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Tuesday, June 2, 2009

President Obama’s Economic Recovery Will Continue To Sputter

President Obama’s auto task force has reported that if GM goes into bankruptcy, then the bondholders would need to take a 10% stake in the restructured company in exchange for their $27B they hold in GM corporate bonds. The re-emerged downsized GM could acquire another $40 billion in loans, which would be in addition to the already nearly $20 billion they have already received. It appears that the bondholders have been squawking over their deal. I say, too bad. Suck it up or loose it! Where is their “shared sacrifice?” as President Obama has demanded from the workers, and all those peripherally connected to the auto industry? Didn’t anyone tell the bondholders that investment is a risk and not a guarantee; and, that this is a bankruptcy unraveling? The UAW health care group will receive 17.5% ownership stake in exchange for the $20B owed them by GM. The U.S government will take a 60% stake in the company, while Canada will own a 12% piece of the pie.

And then there is the bankruptcy of Visteon Corporation, and Metaldyne Corporation both of which supply parts and chassis respectively for Ford Motor Company.

Automaker sales have plunged 37% this year through April, according to Bloomberg News.

The auto task force wants to see the newly-government owned GM company manufacture future cars in China. This sounds like more of the same strategy of outsourcing American jobs. Ship good paying manufacturing jobs overseas where they can be made cheaply, adding to our trade deficit, unemployment problems, further erosion of wages, and a diminished domestic tax base. This is more of the failed Reaganomics-style policies that failed the nation in the past. Haven’t Democrats woken up yet? Oh, I forgot, many are a part of this problem. Aren’t they?

Robert Reich pointed out in “What Industrial Policy Should Be”, 5-19-09, “So tucked into the latest version of climate legislation unveiled this week by the House Energy and Commerce Committee is a provision that doubles to $50 billion loans to help auto makers comply [to fuel economy targets].” Will such research and development, as well as design and manufacturing be done domestically? Or, will that be outsourced, too?

Ralph Nader and Robert Weissman wrote a letter addressed to both Senators Dodd, and Frank strongly suggesting that the Congress exercise their oversight powers regarding Obama’s consideration of bankruptcy for Chrysler and GM, “or other irreversible moves until after the task force plan has been subjected to close and careful review via thorough Congressional hearings.” It does not appear that such considerations will be honored. Just get rid of middle class jobs altogether appears to be the mantra of the nation’s elite. The richest 400 Americans, who have a net worth of $1.7 trillion, based on 2008 figures, which is around 10% of our GDP, want the welfare state kept in place just for themselves. Remember, they got this rich based on shoddy regulation of the financial industry, and the government’s allowance of over-leveraged mortgage-backed securities, as well as the credit default swap scam that kept the high roller financial bankstas, who had been betting against gains, even richer.

According to Les Leopold, in his piece “Fear and Looting in America…” in 1982, the top 400 of America’s richest, their net worth was $604 million; but, by 2008, this net worth had grown to $1.56 trillion!

It seems that the White House has grown so far removed from the collapse of the economy that there won’t be a recovery strong enough to buy even cheap foreign-made GM cars. What we have heard from the media bobbleheads is how the economy has picked up in May. “Hurray! Has a recovery begun? Will consumers continue to spend money they cannot afford to part with? Let us sure hope so! They better stop saving 4% of their incomes and go back to a zero savings rate. Maybe they will start borrowing again, too.” wrote that “Personal savings as a percentage of personal income was 5.7% in April, compared with 4.5% in March.” Americans are now getting it. They better save more and spend less.

The bobbleheaded media pundits cannot see the forest through the trees. What happened in May? Well, there were graduations: college and high school. People bought gifts for the graduates. They traveled to college communities to attend these events. They ate in restaurants and bars. High schoolers bought prom dresses, and accessories. College graduates went to department stores and purchased, probably on credit, a few outfits for their interviews. There may even have been a few house parties. OH NO. WE CANNOT HAVE THAT NOW!

I believe such spending can boost the economy a few percentage points. The AP news service reported that the Consumer Confidence Index rose from 40.8 to 54.9. Macy’s Inc., Apple, and Best Buy Co. saw an increase in sales. Such data makes temporary sense. Families may actually spend money they don’t have on short, and local vacations in the coming weeks. Watch credit card debt increase over the next few months. Has anyone noticed creeping gas prices?

Wages have remained stagnant for many. Foreclosures seem not to be taking a rest during this rise in consumer spending. The private economy continues to shrink shedding jobs at a pace of more than 600,000 a month over the last half-year. Where will all these new college graduates find jobs? Will they earn enough to pay down their student loan debts or will they declare bankruptcy? If some are lucky, they will find work in the public sector getting experience from jobs funded through the U.S. government stimulus package. The private sector surely will not be expanding anytime soon in order to bring on new employees. Households have seen their net worth fall down the well at a cost of $13 trillion.

Also found on Bomlat’s blog, “Real gross domestic product-the output of goods and services produced by labor and property located in the United States—decreased at an annual rate of 5.7% in the first quarter of 2009…estimates released by the Bureau of Economic Analysis.” We have seen GDP over the last 2 quarter fluctuate between 5.7— 6.3%. Other economists have stated that our real GDP is actually in negative to zero ranges.

Bomlat also reported that “intermodal volume of trailers or containers was off 19.1% from last year, with container volume down 14.2% and trailer traffic off 37.2%.” This data is not very reassuring that a recover is soon at hand. Can someone call Ben Bernanke and tell him so?

The stock market knows that it has no legs. That game is only for those who can jump in and jump out. It has its own rules separate from reality. It has no long term sustainability.

Fed Chairman Ben Bernanke will be finding $1.7 trillion worth of treasuries coming due. He is printing up $1.75 more treasuries to pay for additional deficit spending. Who is going to buy these bonds? It will be the Fed themselves, more than likely. Will there be a point when foreign central banks and currency buyers stop believing in the continued erosion of the US dollar through debt expansion? Will the price of these bonds be driven down, while interest rates move upward? Will this build a wall in the path of home mortgage lenders and new house builders? Both Bernanke and Geithner already know that business-fixed investment, and non-residential fixed investment, which makes up most of all business investment, is collapsing at an annual rate of 40%. Does this sound like the private sector will be growing? The Bernanke fantasy that our national recovery will realize a 3% growth rate next year, 4% in 2011, and 4.6% in 2012 is just gobbligook. Currently, our GDP is basically negative. He drinks too much Psycho Kool-Aid at lunch.

Economist Niall Ferguson has stated that our 2009 deficit will move above 12% of GDP. He also stated that the Fed will likely be buying $300 billion worth of treasuries this year, but they will probably find themselves having to open up their balance sheet to buy more than that. Economist Paul Krugman claims that the US is currently in debt about 60% of GDP. Will the rest of the world back away from financing our growing debt by purchasing virtually zero percent interest bonds? The U.S is basically producing nothing of tangible value to export in order to bring down the deficits.

China is very happy to see all of our manufacturing going over to their side, so we can keep buying their cheap stuff. But at some point, most Americans will not have any money to keep that going. And, if our debt exceeds our GDP, we no longer are a viable economy. Our currency could become worthless through hyperinflation. If we ship our auto industry overseas, then many jobs, which would be interconnect to it, would disappear, too.

The economist Peter Morici recently wrote that “unless the economists are wrong, this key forward looking indicator of economic health [Durable goods orders in March were down 0.8% and the consensus forecast calls for another 0.3% drop.] would likely indicate that the recession has some to time to run. Until consumers have the confidence to purchase big ticket items and businesses put cash into new technology, the economic recovery is not at hand.”

Michael Whitney stated it beautifully. “The current downturn is not really a recession at all; it’s more like a self-inflicted wound perpetrated by avaricious speculators who put a gun to the economy’s head and blew its brains out. The banks and Wall Street have created a capital hole so vast that the entire economy is being sucked into the abyss. And it all could have been avoided. Credit production is too important and too lethal to entrust it to profit-driven vipers whose only motivation is self-enrichment. The whole system needs rethinking and public input before Bernanke wastes trillions more trying to revive the same crisis-prone business model. If “credit is the economy’s life’s blood”, as Obama says, then it should be distributed through a government-controlled public utility. The real lesson of the financial crisis is that privatizing credit has been a disaster.” (The Real Lesson of the Financial Crisis,, 5-19-09).

Thanks for reading, Jerry


SPECTRE of Deflation said...

Very nice analysis. The clowns of the District of Corruption are fooling fewer and fewer people these days based on the savings trend. Frugality is the new normal moving forward. We had our inflation party in assets this time around which is actually much worse than the inflation of the 1970s. In the 1970s, at least wages were keeping up with inflation to blunt it's effect. Now we have gutted manufacturing, and there is zero pricing power for the American Worker. All that's left is unservicable debt and a whole lot of tears.

carlandjerry said...

SPECTRE, thanks for the comment. The disappearing middle class is just beginning.

thanks, jerry

Anonymous said...