The US Economy and its Problems
"The sober reality is that the American economy is only kept alive artificially. The Bush administration is doing everything in its pwoer to nourish the illusion of a recovery.. Families have become indebted at record levels.. Whole regions of the US have become ghost towns.."
The US Economy and its Problems
By F. William Engdahl
[This article originally published in: Zeit-Fragen Nr. 9, March 8, 2004 is translated from the German on the World Wide Web, http://www.zeit-fragen.ch/ARCHIV/ZF_114c/INDEX.HTM.]
Most newspapers are full of the news of a surging recovery of the American economy after a three-year phase of recession and stagnation. President Bush speaks of a constant growth push. The head of the Federal Reserve Bank, Alan Greenspan, says more or less the same. The stocks on Wall Street climb on account of the expected boom. The sober reality is that the American economy is only kept alive artificially. The Bush administration is doing everything in its power to nourish the illusion of a recovery up to the election in November. This could be described as a "virtual recovery".
In past recession phases after the war, businesses reduced their debts, dismissed workers and did everything to create a better relation of debts and revenues. Private households reduced their debts and spent less in a normal recession. The situation is alarming and has nothing to do with a normal recovery phase. For the first time since the Great Depression in 1930, American families increased their private debts during and after the so-called end of the recession officially proclaimed in November 2001. Instead of the usual phase of saving and caution in money transactions, families have become indebted at record levels. Since the collapse of the dot.com-market in March 2001, Greenspan's Federal Reserve Bank has encouraged the greatest consumer indebtedness orgy of world history.
THE DEBTS OF HOUSEHOLDS GROW AND JOBS ARE LOST
Since the end of 2000, the indebtedness of private households jumped from 70% of the gross domestic product to 82% today. In April 2003, the sum total of the debts of all private households from credit purchases, mortgages and other debts (for cars, credit cards and so forth) amounted to $9.3 trillion. This is an enormous increase. The bulk of the debts comes from mortgages on real estate and loans connected with these mortgages. Total debts incurred with mortgages rose to over $7 trillion. This represents a per-capita indebtedness of $25,000 for every man, woman and child. The average debts from credit cards alone amount to $12,000 and the interests to be paid to the banks are over 14% per year.
Additional debts can bed made as long as family income rises. However the opposite is the case in the US today. Last year income increased officially 2% while individual debts rose almost 10%. Debts for cars, credit cards and the like increased for the first timer to $3 trillion. The debts of private households including mortgage debts rose in 2003 around $925 billion while wages and salaries only increased $190 billion. Americans sink in debts to keep the economy alive. A poll revealed that 28% of Americans considered their debts as the greatest problem. Only the lowest interests have made this dangerous situation possible for so long. This cannot continue forever. Bush hopes it will continue at least until the November election.
To prevent a collapse of the US economy after the crash of the information technology branch, Greenspan lowered interests more than 13 times to an absolute low of 1%, the first time in 43 years. This encouraged families to buy new or larger houses. This led to higher prices for real estate. Last year real estate prices for old houses rose 14% nationwide. The prices for new homes rose 18%.
While the personal mountains of debt grew, the incomes for repaying the debts have not grown. The gross domestic product of the United States rose 7.2% since the collapse of the stock markets and the recession of late 2001. In the same time period, wages and salaries merely rose 2% and only 0.6% or almost zero allowing for inflation. Nevertheless the personal debts have exploded. This situation continues as long as people are unable to repay debts from car purchases, credit cards and house purchases.
On January 29, 2004, Greenspan gave an address and promised not to raise interests soon. Still he insisted that the economy was in a healthy phase of recovery. If the economic recovery is sound, why don't the interests rise to the normal level? The answer can only be that the recovery isn't a healthy recovery. Some economists call it the second great depression whose serious effects are only veiled by the extremely low interests and by the enormous deficit-spending of the Bush administration, joined with the continued readiness of the Japanese and Chinese to buy hundreds of billions of dollars of US government bonds to finance the deficit of the Bush administration that isn't possible for Americans themselves.
Jobs disappear at a record speech in all America. Officially 2.7 million jobs have been lost since 2001. Unofficially this number according to a statement of a former economist of the Federal Reserve amounts to 7 million. Whole branches of industry are lost on account of cheap imports from China, India or Mexico. Chinese textile- and furniture imports have increased so enormously in the last two years that whole regions of the United States have become industrial ghost towns. Not only jobs of workers, so-called "blue collar jobs", are lost. In the last 18 months, important US banks and mammoth firms have outsourced whole areas of their data processing and related services to India or elsewhere at a fraction of past costs. For the first time, highly paid jobs or "white collar jobs" like software programmers, engineers and accountants are also impacted.
The American public was also told that unemployment would decline. The American Department of Labor only counts those as unemployed who are actively seeking employment. If one abandons seeking work, one disappears from the statistics. Hundreds of thousands of jobless have disappeared in thin air. Consequently the official unemployment rate is only 5.6%.
The government has different measurements for unemployment. If one counts the und3er-employed who would accept a full-time job if it were offered and those who have given up seeking work, the total unemployment in the United States would be 10.9%, not the 5.6% dominating the headlines... These higher numbers are never published in the press. When other official measuring instruments on the creation of new jobs are applied, their number is lower than after every recession phase since the Second World War.
Those Americans fortunate enough to find a new job in the last three years usually didn't have the happiness of finding a better job. A new study of the Economic Policy Institute showed that economic branches creating the new jobs pay 21% less on average than those economic branches that are cutting their number of jobs. In the auto industry in Michigan, good-paying jobs in production and construction are lost while new jobs in health care and other areas offer 26% less wages. More and more Americans are forced to accept part-time jobs, often without health insurance and similar benefits. Approximately 4.8 million people work part-time because no full-time positions are offered.
The most dramatic change appears in the constant decline of industrial jobs since 2000. US factories set a new record and reduced jobs over 42 months. What is praised today as an upswing is that American industry works at only 76% of its capacity, near the edge of a depression. Goods are manufactured in Asia instead. The Asian central banks, especially those of China and Japan, support the US market, their largest sales market, by buying up government bonds and other securities with their gigantic dollar surpluses from this trade. The effect is the creation of new jobs, jobs in Asia, not jobs in America where they gradually disappear. The subject has become political thin ice.
WILL THE REAL-ESTATE BUBBLE BURST?
Given an actual unemployment of nearly 11% and wages that stagnate or even sink, it is not surprising that some families have problems with survival. The number of bankrupt households is at a record high. For the first time, signs now appear that despite the lowest interest-raters in 43 years families have problems in paying their mortgage interests. Today the relation of private debts to personal assets is at a fantastic all-time high of 22.6%. Many families are forced to take two or three jobs to pay their bills, in particular the costs of the mortgage on their homes.
Prices for homes have risen dramatically in the last three years since low interests seduce banks to lend money to families with high risks. States or semi-state agencies like Fannie Mae or Freddie Mac shift the risk of money lending of local banks to American taxpayers. For over a hundred years, US banks lent money for home=buying on the basis of very conservative rules requiring paying a considerable share - usually 25-30% of the mortgage liability - in cash and showing that the family had additional securities or (property) assets exceeding the value of the new home and covering the loans in case of payment problems.
With new financing instruments and state guarantees, banks lend today without conducting thorough credit checks. In some cases, the credits reach 125% of the value of the home. In addition, the American Congress plans to pass a law "The Zero Down Payment Act of 2004", that would allow certain buyers to acquire real estate without a cent of their own capital resources. This is playing with fire.
That the sale of homes in 2003 broke all records is not a surprise given interest-rates of 5.7% for mortgages with a 30-year repayment time, the lowest rate in 43 years. Since no one of Alan Greenspan's generous credit policy is foreseeable, banks throw cheap credits to homebuyers. The problem is that an end of the artificial home-buying bubble is manifest with the constant growth of unemployment figures and stagnating wages.
In Colorado Springs, one of the strongest economic enclaves in Colorado, forced sales - a process in which the bank or the government repossesses houses without payment - increased 21% within a year and are at a 12-year high. Since 2001, this region has lost approximately 9000 good-paying jobs in the information technology branch. Portland/Oregon has the highest rate of forced sales in the country. In this region alone, 50,000 people are in arrears every month in paying their mortgages. The reason for non-payment is usually the loss of jobs. Nationwide forced sales are at the highest level since the great recession in the early 1970s.
Many families ran into difficulties when prices for homes rose most intensely. This is connected with the fact that the property tax in cities is raised to the market value of homes. In Seattle, the home of Microsoft and one of the strongest home markets in the country, pensioners are forced to sell homes long in their possession because local property taxes rose too robustly for them. They couldn't pay these taxes from their pensions.
Families with great debts have three possibilities: increase their income, borrow more money or become insolvent and declare personal bankruptcy. Declarations of bankruptcies are at an all-time high. Nevertheless interests remain at an historical low. When the interests begin to rise again which must happen soon even if only to stop the fall of the dollar, economists fear a flood of new declarations of bankruptcy and insolvency in mortgages since families will no longer be able to pay the rising interests. This will trigger a new waver of unemployment, plant closings, wage cuts and falling stock prices.
The problem this time is that the United States has already exhausted all possibilities available for combating a normal recession. Greenspan's Federal Reserve has already lowered interests more than ever before. The loss of jobs has reached a record level and families have taken credits in record amounts. Presumably there will still be a great wave of spending when American families receive their tax refunds in April 2004 on account of the tax reform of the last years.
This is an explosive mixture. That the time after the November election will be one of the most dramatic in US economic history is pre-programmed. The Federal Reserve will then try to print dollars like mad to counter the collapse. The effects of the new economic crisis will be felt worldwide. This crisis will strike the world at the same time as the first alarm bells for exceeding the peak outputs for petroleum. Its consequences for the world will be indescribable.
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