Towards a “New Great Depression” in America: Sluggish Economic Growth, Staggering National Debt

Global Research

The American economy is caught between the Scylla of sluggish economic growth and the Charybdis of a staggering national debt aggravated by Washington’s unyielding partisan deadlock over taxes and spending cuts.

After the Great Recession of 2008, the approaching “fiscal cliff” at the end of this year threatens to cause even more economic havoc and bring about another recession which some “doom-and-gloom” economists darkly predict may turn into a new Great Depression. The new “normal” state of the economy is marked by a stalled economic recovery, low consumer demand as well as persistently high unemployment engulfing large sectors of the population. The same “gloom-and-doom” economists even claim that the real level of unemployment may be close to the Great Depression level of 25% if one subtracts the number of those gainfully employed from the number of all working-age adults in the active population. But even “optimists” like the IMF’s chief economist Olivier Blanchard insist that economic turmoil will continue and that the global economy may take a decade to recover from the financial crisis.
According to Dr. Joseph Stiglitz, the Nobel Prize-winning ex-chairman of President Clinton’s Council of Economic Advisers, a growing economic inequality between the “haves” and the “have-nots” endangers America’s future. In his latest book, Stiglitz argues that deeply unequal societies like ours cannot have stable economies and that worsening economic inequalities lead to instability and great economic crises. It does not take a Ph.D. in economics to see that the World Bank’s former chief economist is right. As a result of the neoliberal “supply-side” policies embraced by both Reaganite Republicans and Clintonian Democrats, the US has lost much of its middle class—that bastion of democratic capitalism first created by FDR’s New Deal which was not only a barrier to the spread of communism during the Cold War but formed the backbone of the post-WWII economic boom and “consumer society.” With the fall of Soviet-style Communism and the demise of the Democratic Party’s “Great Society” dream, which has been replaced by the so-called “Washington’ consensus” crafted by the Bill Clinton Administration, differences in material well-being have recently become so egregious that many writers have begun to refer to our post-welfare-state era as the new Gilded Age. Globally, matters are becoming not that different from the middle of the 19th century—the “hard times” described by Charles Dickens and Emile Zola, especially in view of the social dislocations and hardships already inflicted by “globalization” and “tricke-down” economics. With the fall of Communism especially there is no need any more to bribe the working classes through welfare-state generosity.
Thanks to the globalization policies pursued and promoted by the champions of neoliberalism, much of the once unrivaled US manufacturing base has been moved offshore to take advantage of lower wages and laxer tax and environmental laws overseas. According to Dr. Paul Craig Roberts, a former Assistant Secretary of the US Treasury in the Reagan Administration, “The US has lost critical supply chains, industrial infrastructure, and the knowledge of skilled workers.” While this “off-shoring” (or “out-sourcing”) of American industry has brought about super-profits for multinational corporations and increased capital gains for equity owners, ordinary Americans have lost ground both financially and socially, as widespread unemployment, under-employment, job insecurity, and falling incomes have eroded their once enviable living standards, known as the “American Dream.” What is equally important from an economic point of view, their purchasing power has plummeted in this “race to the bottom,” reducing consumer demand for goods and services which cannot be made up for by the “conspicuous consumption” of the moneyed classes (to use here Thorstein Veblen’s old but apt phrase), especially when the so-called “1-percent” elite is fond of investing its money in China and India or depositing it in “tax havens” like the Cayman Islands or in secret Swiss bank accounts. As the middle class keeps losing jobs and income due to a capital flight abroad in search of lower taxes, looser regulations, and higher profits, consumer demand keeps plummeting in a national economy, over 70% of which derives from consumer spending. This is the inevitable consequence of setting up a globalized and highly competitive free market, where each year 4 million more cars are produced (and usually exported) than are actually sold. The sky-high wall of tariffs, import duties, and other protectionist barriers behind which America built its vaunted industry in the late 19th and early 20th centuries is all gone in the name of free trade, open borders, and globalization.
There are few protections left against the tidal wave of cheap foreign imports, mostly Chinese, that is flooding the American market. Many of the traditional tools to make up for the domestic lack of wage competitiveness in this “free-for-all,” WTO-ruled “brave new world” are no longer effective. For instance, the old Keynesianism of pre-”Washington Consensus” days used both fiscal steps (lower taxes and large federal budget deficits) and “easy” monetary measures (low interest rates, easily available credit, as well as a lot of money-printing) to spur demand for goods and services and thus stimulate economic growth and employment at home. The Administration of George W. Bush, for one, tried to boost economic demand by cutting taxes, especially for the upper income brackets, engaging in a military spending spree unprecedented in peacetime history, and also by spreading American homeownership through easy credit and seductively low mortgage rates. Encouraging debt was seen as a way out of the problem of stubbornly slow economic growth. The hitch was that many consumers were already overburdened with debt, so in the end many of them defaulted on their mortgages and the housing bubble eventually burst. As a result, the “too big to fail” banks and whole industries dependent on them for cheap loans were suddenly in trouble and the federal government had to bail them out (instead of rescuing many local governments which have also been up to their neck in debt).
Nor is the old policy of “military Keynesianism” sustainable any more given the tsunami-like size of future federal deficits. In 1946 President Truman and Republican Senator Arthur Vandenberg discussed in private the need for a massive military built-up against the “Soviet threat” to avoid the country relapsing into a new Great Depression (“You’ll need to scare the hell out of the American people to achieve that,” demurred the Senator from California). But this year the size of the federal debt (over $16 trillion and counting) has surpassed the annual GNP, which in fiscal terms makes the US worse off than most of the debt-ridden and crisis-plagued European nations that are daily in the news. For the foreseeable future the federal government will continue to accumulate over a trillion dollars in debt each and every year ($1.1 trillion in the last fiscal year ending in September 2012 alone). That is why the idea of Dr. Paul Krugman (another Nobel Prize-winning economist) of the federal government spending $8-10 trillion over the next decade just to stimulate the economy and spur employment, even if implemented, is hardly practical as it could only sink the country into an even deeper sea of red. Even Dr. Stiglitz’s much more modest idea for targeted federal investments to spur domestic demand and rebuild the country’s crumbling infrastructure, could equally undermine the US credit rating and probably re-ignite inflation.
Paul Craig Roberts has suggested that the federal government may attempt to print its way out of the indebtedness quagmire but this is equally unrealistic. Printing huge amounts of new money could fatally undermine the value of the national currency at a time when many foreign governments, most notably the BRICS countries, are moving away from the US dollar in trade and are instead using their own currencies as well as the euro or the yuan, gold and silver, or even barter. This could threaten the long-term viability of the US dollar as the international reserve currency, as the rest of the world may eventually choose another reserve currency such as the Chinese yuan (the renminbi). But, as former Secretary of the Treasury and of State James Baker recently warned, if the US dollar loses its status as an international reserve currency, the U.S. will become just another Greece (that is, the country will be unable to pay its debts or even pay for vital imports).
Money-printing, which increases the volume of money and credit relative to available goods and services (or what economists call monetary inflation) may unleash destructive price inflation down the road which would certainly end the tenure of any incumbent administration that dares attempt it, if not endanger the entire political system itself (much as it doomed the post-WWI Weimar Republic). For once released, it may not be so easy to put the genie of inflation back into the bottle. To control price inflation resulting from increased demand for goods and services, higher taxes and high interest rates will have to be used to reduce disposable income and curtail consumer spending. Not only is higher taxation unrealistic in the current political climate, but such recessionary policies would only depress economic growth and increase unemployment, as happened in the early Reagan years. It could even usher in another Great Recession under the current unstable economic conditions. So, getting out of the indebtedness trap through “a little bit of inflation” (that is, reducing the real value of the national debt via price inflation), as some popular CNBC commentators have suggested, is a pipe dream, as it could only scare off potential investors and foreign creditors.
After the failure of QE1 and QE2 to provide momentum to the economic recovery, QE3, announced in September 2012, shifts the policy of the Federal Reserve from fighting inflation to battling high unemployment—an important admission of how intractable the problem of unemployment is—by nothing short of re-inflating the housing bubble, forcing people, especially seniors, to withdraw their bank savings due to the nearly negative interest rates, and plunging their life savings instead either into the stock market or into resurgent real estate. Not only is there a danger of disastrous recent history (the 2008 Great Recession) repeating itself, but it is also questionable if this risky plan would boost real economic growth and job-creation, since it stimulates real estate and stock market speculation far more than it does consumer demand. And if the re-inflated housing bubble were to burst once again, this time there will be very little money available for another massive bail-out given the surging mountain of government debt.
With the federal government borrowing four out of every ten dollars it spends today, the state of the national economy seems to be much more dire or even desperate than our politicians, including President Obama and Mitt Romney, are prepared to admit. Given the formidable array of financial and economic ills facing them and the severely limited options they have for dealing with them, it is unclear at this time if any remedy is at hand to avoid a double-dip recession, if not much worse. Pledging to create 12 million jobs over the next four years, while cutting everyone’s taxes and slashing federal spending is hardly a serious election-time promise, let alone a workable plan for the future. Perhaps it is time for the practitioners of that “dismal science,” the herd of economists that we see daily on TV news, to put their heads together and make sure that the proverbial light at the end of the tunnel does not turn out to be the oncoming train of economic collapse. For, if a new recession is now almost a certainty, one cannot dismiss out of hand the dark predictions for a second Great Depression, either.
Dr. Rossen Vassilev is a former Bulgarian diplomat who worked at the Bulgarian Mission to the United Nations in New York from 1980 to 1988. Since 2000 he been teaching political science at Ohio State University.
Articles by: Dr. Rossen Vassilev


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  1. just saying says:

    Interesting article
    Is Legal Tender Next?

  2. just saying says:

    China, Russia, and the End of the Petrodollar
    Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.

    You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.

    Instead, the silence in the U.S. media was deafening.

    However, the truth is that both Russia and China have been making deals like this all over the globe in recent years. I detailed 11 more major agreements like the one that China and Germany just made in this article: “11 International Agreements That Are Nails In The Coffin Of The Petrodollar”.

    A few of the things that will likely happen when the petrodollar dies….

    -Oil will cost a lot more.

    -Everything will cost a lot more.

    -There will be a lot less foreign demand for U.S. government debt.

    -Interest rates on U.S. government debt will rise.

    -Interest rates on just about everything in the U.S. economy will rise.

    So enjoy going to “the dollar store” while you can.

    It will turn into the “five and ten dollar store” soon enough.

    Some thoughts….cont

  3. just saying says:

    11 International Agreements That Are Nails In The Coffin Of The Petrodollar

  4. just saying says:
  5. just saying says:

    Blair T. Longley
    July 18th, 2012 at 7:37 pm · Reply
    I will repeat that when I read articles like the one above, I think that this is a good metaphor for future of USA economy:

    Exploding iceberg in Antarctica!

    Bit by bit, the people that control the people that control the government of the USA have been hollowing the system out. They appear to want to destroy the republic, and they are clearly succeeding in doing so. I can not think of anything but implausible series of political miracles that could change the path that we are on … therefore, there MUST come some time in the future when that video above is a good metaphor for what finally has to happen.

    However, the difference is that the collapse of the American economic system is on an astronomically amplified scale, with consequences that are quite impossible to imagine.

    I also think that there are correlations between nature going nuts, at the same time as civilization goes crazy.

    We have very rapidly built a system of global electronic fiat money fraud, backed up by atomic weapons. The collapse of a system of that ASTRONOMICAL SIZE no longer fits within any kind of common sense comprehension. Rather, we are looking at the magnification of lies, backed by violence, by billions and trillions of times, … until the collapse into chaos of such an incomprehensible system is a psychotic breakdown somewhere in the quadrillions of times more insane than we can actually imagine.

    The magnitude of the triumph of the frauds, backed up with violence, that built the currently established systems seems to have become the only thing keeping them going … Nobody can imagine what happens after the American Dollar and American Military became like flying unicorns and dragons, whose sheer unintelligiblity was the only thing keeping them in the air. We have outdone old Orwellian ideas by several orders of magnitude. The secretive ESF, Exchange Stabilization Fund, that appears to be behind the five biggest banks holding hundreds of trillions of units of whatever the hell their derivatives complexes represents, have systematically stabilized a pyramid scheme house of cards to be able to built, until it went over the dark side of the moon.

    Every “success” of the established systems made it possible for its huge lies to make and maintain FRAUD TO BE KING OF THE WORLD.

    The longer that the established systems “succeed” in their efforts to stabilize themselves, and to benefit from that, then the more unimaginably spectacular must be the final psychotic breakdowns, due to the fundamental insanity of global electronic fiat money frauds, backed by nothing but mass destruction weapons.

    We are witnessing the triumph of organized crimes on an astronomically amplified scale, which no longer makes the slightest bit of common sense anymore, and which, therefore, cannot be predicted nor understood with any kind of residual common sense.

    To return to the image in the video above, the difference is that we are sailing in and through, looking up at those systems that we are INSIDE OF. Therefore, the whole world is deserving of a “Darwin Award!”

    Our ability to get away with backing up huge lies with violence for so long has created a system that we almost all depend upon to live, but which is utterly insane, to an astronomically amplified degree.

    The American Dollar and American Military became the heart of the global money/murder systems. We are living on the basis of astronomically amplified systems of organized lies operating organized robbery. However, we blithely keep sailing through those established systems, taking them for granted. It is apparently impossible for us to understand what we are doing!

    Thus, again, I think of that video I linked above, and with the qualifications that it is astronomically bigger in the real world, and that therefore, we are now INSIDE of that metaphor, it nevertheless looks like only a matter of time until what we see in that video happens around us too.

    That is way too awesome in SIZE to believe that holding gold or guns will help us to survive through that economic collapse. I also do not believe we could collapse coherently back to any other, even older, level of technologies.

    The current systems of electronic fiat money frauds, backed up by atomic bombs, are NEVER going back to gold and guns, nor to any other coherent image of past levels of human development.

    People are deluding themselves to believe that. We are going to have to change our politics as much as we changed our physics, before we have a hope of surviving the real physics that we have already created, or could reasonably expect to create.

    Our science and technologies have multiplied everything by billions and trillions of times. However, the basic design of Neolithic civilization then became based on lies, backed by violence, that was billions and trillions of times BIGGER. I see barely the slightest signs that our society will be able to understand what is going to a happen to it. Rather, we shall be going through an extraordinary social psychotic breakdowns, that goes far, far beyond the ability of the socio-psychopaths that control our civilization comprehend!

    I guess there was never any way out of the dilemmas of the human experiments in the evolution of intelligence. As Einstein joked, it seems that human stupidity is infinite. However, there must be some limit, somewhere, to the established systems of global electronic fiat money frauds, backed up by the threats from mass destruction weapons. We just have no way whatsoever to actually imagine what those will be …

    As in the video linked above, each of these 11 examples of the collapse of the American (petro) Dollar system are like watching small pieces of the whole break off, and fall away, while STILL the basic system stands. However, as each new piece falls away, and the system as a whole gets more and more hollowed out, theoretically, there must come some point where the arch of the system as a whole collapses down to whatever level of reality is left there afterwards.

    Perhaps some of us may survive through that somehow, and thereafter come to better terms with things like electronics and atomic energy, to rebuild some new systems, from the surviving seeds of the old, … but to do so requires we change our politics just as much as we changed our physics, in order to make those technologies possible, which drove the creation of American Dollar and American Military, that we take for granted today.

    The kind of politics we need in the future is almost beyond imagination. One thing I am sure of, is that it could not be a return to old fashioned gold and guns systems. There is no science fiction anywhere that I am aware of that came remotely close to imagining this … The ASTRONOMICAL AMPLIFICATION BY MANY ORDERS OF MAGNITUDE leaves no story tellers and no audiences left to comprehend that!

  6. just saying says:

    Reality Check: Is This The End of The Petro-dollar?

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