July 2009
According to Paul Samuelson, "Economists have correctly predicted nine of the last five recessions.” Such “accuracy” likely also applies to recent rosy predictions of recovery from our current slump. The Conference Board’s index of leading economic indicators moved up in April for the first time in 7 months, led by stock prices, and the index of consumer expectations. Weak elements, which continued to move down, included building permits and manufacturers' new orders for capital goods. While the psychology of the stock market can turn on a dime, and so can consumer expectations, business commitments such as building permits and orders for capital goods reflect fundamental forces.
The current pattern with regard to building permits in the US is unusual. Historically, housing construction has been one of the first to turn positive during a slump, because of real estate’s sensitivity to interest rates. Typically rates tighten when the economy heats up, shutting out payment-sensitive brackets of homebuyers. As a slump takes hold, the demand for bank credit slackens and the mortgage rate situation begins to reverse itself. Then, brackets of homebuyers previously shut out are able to qualify again, setting in motion a whole range of ripple effects throughout the economy. Regrettably, it's different this time because interest rates were kept artificially low by the Fed.
Not only was no bracket of motivated buyers restrained during the Bush years, but at the peak virtually anyone willing to sign a promissory note was able to get a “sub-prime” mortgage. So it's not surprising there is no rebound now, as the slump deepens, even though mortgage rates are lower than they have been in 50 years. And worse still, with construction materials and labor costs little changed, yet with home prices down as much as 60% depending on metro-market, builders have little appetite to risk whatever capital they may have left. The result is that building permits are currently running at a rate of less than 50,000 units, down from over 200,000 three years ago.
Likewise, a turn-around in industrial orders for capital goods is not likely to follow the typical pattern of post-WWII recessions. When a period of prosperity peaked, orders for capital equipment would fall off sharply because industrial production would be throttled back well below capacity due to ballooning inventories, in turn the result of slackening consumer demand. This is true now, too, but with a difference. While twenty years ago approximately 90% of manufactured goods consumed in the US were made here, now the figure is more like 75%. Much of this loss has occurred recently --manufacturing employment in the US dropped from 18.5 million workers in 2000 to 12.5 million currently--because US industries have been globalizing themselves to take advantage of dramatically lower labor costs in other countries. The consequence is that when inventories finally do tighten, plants in China, Mexico, Brazil, dia, and other cheap labor areas will be getting capital infusions from the very same corporations that used to do their capital spending here in the US.
In addition to residential construction and industrial capital equipment, another traditional counter-recessionary dynamic is deficit spending by the government. This time, in spite of bitter opposition by the Republicans, Congress has voted the Obama administration authority to throw massive sums into stimulus measures.
But unfortunately by mid May, three months after the President signed the stimulus bill, less than 6% of the authorized money was spent, and that was mostly in the form of social service payments to the states (unemployment extensions, for example). Unless the stimulus money gets out there and goes to create jobs, it won’t even begin to get us out of this recession.
Complicating any hope for recovery, all three of these counter-recessionary factors are perversely linked to the global economic crisis. During the Bush years the principal source of mortgage credit for US homebuyers shifted to Wall Street, which packaged mortgages into derivative securities and peddled them all over the world. However, this pattern of finance caused a disconnect between mortgage credit underwriting at the local level, and long term ownership of the loans which might be anywhere in the world. In the heady chase for origination fees, unrestrained by any long term responsibility, sub-prime borrowers were routinely qualified, often fraudulently. So Wall Street’s triple-A rating for derivatives based on those mortgages turned out to be fraudulent too, and market for them collapsed, with global effects. Now, the entire real-estate finance business is in a drastic state of retrenchment with no more foreign money coming in.
On the subject of capital spending by US industry, there is little hope of much counter recessionary kick in the foreseeable future because our most successful corporations are up to their necks in that global “race to the bottom,” and heavily dependent on countries with the lowest labor costs and environmental protection standards. Consequently, the industrial jobs lost here are not coming back. And the countries where those jobs have gone, like China, India and Brazil, are well positioned to take advantage of the lapse of US demand for their exports by refocusing idled manpower and entrepreneurial spirit on emerging technologies, such as “green energy.”
Finally, with regard government deficit spending, neither taxes nor domestic funding sources are adequate to finance the Obama administration’s giant stimulus package. In the past, foreign countries have been happy to snap up US treasury debt because the dollar has been the dominant reserve currency of central banks, world wide. The dollar has survived in this role since WWII thanks to a paradoxical circumstance. For a nation’s central bank notes to be available in good enough supply to be the international reserve currency of choice, the country must be running a deficit covered by selling its treasury notes in international markets. If that country begins running a persistent surplus and redeems its borrowings, the reduced supply will make that country’s obligations unsuitable for international reserve accumulation. So, paradoxically, the supply of dollars to the rest of the world depends on the U.S. deficit, and yet at the same time the willingness of other countries to hold dollars depends on the US economy’s ability to inspire confidence. Regrettably, this financial crisis has badly shaken international confidence in Wall Street, the capitalist system, and the US. So, if the dollar starts to slide, it will become significantly more difficult and costly to finance the giant stimulus (among a host of other consequences of a dollar debacle on US citizens).
Countries like China with big dollar holdings are helping us keep the dollar stable. But China has signaled its desire to change the rules so it doesn’t have to keep financing the endless deficits of a nation whose economy has been wounded by Wall Street fraud and by the global race to the bottom (of which China is probably the primary beneficiary, ironically). The challenge for China is to make a relatively smooth transition from the dollar to some other reserve currency, while also shifting from so heavily exporting to the US, to diversifying more broadly to other markets. For a new reserve currency, China favors notes to be issued prospectively by the International Monetary Fund, whose value would be tied to a basket of currencies including the dollar. The Obama administration, with a stimulus to finance, obviously would like to delay any such transition as long as possible. This was dramatically illustrated at the June 24-26 United Nations' Conference on the World Financial and Economic Crisis where our UN Representative Susan Rice made a statement before the conference started praising the reform agenda that included consideration of the prospective IMF reserve notes, but then she was replaced as the conference got underway by a stand-in who proceeded to oppose reform… reportedly at the insistence of the Treasury Department.
As for World Federalists and other citizens for global solutions, the good news is that the prospective reform of the international financial system is gradually building support, and will of necessity draw the world’s trading nations into a more cooperative and mutually responsible framework. This will be one more brick in the gradual evolution of global institutions and laws, although one that will inevitably come at a cost to the prestige and economic dominance of the USA. .
According to Paul Samuelson, "Economists have correctly predicted nine of the last five recessions.” Such “accuracy” likely also applies to recent rosy predictions of recovery from our current slump. The Conference Board’s index of leading economic indicators moved up in April for the first time in 7 months, led by stock prices, and the index of consumer expectations. Weak elements, which continued to move down, included building permits and manufacturers' new orders for capital goods. While the psychology of the stock market can turn on a dime, and so can consumer expectations, business commitments such as building permits and orders for capital goods reflect fundamental forces.
The current pattern with regard to building permits in the US is unusual. Historically, housing construction has been one of the first to turn positive during a slump, because of real estate’s sensitivity to interest rates. Typically rates tighten when the economy heats up, shutting out payment-sensitive brackets of homebuyers. As a slump takes hold, the demand for bank credit slackens and the mortgage rate situation begins to reverse itself. Then, brackets of homebuyers previously shut out are able to qualify again, setting in motion a whole range of ripple effects throughout the economy. Regrettably, it's different this time because interest rates were kept artificially low by the Fed.
Not only was no bracket of motivated buyers restrained during the Bush years, but at the peak virtually anyone willing to sign a promissory note was able to get a “sub-prime” mortgage. So it's not surprising there is no rebound now, as the slump deepens, even though mortgage rates are lower than they have been in 50 years. And worse still, with construction materials and labor costs little changed, yet with home prices down as much as 60% depending on metro-market, builders have little appetite to risk whatever capital they may have left. The result is that building permits are currently running at a rate of less than 50,000 units, down from over 200,000 three years ago.
Likewise, a turn-around in industrial orders for capital goods is not likely to follow the typical pattern of post-WWII recessions. When a period of prosperity peaked, orders for capital equipment would fall off sharply because industrial production would be throttled back well below capacity due to ballooning inventories, in turn the result of slackening consumer demand. This is true now, too, but with a difference. While twenty years ago approximately 90% of manufactured goods consumed in the US were made here, now the figure is more like 75%. Much of this loss has occurred recently --manufacturing employment in the US dropped from 18.5 million workers in 2000 to 12.5 million currently--because US industries have been globalizing themselves to take advantage of dramatically lower labor costs in other countries. The consequence is that when inventories finally do tighten, plants in China, Mexico, Brazil, dia, and other cheap labor areas will be getting capital infusions from the very same corporations that used to do their capital spending here in the US.
In addition to residential construction and industrial capital equipment, another traditional counter-recessionary dynamic is deficit spending by the government. This time, in spite of bitter opposition by the Republicans, Congress has voted the Obama administration authority to throw massive sums into stimulus measures.
But unfortunately by mid May, three months after the President signed the stimulus bill, less than 6% of the authorized money was spent, and that was mostly in the form of social service payments to the states (unemployment extensions, for example). Unless the stimulus money gets out there and goes to create jobs, it won’t even begin to get us out of this recession.
Complicating any hope for recovery, all three of these counter-recessionary factors are perversely linked to the global economic crisis. During the Bush years the principal source of mortgage credit for US homebuyers shifted to Wall Street, which packaged mortgages into derivative securities and peddled them all over the world. However, this pattern of finance caused a disconnect between mortgage credit underwriting at the local level, and long term ownership of the loans which might be anywhere in the world. In the heady chase for origination fees, unrestrained by any long term responsibility, sub-prime borrowers were routinely qualified, often fraudulently. So Wall Street’s triple-A rating for derivatives based on those mortgages turned out to be fraudulent too, and market for them collapsed, with global effects. Now, the entire real-estate finance business is in a drastic state of retrenchment with no more foreign money coming in.
On the subject of capital spending by US industry, there is little hope of much counter recessionary kick in the foreseeable future because our most successful corporations are up to their necks in that global “race to the bottom,” and heavily dependent on countries with the lowest labor costs and environmental protection standards. Consequently, the industrial jobs lost here are not coming back. And the countries where those jobs have gone, like China, India and Brazil, are well positioned to take advantage of the lapse of US demand for their exports by refocusing idled manpower and entrepreneurial spirit on emerging technologies, such as “green energy.”
Finally, with regard government deficit spending, neither taxes nor domestic funding sources are adequate to finance the Obama administration’s giant stimulus package. In the past, foreign countries have been happy to snap up US treasury debt because the dollar has been the dominant reserve currency of central banks, world wide. The dollar has survived in this role since WWII thanks to a paradoxical circumstance. For a nation’s central bank notes to be available in good enough supply to be the international reserve currency of choice, the country must be running a deficit covered by selling its treasury notes in international markets. If that country begins running a persistent surplus and redeems its borrowings, the reduced supply will make that country’s obligations unsuitable for international reserve accumulation. So, paradoxically, the supply of dollars to the rest of the world depends on the U.S. deficit, and yet at the same time the willingness of other countries to hold dollars depends on the US economy’s ability to inspire confidence. Regrettably, this financial crisis has badly shaken international confidence in Wall Street, the capitalist system, and the US. So, if the dollar starts to slide, it will become significantly more difficult and costly to finance the giant stimulus (among a host of other consequences of a dollar debacle on US citizens).
Countries like China with big dollar holdings are helping us keep the dollar stable. But China has signaled its desire to change the rules so it doesn’t have to keep financing the endless deficits of a nation whose economy has been wounded by Wall Street fraud and by the global race to the bottom (of which China is probably the primary beneficiary, ironically). The challenge for China is to make a relatively smooth transition from the dollar to some other reserve currency, while also shifting from so heavily exporting to the US, to diversifying more broadly to other markets. For a new reserve currency, China favors notes to be issued prospectively by the International Monetary Fund, whose value would be tied to a basket of currencies including the dollar. The Obama administration, with a stimulus to finance, obviously would like to delay any such transition as long as possible. This was dramatically illustrated at the June 24-26 United Nations' Conference on the World Financial and Economic Crisis where our UN Representative Susan Rice made a statement before the conference started praising the reform agenda that included consideration of the prospective IMF reserve notes, but then she was replaced as the conference got underway by a stand-in who proceeded to oppose reform… reportedly at the insistence of the Treasury Department.
As for World Federalists and other citizens for global solutions, the good news is that the prospective reform of the international financial system is gradually building support, and will of necessity draw the world’s trading nations into a more cooperative and mutually responsible framework. This will be one more brick in the gradual evolution of global institutions and laws, although one that will inevitably come at a cost to the prestige and economic dominance of the USA. .
No comments:
Post a Comment