Monday, August 4, 2008

How Bad is the Economy?

John McCain generally agrees with the direction that George W. Bush has taken on the economy.

Some Bush supporters have pointed to the recent news that the economy has expanded by about 2 percent as evidence that things are not so bad.

We need to look at this news though in the proper light. We can't compare economic growth under the Clinton adminstration, for example, when the budget was balanced, to debt-driven Bush GDP growth.

The Bush administration will register a record budget deficit this year of nearly $500 billion.

Bragging about GDP growth like this is akin to someone boasting that they "earned" $300,000, when they really mortgaged their house.

Debt woes

While the U.S. economy will grow by about $275 billion this year, the amount borrowed by the government is expected to exceed $500 billion most of which will be spent on the current budget.

Quite obviously one can say that without record government debt spending, the economy would be shrinking. Also much of the borrowed money is coming from foreign sources.

If one takes the overall debt into account, what is known as the current account deficit, the U.S. will pay about 0.8 percent of GDP this year on international debt service payments according to some estimates. That's more than 40 percent of the projected growth for 2008.

As with the dotcom and mortgage meltdowns, at some point the chickens will come home to roost on any bad debt scheme. For awhile things look great, then...

However, things already are not looking that great. People are definitely feeling the pinch. One of the reasons for this is that much of the GDP growth is just paper or transactional growth. It's not your grandpa's type of economic growth. Few or no jobs are created by this phenomenon, which can be described basically as market speculation. However, since it is taxable it is included in the GDP figures.

If you look at other statistics including money supply (M1 and M3) we are already well into recession.


Recent figures show a sharp increase in unemployment, but Bush supporters like McCain claim that unemployment figures are still at 'historically low' levels.

Again we have to know the context in order to ascertain the true meaning of these statistics.

It would not be correct to compare unemployment statistics of today with those of Reagan's or Carter's time. The manner in which these stats are gleaned has changed. It's more difficult now to get unemployment checks, and facilities have been scaled down. Many people, especially in certain industries, no longer bother to register at employment offices with their long lines and ineffective services. They already know when they are ineligible or unlikely to receive any payments.

These people, along with those who give up searching due to frustration or what-not, are dropped from unemployment rolls.

From the graphic above, we can see that among adult men, at least, the percentage actually not working has no agreement with the official unemployment rate. In fact, the rates of working age men that are not working is the highest since World War II.

I won't go into all the ways that the government has found to take people off the employment rolls but they are numerous and include excluding those on Social Security disability checks and those who are incarcerated.

Another thing that has skewed unemployment rates is the high and increasing rate of underemployment. We are just beginning to fully understand the problem of underemployment brought on by the increasing practice of using part-time and temporary workers. Underemployed people often know they are not eligible for unemployment insurance and thus do not bother registering as unemployed.

Other Debts

As goes Washington, so goes the nation.

The national debt is not the only debt problem a new president will have to deal with. Everybody else seems to have followed Washington's lead from consumers to state governments.

Barack's recently announced emergency economic plan includes money to help states that are having their own deficit dilemmas.

On the corporate front, we have seen recently a number of federal bailouts for leading financial institutions. Most recently, Fannie Mae and Freddie Mac have joined the ranks of troubled lenders. According to the buzz, more trouble is on the way.

Consumers are also over their head in debt, and the inflation problem is not helping. Many have taken to using credit cards for ordinary living expenses. Debt to disposable income has risen to 140% from 100% in 2000.

Oil-centric Approach

Traditional oil politics, to which some would include the decision to invade Iraq, has allowed America's competitors to leapfrog ahead in the world of clean, renewable technology.

Not only Japan and Germany, but even nations like China and Brazil are advancing forward at a more rapid pace than the United States.

If one were to predict $130 a barrel oil, or even oil at today's price of $120, at the start of the first Bush administration you would have been branded a false prophet or alarmist by most "level-headed" analysts. But the fact is that all experts, including conservatives, know that it is only a matter of time before oil moves even much higher.

When the condition known as peak oil arrives, those nations that have not invested sufficiently in green tech will fall seriously behind. Offshore drilling and opening reserve stocks only distracts from the necessary steps that are needed to prepare for a new world economy.

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