Is The Bailout Going To Work, Or Is America Going To Descend Into The Depths of Economic Hell?
by Bill Sardi
Recently by Bill Sardi: Advantages and Disadvantages of Silver
Most Americans are too busy or distracted to realize the world economy now sits on an unprecedented abyss. The question is — will the US economy, which dominates all other economies ($14 trillion of the world $61 trillion gross domestic product (GDP)), get back on a growth curve after being derailed by imprudent and outright fraudulent banking, lending and hedging schemes, and after a monumental rescue effort in the form of bailout money to banks and corporations as well as a buyout of real estate assets, now on the public ledger at the Federal Reserve Bank? In other words, did the $700+ billion Troubled Asset Relief Program (TARP) actually work? Maybe not, and you can sense the fear that palpitates through America today as this gargantuan financial failure unfolds.
What we see in the following chart (right side) is that the temporary false economy, spiking upwards as the economy relied upon bailout funds, followed by a disturbing steep downturn in the growth rate of the economy as the government withdrew its props (end of $8000 tax credit for 1st-time real estate buyers, unplugging extended unemployment benefits, end of short-term works projects, end of 400,000+ temporary Census Bureau employment).
What was promised is the economy would get back on a growth track if more money was pumped into the system.
Here is what the federal government is hoping for (see chart below) — a turn-around in the real GDP.
What happened to America is that its Gross Domestic Product (GDP), the measure of the nation’s overall economic output, declined by —2.5% (real or inflation-adjusted GDP) in 2009. The government wants to get the economy growing at the rate of 2.2% this year (2010). However, it is not quite on track.
The split recovery
What has happened to the economy is described in a recent article published in the Seattle Times entitled "Whatever GDP and Bank Profits Show, We’re in a Jobs Depression." The US has developed a split economic personality.
As Seattle Times reporter John Talton says it: "The Federal government used its firepower to rescue the financial system… Now u2018austerity’ and the deficit are the big memes in the other Washington. It was politically impossible even to extend jobless benefits…. For decades the American job machine was the envy of the world. Now something is very wrong, and it defies easy talk-radio ideological name calling."
To rub more salt into the wound, the public doesn’t fully realize how the banks not only imprudently conducted banking, knowing the government would bail them out and would shove losses onto the public ledger, and have been handed money at zero-percent interest from the Federal Reserve, but they are also lending this risk-free money back to the government at 3%—4% interest AND (get this), borrowing at least $10 for every $1 of equity capital they have to increase the size of their returns. (The banks have to pay back the bailout money in full by 2012.) Meanwhile, millions of Americans are wallowing in unemployment lines and foreclosing on their home mortgages.
The President echoes this split recovery (one bailout for the banksters, one bailout for the masses) when he said the economy has achieved a "stark turnaround," but there is still a "great deal" of work to do to repair the economy. "Make no mistake, we are headed in the right direction. We are not headed there fast enough for a lot of Americans," said the President. "A lot of Americans" is an understatement. Most Americans were left out of the equation.
Following false statistics
Putting true numbers to the economic crisis is difficult because the government issues more flattering numbers than what the real America experiences. The Bureau of Labor Statistics says unemployment is around 15 million, or 9.7% of the workforce, but in reality, government numbers only reflect the short time period when people have recently been laid off of work and are seeking jobs or applying for unemployment.
True unemployment is around 21.7% (near depression-era rate) according to Shadowstats.com. Furthermore, says John Williams of Shadowstats.com, the M3 money supply reported for June 15, 2010 shows a negative 5.91% drop, the steepest decline in the M3 since the 1930s banking crisis. (The M3 is the broadest measure of money. It includes currency, checking and savings accounts, large time deposits, institutional money market mutual fund balances.)
Ee-gads! By two measures the economy is sinking, not growing. The stock market could tumble downward beyond belief, and all the pension plans, mutual funds and 401(k) plans with it.
Growing out of debt
The Federal government keeps saying America will grow itself out of its debt load and unemployment problems, so in the 1st Quarter of 2010 the bailed-out economy reportedly grew by a reported 2.7%, but as results of 2nd Quarter approach, doubts over continued growth are beginning to creep in.
Joel Naroff, president of Naroll Economic Advisors, says: "I’m basically having trouble getting to a 2% growth rate in the second quarter."
Ambrose-Evans Pritchard, the economics writer for the Telegraph in Britain says: "Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing, and fiscal stimulus."
Despite the Federal government revamping 30,000 miles of highways, launching 2,800 water projects and weatherizing 120,000 homes, in what it is calling the "Summer of Recovery," Brian Bethune, chief US financial economist for IHS Global Insight says: "It is very hard to discern any impact." Some 57% of tax benefits and 60% of entitlement money has already been doled out.
Stephen Lewis of Monument Securities says: "The US recovery is in imminent danger of stalling. Growth could be negative again as soon as the fourth quarter."
Peter Morici, writing at TheStreet.com, says: "If the economy goes down a second time — for example, GDP declines significantly two quarters in a row — then it likely goes down for good."
The following chart shows what leading analysts predict for the future US economy. You see a sharp downward trend, which suggests analysts believe the economy is going to tank, not grow as the government indicates.
What about a second bailout?
What about a second bailout? The Bank of International Settlements in Basel, Switzerland, the "central bankers bank," has already warned the Bank of England that repeating the bailout in the UK may be impossible. A BusinessWeek article says: "Governments may not be able to repeat such a bailout in the event of a second crisis."
The President sets the table for tax increases
With a second bailout off the table for now, it appears The President is intentionally increasing spending and debt so he can say the debt is "unsustainable" and that the only "responsible" policy is to raise taxes, says a Wall Street Journal article.
"Next year when I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits step up. Because I’m calling their bluff," the President said.
What The President is saying, with his John Wayne attitude, is significant cuts in spending will not be forthcoming while tax increases will. Jeremy Walker, writer for the Telegraph (UK), says "the Administration hasn’t yet even begun to think about deficit reduction." The President has adopted a "spend until we are broke" approach in a "calculated bid for growth and votes."
Will higher taxes increase revenues?
So will tax increases really raise more revenue for the federal government? According to an article in Barron’s, while the Administration is going to push for tax increases among higher income groups, federal revenues as a percentage of GDP tend to fall into an 18—20% range, regardless of the tax rates on individuals. This phenomenon is explained by market forces and changes in the behavior of taxpayers who can elect when to realize gains on stocks, mutual funds, real estate or business.
This is called Hauser’s Law. Regardless of different tax rates over the past 60 years, federal tax revenues as a percent of GDP have not changed much. Increasing taxes yanks money out of the private sector and it can’t be used to grow the economy. Soaking the rich by raising taxes doesn’t work. Raising the GDP, not income tax rates, is what increases federal revenues. One wonders if the President’s advisors have ever heard of Hauser’s law.
When GDP rises but economy sputters
A scenario where the GDP rises but the economy still sputters is a real possibility, mainly because government continues to spend rather than cut spending, and because, in the long-term, indexed expenses (Medicare and Social Security) combined with an aging population will overrun the system.
Certainly the government is going to partially default on its promises to deliver pension checks and medical care. There is going to be pressure on workers to stay in the work force into their 70s, and to delay medical treatment as a form of rationed care. Britain faces a future scenario where there will be three people in their 90s for every newborn by the year 2050. America faces a similar future. The economy (GDP) has to expand faster than the growth in the number of retirees.
There is also a short-term problem that is perplexing. The country has seen a 7-percent shift out of manufacturing and a 7-percent gain in finance, insurance and real estate. Wall Street once existed to help fund an economy that would supply jobs and incomes. Today this has shifted from "wealth creation" to "wealth extraction" says Vladimir A. Masch. The money and lending industry doesn’t bring new money across the US border. It doesn’t generate imports. It isn’t generating new jobs. It has become a counter-productive industry, often gaining as others fall (shorting stocks and other investments).
Another change in the economy is that as companies downsized, reduced inventories and laid-off employees, they became more profitable. Many of these companies are half the size they were three years ago. This buoyed the stock market, but not the economy (more evidence of Wall Street thriving while Main Street dies.)
Solving the problem
For whatever reasons, over a period of decades, past and present Administrations have doggedly stuck to policies and practices that have progressively ruined the American economy. Your favorite President never even winked at the public about this problem. It is endemic on both sides of the paid-off political aisle.
It is not a business cycle that causes ups and downs in the economy, it is fraud, usury and greed which persists only due to a public that is overly loyal to government.
Americans largely learn nothing about fiat money, usury, or fractional banking in school. The whole framework of America, beginning in the school system forward, keeps the American public in the dark over financial matters. Most Americans feel they don’t know how to even manage their own money and must rely upon the banksters who have plundered their money for decades.
That the US dollar today is worth 3 cents in purchasing power, compared to a 1913 US dollar, stands as evidence of the need for a long-overdue overhaul of American currency, banking and lending practices.
That fact that Americans capitalize banks with their savings, which is then used as a 10% reserve for the banks to make 10-fold larger loans, which yields nearly 20 times more profit for the banks than the depositor gains from interest on their banked money, says Americans are unknowingly being duped.
That Americans pay nearly double the selling price of a home in accumulated interest over the lifetime of a mortgage, and incur costs to maintain a home that is usually 90% owned by the bank during the first 15 years of that mortgage, is yet another evidence of a one-sided relationship in lending.
It’s what the public doesn’t hear — the need to cease printing fiat money, and to revert back to a Constitutionally-prescribed gold and silver-backed dollar (hard money) — that keeps the wheels of banksterdom going. The banksters control the news media, and therefore these issues are rarely brought into the public forum.