11/17/09 London, England – The US now has the highest unemployment rate of all major economies. Even France – historically, an economy with high jobless rates – is at 9.5% unemployment, while the US is 10.2%.
As for inflation, the lowest inflation rate among the world’s larger economies is in – you guess it – Japan. After 20 years of on-again, off-again deflation, it’s on again in Japan…with inflation at NEGATIVE 2.2%. But inflation is negative in the US too – at minus 1.3%.
Both Japan and the US claim positive GDP growth, compared to Europe, which is still in recession. But throughout the world – except perhaps for the BRIC nations – growth is weak and hesitant.
The US and the UK are both consumption economies. No consumption; no growth. But how do you get people who’ve consumed too much to consume even more? They know they can’t afford to keep spending. And they know that going further into debt just makes the situation worse. What can you do?
You bribe them!
You give them more money, say, in unemployment assistance. Or, you give them a tax credit when they buy a new house. Or, you give companies a big tax break. In the most recent stimulus bill, for example, the feds do all three – including giving Pulte Homes a $450 million tax refund.
Here at The Daily Reckoning we never met a tax cut we didn’t like. But with the deficit at 13% of GDP, we might make an exception. One way or another, someone’s going to have to pay for the feds’ big spending stimulus efforts. Taxpayers. Bondholders. Dollar holders. All of the above.
President Obama told the crowd in Singapore this weekend that he would make sure Ben Bernanke stayed away from his helicopters. The Chinese are the biggest holder of US bonds in the world. The Japanese are next. Between the two of them they fund a big part of America’s current spending. Naturally, America’s president is eager to keep the cash coming his way. So he has had to reassure the nation’s largest creditor that their loans to the US will be repaid in good order…and good currency.
China alone has $2.3 trillion in reserves…most of it in dollars. Of course, the Chinese want to diversify out of greenbacks. But they’re caught in a trap of their own making. If they turn away from the dollar, they undermine its value…and the value of their own reserves. What’s more, America is still China’s number one customer. They need to sell to America. And for that they need to keep their own currency from rising too much against the greenback. A higher yuan makes their products relatively more expensive compared to other exporters.
So, the infernal system continues…America creates dollars. The foreigners take them as though they had value. And they will have value…as long as they take them.
In the ’90s and ’00s the newspapers were full of stories about what a great place America was. Its economy was so dynamic…its entrepreneurs were so clever…its financial system was so highly evolved and flexible. What could go wrong?
Everything!
And now we’re going to read a lot of claptrap about what an awful place it is.
“The American dream needs repair,” is forerunner of the genre. In today’s Financial Times, it focuses on the rigidities of the US system. The time was when a young American could start at the bottom and work his way up. Luck and pluck was all that it took. But now, according to scholars at the Brookings Institution, people stay put. If you’re born poor in America you’re more likely to stay poor than if you had been born poor in Britain, Denmark, Sweden or dozens of other countries.
What happened? The authors do not say. So we will. Success breeds failure. As a society becomes rich, more and more people find ways to game the system. The elite get tax credits, tariffs, and protective regulations. Every layer of bureaucracy makes it harder for new competitors to get ahead. And every new tax on income makes it harder for upstarts to join the ranks of the rich. The poor get their parasitic benefits too. Welfare, unemployment compensation, child tax credits, medicare, food stamps, social security – all of these programs give the poor an incentive to stay poor.
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“Even France – historically, an economy with high jobless rates – is at 9.5% unemployment, while the US is 10.2%.”
Unemployment in the US is actually 17.5%
Awwww Man, who let the Harry?
What I find so appalling is the common theme of requiring consumers to give up their rights:
Need a job? Give up your right to sue your employer for damages
Need a car to get to your job? Give up your right to sue the dealer who sold you the lemon.
Need insurance to legally drive your car? Give up your right to sue the insurance company for denying a claim.
Want to buy a house? Give up your right to sue the bank for “fine print” fraud.
Need homeowners insurance on that house? Give up your right to sue the insurance company for canceling your policy and leaving you subject to foreclosure (for not having insurance).
Want cable or satellite TV service, phone service, internet service? Give up your right to sue in the event that these companies slander your name to credit reporting agencies.
I should not be required to waive my rights in order to participate in modern society.
I have a job, and if politicians and businesses expect to get a piece of my paycheck, they had best step up to the plate for consumer protections.
Tim,
I think you are partly correct according to the article on the hot-link in your comment.
I also believe it was a combination of both; fear of peak oil which in part caused an artificial huge spike in consumption (gas) which toppled into the enormous ordinary consumer debt like credit card, auto, appliance and more importantly, mortgage payments.
Like dominoes, they all fell.
What happens when the gov (or FED) realizes they must because of global concerns, that the “bribing of the consumer” must slow or completely stop?
Then all Hell will break loose.
“…social security – all of these programs give the poor an incentive to stay poor.”
Yes… but take all that away completely and THAT gives them an incentive to _mug_ you!
“So, the infernal system continues…America creates dollars. The foreigners take them as though they had value. And they will have value…as long as they take them.”
Do you realize how silly you sound? That’s exactly why we’re not on the road to disaster as you seem to think. Obviously, there is strength in America that the entire world is literally buying into. And rightly so.
@ M.S.
Not Bill. He’s fast on his feet.
This is mainly directed to Harry. It’s not silly, it’s true. Value only exists in a rational market. If the market is not rational, the value of many things, [ex: oil, gold, stocks,] is suspect. Strangely, the flood of U.S. currency into the world seems to be having a somewhat beneficial effect for developing countries. This may well be by design. [the powers that be] I suspect the powers that be are expecting a miracle response from the American economy [ie: exports] to enable a recovery as well as growth in the U.S. and the rest of the world. So, in a sense, I hope you are right in your observations. I remain convinced, however, that recovery will be very painful, especially for the western worker, but eventually, inevitable. Regards, Hugh.