Based as they are on a vast array of often-contradictory data, economic perspectives are extremely difficult to make with any precision. Our task is to draw a general picture of the state of the economy, and sketch out the most likely path of development. In previous articles we raised the possibility of a “double dip” back into recession after the brief recession of 2001. This has not occurred. We also raised the possibility that if the economy did gain some momentum and avoid slipping back into recession, it would be based on the increased squeezing of the U.S. and world working class, not job growth or significant investment in productive capacity.
This “jobless” recovery is precisely what we have seen over the last 2.5 years. Job creation has improved somewhat in recent months, but it is a drop in the bucket compared to what has been lost since 2001. New jobs are largely non-union and pay significantly less than those that have been “downsized” or “off-shored”. Working and living conditions have worsened for millions of Americans, and Bush’s planned cuts will even further degrade our quality of life - all of this during a so-called “recovery”.
Job creation remains haphazard, averaging just 188,000 per month since November 2004 (including the 300,000 created in February). Taking into account that the economy must produce some 150,000 jobs just to keep pace with new workers entering the market, these rates effectively reflect stagnation. Aside from a brief and temporary uptick here and there, manufacturing jobs have been in decline for years. The dramatic decline of U.S. industry can be seen in the fact that the service industry now accounts for an incredible 80 percent of the economy. Consumer confidence has seen wild swings since the start of the year, reflecting uneasiness about the future of the economy. Investor’s Business Daily and TechnoMetrica Market Intelligence’s economic optimism index slipped 0.2 points to 47.2 in May from April’s 47.4. A reading above 50 indicates optimism while a reading below 50 indicates pessimism. According to IBD associate editor Terry Jones, “The Federal Reserve’s interest rate hikes, recent stock market weakness and the spike in oil prices above $50 a barrel recently have taken their toll on consumers’ optimism.”
The ballooning budget deficit weighs like a ton of bricks on the back of the economy, due largely to Bush’s tax cuts and increased military spending. The U.S. posted a record $113.94 billion budget deficit in February 2005, exceeding the $96.70 billion deficit in February 2004. This fiscal year’s total deficit is estimated at $427 billion. This means the U.S. must borrow $1.2 billion daily to make up the difference. Bush’s pledge to cut the deficit by slashing social programs is a transparent ploy to make the working class pay for the irrationality and excesses of the military-industrial complex.
The total national debt now stands at $7.7 trillion – over $26,000 per U.S. citizen. This is money that must be paid back with increasingly high interest. Some analysts estimate America’s long-term budget shortfall is closer to $43 trillion or more, about four times the size of the nation’s economy, and more than 20 times the Federal government’s annual tax revenues. Some forecast that within the next 10 years, the U.S. government will simply not be able to borrow money fast enough to keep up with its exploding expenses. We are not talking about some “Banana Republic” possibly going bankrupt, but of the backbone of the world economy.
The trade deficit is also a destabilizing yoke on the economy. It has increased by $500 billion since 1993. For all of 2004, the U.S. trade gap surged by 24.3 percent to $617.1 billion, setting a record for the third straight year. An even higher gap is expected for 2005. Although exports rose by 0.4 percent in January to $100.8 billion, imports rose even faster at 1.9 percent, reaching $159.1 billion. This surge in imports of consumer goods pushed the U.S. trade deficit to a wider-than-expected $58.3 billion in January, the second largest on record. The trade imbalance with China alone was $15.3 billion, the third biggest gap on record and up 7 percent from December. Exports to China dropped nearly 20 percent and imports edged up 1.9 percent. Overall imports of consumer goods jumped $2 billion to a record $34.6 billion. Again, much of this consumption is based on credit – to be paid back with interest in the future.
Making up the difference between imports and exports requires a cash inflow of billions of dollars each month - which means borrowing from foreign banks and investors. These investors do not lend their money out of the goodness of their hearts, but to make a profit and shore up the voracious U.S. appetite for their own countries’ goods. But there are limits to how long a creditor will lend money to an irresponsible borrower. The dollar has been battered on world currency markets, and several central banks have already started or have threatened to unload their U.S. dollar assets. This has decimated the value of these foreign-held U.S. assets. Against the Euro, the wildly fluctuating U.S. dollar is down between 20 and 30 percent from two years ago. There is also talk among major oil producing nations of switching to the Euro or another currency for trades in petroleum.
As reported this past December in The Economist Global Agenda: “The cause of the dollar’s decline is hardly a mystery: private investors have become less eager to finance America’s huge current-account deficit … These record deficits are adding to America’s foreign debts at an alarming rate. But as yet, America still earns more from its foreign assets than it pays on its foreign liabilities. That is about to change. As interest rates rise, refinancing America’s debt will become more costly. Goldman Sachs forecasts that net foreign-investment income is likely to shift to a sizeable deficit during 2005, growing thereafter. The investment bank estimates that, if America’s current-account deficit remains steady as a share of GDP and interest rates average 5 percent in future, net foreign debt-service payments will reach 4 percent of GDP by 2020 - a significant drag on American living standards.”
This is an intolerable ball and chain for the economy to drag around, and it is having a direct effect on workers’ standard of living, who see their meager wage rises drowned by increasing prices. When adjusted for inflation, the result is a fall in real wages. In other words, consumers can buy less today for each dollar they earn than they could only yesterday. High energy prices and rapidly rising food costs disproportionately affect the working class and are putting inflationary pressure on the economy. Three years ago, the threat of deflation loomed large. Now the specter of inflation has reared its ugly head. The personal consumption expenditure price deflator, a measure of inflation, rose 2.5 percent in the fourth quarter of 2004.
The Reuters-CRB price index of 17 commodities including oil, wheat and metals recently rose to its highest level since January 1981. This presents a clear threat of inflation, possibly forcing the Federal Reserve to raise interest rates faster than it would like in order to curb it. Higher interest rates cut into profits and make borrowing money more expensive. This can dampen consumer spending and act as a deterrent to increased investment and hiring. Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors recently stated: “Investors remain very, very concerned, and they should be, that we’re headed toward higher inflation and higher interest rates. No matter how you say it, higher inflation and interest rates is the biggest risk that faces the stock market in 2005.”
In an effort to control inflation, Alan Greenspan and the Federal Reserve have been raising interest rates steadily over the last few months. However, managing the world’s largest unplanned economy cannot be accomplished with any degree of control simply by raising and lowering interest rates. Until now, Greenspan has had a lot of luck on his side. But the ever-more delicate and unstable balance between growth and contraction, inflation and deflation, spending and saving cannot last forever. Even a tiny shock can tip the balance.
The housing boom, boosted by low mortgage rates, has inflated people’s sense of personal wealth. But this bubble appears to be on the verge of bursting in some major markets. After years of serving as a decisive support to the economic expansion, home sales tumbled 9.2 percent in January, despite Wall Street’s predictions of an increase of 2.5 percent. Again, rising interest rates endanger this vital sector of the economy – but the Fed has no choice if it is to combat the even more potentially damaging climb of inflation and the falling dollar. A nightmare scenario could be played out for millions of recent homeowners, who could well end up owing a $250,000 mortgage on a home now worth just $200,000. The knock-on effect of a collapse in housing prices would be far-reaching.
As explained in Socialist Appeal issue 17, even if the U.S. economy miraculously takes off in the second half of 2005, the damage has already been done for millions of working Americans. The capitalist system stands condemned before history. Its “golden days” are long over, and every day it continues is another day of “horror without end” for billions of humans around the planet. Even in the best of times, millions are crushed by the relentless drive for profits. The U.S. is no exception. Our task is to overthrow this rotten system and replace it with a rational and democratically planned socialist economy that places human need above corporate profits.