Are Ordinary People In The United States Screwed? My Reply

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Above photo: Occupy Wall Street, by Amy Sussman/Corbis.

Note: A reader wrote Rasmus about his article. Argentina & the Next Global Financial Crisis, and Jack used it as an opportunity to explain the realities of the current global economic situation. KZ 

    My Reply to a Reader:

“If by ‘ordinary Americans’ you mean those of us whose income is in the ‘bottom 90%’, the answer is ‘yes, we get screwed when the rich and their politicians get filthy rich by causing an economic crisis, then get richer off that crisis once it happens’.

More than a trillion dollars every year since 2011 on average has been distributed by their corporations to them in stock buybacks and dividends. last year it was $1.2 trillion. This year it will be closer to $1.5 trillion.

Meanwhile we get to work more part time and temp jobs (2nd and 3rd jobs which is where most of the job creation has been occurring) and we get little or no wage increases (most of the wage gains are going to the top 10% of the workforce, leaving the middle stagnating and below the middle falling in real wage terms). The official 3.1% wage gain is just an ‘average’, with most of the gains skewed to the top 10%. Nor does that 3.1% include part time wages, just wages of full time workers. Nor does it account for inflation offsetting the 3.1% nominal wage gains (inflation which is greater than reported as well). And if you’re one of the unfortunate getting hit with accelerating health care insurance premiums and drug costs, or student loan debt, or rising rent costs, then you’re going backward in wages even more.

In short, the policies since 2008–both Obama’s and Trump’s–for ten years now have been subsidizing the rich, the elites, the owners of capital incomes like never before in US history. Tax cuts and Fed policies have subsidized (i.e. redistributed) tens of trillions of dollars for the elites from fiscal and monetary policies. The redistribution/subsidization has been so extreme that that fiscal and monetary policies are now effectively ‘dead in the water’ when it comes to try to stimulate the real US economy once it descends into recession–which is less than 12 months away for the US and already happening in Europe, Latin America, and parts of Asia.

Fiscal policy in the US is now dead-ended as an effective stimulus policy tool due to the $22 trillion current US national debt levels and annual $1 trillion plus budget deficits. National debt in the US will be $34 trillion by 2027, or even more if there’s a deep recession (which will happen). Interest on that $34 trillion debt, per the CBO, will reach $900 billion a year. Increasing government spending or reducing middle class taxes to try to stimulate the economy out of recession is thus largely neutralized.

Monetary policy is also now largely neutralized I believe. Fed monetary policy interest rates will soon fall to zero, or even turn negative as in Europe and Japan, and will stay there for years. Interest rate policy to stimulate recovery of the real economy is thus now ‘dead’ as well, as a policy tool. (which was my prediction in my 2017 book, ‘Central Bankers at the End of Their Ropes’). Fed rates are at 2% and will soon fall further. But it will have little effect on the real economy, now or in the near future.

So with both fiscal and monetary policy essentially neutralized in the coming recession, the recession may descend deeper and last longer than politicians and capitalists now think.

This is part of the analysis I made back in 2010 in my other book, ‘Epic Recession: Prelude to Global Depression, where I predicted the recovery from the 2008-09 ‘great recession’ (what I called ‘epic recession’) would follow a trajectory long term of short shallow (weak) recoveries of the real economy, punctuated by short and shallow returns to recession. Meanwhile, stock and other financial markets would boom as the monetary stimulus flowed into financial asset markets and not the real economy. That is what clearly has been happening since 2008 in both Europe and Japan that have experienced repeated recessions, and are now in yet another recession.

In the US this ‘epic’ recession scenario–of short shallow contractions and recoveries amidst booming financial markets–has been muted somewhat because of the US global economic dominance and therefore its ability to ‘export’ some of its economic weakness offshore (mostly to Japan and Europe). But epic recession did not bypass the US. Its effect was only muted compared to Europe and Japan. The US also experienced two brief periods of essential real GDP stagnation, and even decline, in 2012 and 2015. This was obfuscated as well in part by the US redefining its GDP numbers in 2013 to cover up the short, shallow contractions.

Both the global and US economies are now on another trajectory for another contraction, both in the advanced economies (US, Japan, Europe, etc.) but also now increasingly among emerging market economies worldwide. Watch for the economic events in Argentina to spread throughout Latin America. Markets and currencies will continue to fall from Argentina to Mexico. Watch also for big bank and credit problems in India to intensify. Watch for Australia-New Zealand-Southeast Asia (and even So. Korea) economies now weakening. The global economy is now experiencing worldwide financial asset market price declines everywhere–in stock markets, bonds, property values, derivatives, currencies, and of course oil and other commodity futures.

That global financial asset deflation is a harbinger of possible renewed global financial crisis coming. Should the current global manufacturing recession spill over to other sectors of the real economy, which it is now doing in Europe and elsewhere (and beginning now in the US as well), and should this real economic contraction overlap with an accelerating deflation of financial markets (now appearing), then the next recession will likely appear more serious than prior ‘normal’ recessions. The inability and ineffectiveness of fiscal and monetary policies to do much about it will exacerbate the dual trends even further. The on-going ‘epic’ recession is now reasserting itself and intensifying in another downward cycle swinging toward economic contraction again.”