US economy: Rotten to the core

FRFI 212 December 2009 / January 2010

Superficially, the US economy looks as if it might be improving. The stock market has bounced up by over 30% this year, breaking through the 10,000 mark on the Dow Jones index. Indexes of this and that economic factor seem to show something positive – even if only to tell us that things are getting worse less fast. And everywhere in business circles and on the nightly news is the talk, talk, talk of recovery. STEVE PALMER reports.

Behind the scenes, the economy continues to rot away, tossing hundreds of thousands into a dustbin of unemployment, homelessness and poverty – and not just in the US. The contradictions of the US economy are preparing new financial bubbles in Asia and ‘emerging economies’, like Brazil. Fresh instability lies ahead.

First there is the huge debt, which continues to swell – some $52.8 trillion, almost four times the annual production of the US – about $185,000 for every man, woman and child, or about $750,000 for a family of four. Government spending continues to add to the pile of debt. After posting a record $1.4 trillion budget deficit for the 2009 fiscal year, October opened with a deficit of $176.4 billion. Individual states are in a serious debt crisis too. California’s revenue falls short of its budget needs by 49%, Illinois by 47%, Arizona by 41%, Nevada 38%, New York 32%. All this debt is a time bomb, ticking away, which one day will have to be reckoned with. For the moment, the debt is able to grow, by borrowing from the rest of the world.

The financial sector has done extremely well out of the crisis, having almost wrecked the entire system (see Table 1).

The success of the financial companies has been due to the massive intervention of the US government and the Federal Reserve Bank. Apart from direct donations of billions of dollars, government-backed loans are responsible for 99% (about $1.5 trillion) of purchases of mortgage-backed securities, up from about 80% before the crisis: the private secondary market has completely collapsed.

The main beneficiaries of the crisis have been a handful of the very largest banks which have benefited at the expense of the rest. JP Morgan Chase, Bank of America, Wells Fargo and Citibank now issue half of all mortgages and about two-thirds of US credit cards. They are each allowed to hold more than 10% of the nation’s bank deposits.

At the other end of the scale, smaller regional banks are failing at an increasing rate (see Table 2). The Federal Deposit Insurance Corporation had 552 banks with $345.9 billion in assets on the confidential problem list as of 30 September, a 33% increase from 416 lenders with $299.8 billion in assets at the end of the second quarter, while its insurance fund has a $8.2 billion deficit, its first negative balance since 1992.

Even the non-financial sector profits may be fictitious. Various accounting tricks are surfacing. Assets bought at inflated prices before the crisis are being held on some companies’ books at those prices – as ‘goodwill’. This inflates the value of the company. The Huron Consulting Group shows $506.5m of goodwill – more than 65% of its assets. More than 20% is regarded as exceptional, yet 12% of large companies have goodwill above this level. Some companies are recording transactions when the sale is made, not when it receives the cash. They can also delay paying suppliers. Although the normal period is 30 days, the internet giant Amazon is taking 65 days to pay suppliers. This practice boosts the company’s cash flow – on paper; this amounted to 70% of the company’s cash flow in the last year. These kinds of tricks will continue until the day the bills really do need to be paid in cold hard cash.

Despite the talk of recovery, the suffering and misery of American working people continues to grow. Since 2008, some five million jobs have disappeared. In the months since the Obama administration supposedly began to stimulate the economy, 2.8 million jobs have disappeared. Official unemployment is at 10.2%, while other measures show the real rate to be much higher. In addition to the 15.7 million registered unemployed, a further 5.6 million are classified as ‘not in the labour force’ but want a job, bringing the unemployment rate to 13.8%. By the broadest official measure of unemployment, which includes those forced to work part-time, the rate is 17.5%. The burden of unemployment is unevenly distributed: among white people, the official rate is 9.5%; Hispanic people – 12.4%; black people – 15.7%. Among youth: white youth – 25.3%; Hispanic youth – 35.6 %; black youth – 41.3%.

The Mortgage Bankers Association reported that in September, 14.1% of borrowers – around 10 million loans – were either delinquent on their mortgage or in foreclosure, the highest levels since recording began in 1972. Over half these loans are ‘prime’ loans – not the ‘sub-prime’ loans which triggered the current crisis. Many of these borrowers are going to end up homeless. At any one time in the US in 2008, there were believed to be around 700,000 homeless, sheltered and unsheltered, but in the course of a year, some 1.6 million people used some form of homeless shelter. It is expected that 1.5 million additional Americans will become homeless in 2009 and 2010.

Census figures for 2008, the latest available, show that the poverty level rose to 13.2%. The absolute number was 39.8 million, the highest since 1960. Among whites, the level was 8.6 per cent; Hispanics – 23.2%; blacks – 24.7%. 14.1 million children under 18 were living in poverty – one child in five. Median household income fell by 3.6% in 2008. In August the number of Americans receiving food stamps rose to a new record of 36.5 million people – one in eight of the US population and an annual increase of 24%. If all those eligible for food stamps collected them, 54.8 million Americans would be receiving. About 49.1 million people – one in six – were ‘food insecure’ in 2008 meaning that they ran out of money to buy food, could not afford balanced meals, or skipped meals. At the same time, food prices jumped by 5.9%, the biggest increase since 1980. All this in the richest country in the world, where they hand out millions and millions in bonuses to already overpaid financial maggots.

Exporting the crisis

The record low US interest rate combined with falling prices means that core US interest rates are effectively negative. This has resulted in the dollar ‘carry trade’ soaring: borrowing cheap US dollars to buy risky non-US assets while the dollar is trading at a 15-month low. This ‘hot money’ has been pouring into Asian countries, inflating property prices, pushing up local stock exchanges and encouraging local financial bubbles. MSCI’s emerging-markets stock index has risen 71% this year, an extraordinary performance. International commodity prices have risen some 37% since March. The Brazilian stock exchange equity index has grown by 84% since March. At some point, this dollar carry trade is going to end abruptly, whether through inflation or increased interest rates in the US. At that point, these asset bubbles are going to turn into a new crash in Asia and the ‘emerging economies’ and a renewed financial crisis. The recent crash of Dubai World is an example of such overblown asset values and may well trigger a more serious crisis. Truly a system rotten and rotting to the core!