The Deflating Economy

[Crewleader]

July 13, 2009

Drifitng Downward
The Deflating Economy

By MIKE WHITNEY

There should be a modest uptick in GDP in either in the 4th quarter 2009 or the 1st quarter 2010. This will mark the end of the current 20 month-long recession, but not the end of the crisis. The blip in growth doesn't mean that the troubles are over or that the economy is on the way to recovery. It simply means that Obama's $787 billion fiscal stimulus is beginning to kick in, giving a boost to consumer spending and generating short-term economic activity. Regrettably, when the stimulus runs out, the economy will slide back into negative territory. That's because the US consumer has crossed an important threshold and no longer has the ability to drive the economy through debt-fueled consumption. The data indicates a critical change in consumer behavior which portends a shift away from the current model for economic growth. It's a whole new ballgame.

From the mid-1980s to 2007, the ratio of debt-to-GDP rocketed from 165% to to over 350%; more than doubling in that same period. The build-up of personal debt follows the exact same trend-line as the aggregate profits of the financial sector; they're opposite sides of the same coin. Financial institutions increase profitability by expanding credit and inflating asset bubbles, not by allocating capital to productive enterprises. Their business model is inherently flawed. Speculative bubblemaking is Wall Street's method of shifting wealth from workers to the investor class. It never fails. It's the reason why 42 states are now facing budget shortfalls, unemployment has risen to 9.5 percent, and $45 trillion has vanished from global equity markets. Financialization has created a global crisis, crushed consumer demand, increased systemic instability, and put the economy into a nosedive.

In the last decade, the shifting of wealth from one class to another has greatly accelerated due to deregulation and the Fed's low interest rates. Stagnant wages have forced reluctant participants into the market seeking a better return on their savings, while lax lending standards and easy credit have seduced workers into increasing their personal debt-load. All of this has been done by design to ensure the profits for the few over the well-being of the many.

http://www.counterpunch.org/whitney07132009.html

[troubledamerican]

1. "US consumer no longer has the ability to drive the economy via debt-fueled consumption"

Ruh-roh