Last week, the Australian central bank became the first to declare victory. It raised its key lending rate 0.25 per cent and gave a whoop ... signaling an end to the slump. The European Central Bank fidgeted and vaguely threatened to raise rates too. But the Americans stayed in their trenches. New York Fed governor Bill Dudley said that even though the economy is recovering, any rate hikes in the United States would be over his dead body.
Then, word came that even Alan Greenspan thinks a recovery is underway.
"This is what a recovery looks like," said the maestro. That settled the matter as far as we are concerned. Alan Greenspan didn't see history's biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.
"Great time for US consumers, America is on sale," says an item at YahooFinance. The "discounts are unbelievable," adds a blogger known as Frugal Rhode Island Momma. All across the nation, merchants are no longer selling the merits of their products; they're selling price. McDonald's advertises its "dollar meals". Hotels have cut room prices by 20 per cent in the last year. House prices are down about 30 per cent since 2006. Sellers are offering bargains and they want buyers to know it. "Sold for $365,000 in 2006. Now $195,000," says a typical house ad.
Foreigners have noticed too. Colleagues in London say they are thinking of moving to Florida where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example. In the first quarter, foreigners were unloading US shares. Now they're buying more than $100 billion worth per month.
It is a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. The CPI in the United States is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. "Cash for Clunkers" cut prices on new cars by about 20 per cent. As soon as it ended, so did auto sales. Most new house sales could be traced to a tax credit - which reduced the down payment by at least 20 per cent. That program is scheduled to end in November.
And now, the White House frets about jobs. Unemployment is supposed to be a lagging indicator, but this time it seems to have dropped out of the race all together. Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So, the Obama administration is considering a $3,000 tax credit to bribe businesses to hire them. If the typical employee costs his firm about $40,000, this effectively reduces the cost of labour by 7.5 per cent.
It's beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era - 2002-2007 - will have been eliminated, making it the first decade with no job growth since the '30s. We're expecting a fireside chat any day.
Typically big businesses cut workers in a recession. Then, when the economy recovers, small businesses are quick to take them back. But this is unlike the typical post-war recession. This time, deprived of capital as well as customers, small businesses don't have a chance. Neither does a genuine recovery.
The authorities still do not understand what is going on. They are used to fooling most of the people most of the time. They think they can dupe them again - with bailouts and boondoggles. But real demand has vanished as households try to pay down their debt. That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery. It's savings - capital - the US economy needs. A capitalist economy in which the capitalist have no capital won't work. Why is there no capital? Because the feds take it.
Supplying cash-for-this and cash-for-that is an expensive proposition, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6 trillion the US government will borrow this year, the biggest single lender is the private sector, chipping in $700 billion. But instead of being put to use in a way that might stimulate a real recovery - providing credit for small business and consumers - it is taken up by the US government and then frittered away.
The banks are happy to play the government's game too. They can borrow overnight money from the Fed at only one quarter of 1 per cent, annualised. But lending to small business is hard work. And it is risky. Why bother? The US Treasury will pay them 4 per cent for lending back to the government, long term. This is practically free money to the banks. Both the bankers and politicians end up ahead - with a bigger piece of the economy under their control.
Meanwhile, the real economy staggers. "Drought of credit hampers recovery," summarises The Wall Street Journal. The United States needs to create a million and a half new jobs each year just to keep up with population growth. Currently there are 15 million people without jobs already ... and a couple hundred thousand more unemployed every month. And if this recovery continues long enough there won't be a single person left in America who still has a job.
Even if the economy could be stabilised, it will leave millions without jobs - more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That's why this slump is not going away any time soon. As in Japan in the '90s, we may have to live with this depression for the rest of our lives.