US economy on the brink

The self-created mirage of recovery that helped sustain the tattered remnants of the American Dream evaporated yesterday as reality came calling.

The desperate measures taken to halt the imminent sacking of hundreds of thousands of public sector workers was only one event in a day of reckoning.

Five stark paragraphs comprising the statement issued by the Federal Reserve - America’s central bank - reeks of the stench of exhausted defeat. The first outlines the problem. It needs no interpretation:

Information received since … June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in non-residential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In the action paragraphs, the committee explains that base interest rates will be kept at their historic low, but reiterates that “resource slack”, which means massive overcapacity in production, eliminates any hope of anything changing for years or decades to come.

In what is seen as a reversal of previous policy, the Fed is intent on printing even more money in a bid to stimulate the economy. It plans to use the income from repayments on mortgages it bought during the financial meltdown of 2008 to pump out more dollars.

If nothing else it gives a new meaning to recycling. Once the money has been captured from American families, the figures just keep moving around inside the Federal Reserve’s computers. Paul Ashworth of Capital Economics called the decision a "symbolic gesture".

Yesterday, Obama recalled the members of the House of Representatives back from their summer recess so that they could pass an emergency bill approving $26bn (£16.4bn) funds for states which have run out of money, and $16.1bn to extend funding for the Medicaid healthcare programme for low-income Americans.

Without the emergency aid, states would have laid off police, teachers and firefighters and all of the key services would have ceased functioning. The states themselves have suffered during the recession through a loss of revenue through sales and property taxes. The aid will only get them through the current financial year, however.

Those who claim that public spending is the answer to the economic crisis have had their fingers burnt by the US experience. Obama’s government has spent trillions in a various stimulus packages – all to no avail.

That’s because the crisis of capitalism is global and marked by the classic symptoms of over-production, over-capacity and falling demand. The boom was artificially fuelled by mountains of credit and debt which inevitably proved unsustainable and led to the implosion of the financial system. Without easy credit, consumers are in general spending what money they have on necessities like food and shelter.

It all adds up to the American economy being on the brink of collapse, adding to the sense of political crisis gathering around the Obama presidency.

Gerry Gold
Economics editor

The American dream is a nightmare of foreclosures

Las Vegas – known best for its gambling haunts – now has a new reputation. It’s America’s No.1 city for foreclosures, with more people losing their homes here than elsewhere in the country.

Artist Emily Kennerk has created a 22-hour video installation which shows an image of every home foreclosed in 2009. (Foreclosure is the legal process whereby a bank or lender obtains a court order that terminates the borrower’s right of redemption. It is harsher than repossession).

Describing her installation, Kennerk says as you walk around the town you can’t help but see “this ghost town is forming around you. It’s broader than Las Vegas. This is the first generation that’s going to have to deal with the death of the American dream”.

More than four million US homes have been repossessed in the past three years. A website currently lists 2,304,257 foreclosed properties in the US. In the state of Nevada where unemployment stands at 14%, more than six out of ten of all home sales are currently from foreclosures.

At the start of the sub-prime mortgage crisis, back in September 2008, the US Treasury took the mortgage giants Fannie Mae and Freddy Mac into government “conservatorship”. These two mortgage corporations were set up under Roosevelt’s New Deal during the Great Depression of the 1930s. Along with Ginnie Mae (the Government National Mortgage Association) they currently guarantee $5 trillion in US mortgages and 96.5% of all newly originated mortgages in the US.

So far the government has injected $145 billion into them to cover their losses. The mortgage market now is almost a wholly owned subsidiary of the United States government, according to former Federal Reserve chairman Paul Volker. "Almost all the mortgages made now are insured by the government, bought by the government, and the guys at Fannie Mae and Freddie Mac are the market . . . It’s clear Fannie Mae and Freddie Mac need to go. "

But the US is not only affected by a housing crisis. The malaise goes far, far deeper. Three trends have come together. Economists estimate that the annual incomes of the bottom 90% of Americans have risen only 10 per cent in real terms over the past 37 years while the incomes of the top 1 per cent have tripled.

Thus, a “slow economic strangulation”, which began well before the Great Stagnation, now means that income mobility is declining just as inequality rises sharply. Even families with a gross joint income of $70,000 per year, are only “a pay check or two from the streets” as one Minneapolis worker puts it. Medical expenses are a nightmare. Even families on twice the US median joint income have to borrow heavily to have essential, life-saving operations.

Arthur Miller’s 1949 play, Death of a Salesman, dramatised the anxieties arising from US Great Depression of the 1930s and the reliance on credit to provide necessities. During the Cold War years, such plays were seen as an attack on great American dream. But in today’s Great Stagnation, following the years of easy debt-fuelled consumer credit, which analysts call the “Great Moderation”, it’s certainly not playwrights who are pricking the dream-bubble.

The inability of the capitalist system, not only to ensure the fundamental necessities of life, but the very notion of a positive future is self-evident. Cities and states are staring at bankruptcy while trillions of government dollars have failed to revive the economy. As American comedian George Carlin quipped: “It’s called the American Dream because you have to be asleep to believe in it.”

Corinna Lotz
A World to Win secretary

Should energy go local?

There are many problems associated with retooling how America obtains its energy, more specifically, how it is generated and transmitted to the consumer. Obama is faced with some energy decisions that will affect the shape of the country indefinitely. We created a vast federal highway system that only created suburbia, and more cars, more development, and more “stuff”. The question is: should energy be generated and distributed locally? Or should it follow the same ethos of our current energy infrastructure and build a large energy “back bone” across the country to distribute energy from mega-sources?

These very questions arose in the state of Minnesota. Regulators were considering the construction of new power lines that connected with proposed solar farms in the Dakotas at a cost of $1.7 billion. The thought of all that copper wire and disrupted landscapes makes my head spin. Of course, wind energy investors like T. Boone Pickens were delighted by this prospect, as if his life depends on socking away another billion this year hiding under the cloak of “going green”.

Thankfully, the Minnesota regulators took a step backward and looked at the issue from a different angle. Considering that in modes of bulk transmission around 7% of the energy is lost, and the unbelievable cost of the project, the regulators found a more simple and economic solution. They decided to develop a bunch of small 10-40 megawatt wind farms located within the state, producing about 600 megawatts and able to use their existing grid system.

This model poses an interesting solution to the energy woes in America. Perhaps we have been thinking about energy in the wrong way with large projects that are located in rural areas. We are in the habit of pushing the most unsightly and polluting aspects of urban life into rural or wilderness areas, which raises many social and environmental justice issues. We are not shy about building coal-fired power plants on sovereign Native American lands, while they live without power and sometimes no running water.

In Arizona, for example, it would seem reasonable to build a large solar facility, like the one being constructed south of the Phoenix metro area. It would create jobs and provide a clean source of energy. But on what land is it being built, and how far away is it from the consumer? Conversely, it would also be possible to place those panels on rooftops, so that the citizen has direct access to their energy, almost wirelessly. In this scenario, little to no energy is lost in transmission, and precious metals do not have to be mined from the ground to construct the proposed gargantuan transmission lines. In addition, local economies benefit directly as jobs are created, and not in another state or region.

Although the Minnesota model transcends scale in a way, it is important to acknowledge that this model does not apply to every situation. Some localities, and even some states, do not have the climate or geological conditions conducive to small-scale (or even large scale) renewable energy sources. But overall, the United States has hit the lottery in potential for renewable energy. We have a wide variety of renewable energy potentials. Pushing for our energy to be in the complete control of local entities, or more desirably at the personal level, is a scary thought for many government agencies and energy companies. Imagine taking away the power (social that is) from these companies to operate energy monopolies. There is of course no end of political resistance to such a scenario.

The prospect of the people having the power and not corporate or government interests is heart warming. It is important to resist these pervasive neoliberal agendas. We do not have to commoditise everything, and we do not have to profit from everything. We all have the right to gaze up at the Sun and absorb its benefits.

Colin J. Gardner
A World to Win’s US correspondent

American dream in tatters

The first fall in US household wealth in five years reveals the growing impact of a financial and economic crisis that will be felt by every person on the planet. World prices for oil – now over $100 dollars for a barrel of crude, gold nearing $1000 an ounce, food driven skywards by demand for biofuel, and many other basic commodities are spiralling, whilst the warning signs of recession, including declining retail sales are appearing everywhere.

Many US consumers, already burdened with debt, are being ruined. High-powered salespeople first seduced them with low rates of interest - soon to be replaced by punitive, impossibly high mortgage repayments – thus pushing many over the edge. The US Mortgage Bankers Association said yesterday that the "mortgage delinquency rate hit its highest since 1985 in the final three months of 2007. While the rate of failing loans swelled across most mortgages, it was led by a growing wave of sub prime borrowers unable to make payments". In addition, the number of workers claiming unemployment benefit has remained at its highest in nearly two and a half years.

The property sponge is now being squeezed out, and the world’s financial, stock and commodity markets are in turmoil. New outlets must be found to house the inflationary growth of credit fed by the central banks’ desperate attempts to reduce the impact of recession by injections of liquidity and reducing base interest rates. Despite the actions of impotent governments the cost of credit is increasing. The managers of accumulated oceans of currency in sovereign wealth funds are scouring the planet for profitable enterprises into which they can sink some loot.

As repossessions mount, and demand for housing and all associated goods and services are falling, house prices are tumbling. In America, just as in the UK and in many other countries, private property – both housing and commercial, absorbed the inflationary expansion of credit and debt that made globalisation possible. This fantasy finance – Marx called it fictitious capital – paid for the American dream. It kick-started the growth of transnational corporations that subcontracted unsustainable production to Latin America, China and India to provide cheap commodities, corporate profits and the legacy – climate change. The worst of all possible future consequences are laid bare in The Road, Cormac McCarthy’s dystopian nightmare of the few remaining inhabitants of a dying planet.

It doesn’t have to be like this. Another world is possible.

At the top, refugees from the nightmarish world of fantasy finance have been pitching up as advisers to New Labour. Gordon Brown’s office has welcomed flawed expats from Goldman Sachs, one of the world’s biggest investment houses. Now their advice and the scandals they bring with them are weakening the government’s grip. Good news.

From the bottom, and across the world, broadening social movements like the Transition Town initiative are exploring different ways of living, ways which are not dependent on fossil fuels. For such experiments to become truly effective however, it will be necessary to remove the profit incentive that motivates the extraction of oil, gas and coal. And that means bringing the corporations into social ownership.

Gerry Gold
Economics editor