bailed out, to start to prop up both consumer and investment credit. The results of this entire economic stimulus are the following:
US debt
After decades of running budget deficits, U.S. public debt spiraled out of control in 2008 because of the stimulus effort. It now stands at a staggering $14.6 trillion.
It doesn’t seem to worry the US government that 47% of the national debt is in the hands of foreigners: mostly Chinese, Japanese and British. When they wake up and see that their investments are rapidly losing value, the perceived flight to “the quality of the US dollar” will stop.
Of course they cannot start selling the bonds they hold, but the central banks can decide to stop investing in these. The Chinese Central Bank has already expressed a lot of interest in buying European Debt and financing myriad resource extraction projects throughout Africa and East Asia.
The total credit market debt now is at an all time high 3.5 times GDP and amounts to a breathtaking $52.2 trillion. Put simply, this means that the United States as a whole consumes more than 2.5 times it’s means. It’s like a family borrowing from a credit card 3.5 times its salary. At one point there will have to be some form of deleveraging and its going to be more and more painful as time goes on.
Employment
The official unemployment rate now stands at 9.1% in the U.S., with almost 14 million people unemployed. Now don’t be fooled: this number only represents the people on unemployment support. The ones that gave up looking for a job, or found part time jobs, or ex-mechanics flipping burgers at KFC, or the ones for which the unemployment support came to an end, or the ones that are working on a cash-in-hand basis (and not paying any taxes), are not included in this government figure. The true unemployment rate, according to Shadowstats, is more like 22% – 25%
The average unemployed worker has to look 40 weeks for work to find a new job. The employment to population rate dropped to its 1968 value of 58.2%.
U.S. citizens in poverty
The number of Americans relying on food stamps reached 45 million in 2011 (that is 14.5% of the US population) amounting to $72 billion in government aid. The figure for 2005 was 27 million Americans, receiving $30 billion in government aid.
15.1% of Americans have less than $22,314 annual income for a family of four (the federal poverty line). This is the highest level since 1993.
The number of uninsured Americans reached 49.9 million, or almost a sixth. As more and more citizens become unemployed and go under the federal poverty line, the saving capability of the US will weaken. Without a savings surplus, there cannot be organic capital investments, and foreigners will do all capital investments in the U.S. Or will they?
Lucian-Nicolae trades US and European stock indices and commodities and writes about investment and macroeconomic analysis at journey-to-alpha.blogspot.com.
