Real Per Capita GDP Falls 1.5%, Recession Now One Year Old

Yesterday, November 25, the Bureau of Economic Analysis announced that real GDP* in the 3rd quarter fell at an annual rate of 0.5%, worse than its preliminary estimate of a decline of 0.3%.  But GDP is a meaningless figure if it’s not related to the size of our population. Since the U.S. population is steadily rising at an annual rate of about 1%, then the GDP pie has to be sliced into more pieces. If the pie isn’t growing faster than the population, then everyone gets a smaller piece. In other words, the effect on individual Americans is even more pronounced than raw GDP data would lead us to believe. In the 3rd quarter of 2008, real per capita GDP fell by 1.5% to $38,412 per person (adjusted for inflation and expressed in 2000 dollars). That’s a decline three times as bad as the government’s raw GDP data.

This is the third quarterly decline in real per capita GDP in the last four quarters. Only the second quarter of 2008 had a small gain of 1.8%, thanks to the fiscal stimulus package. Real per capita GDP is actually lower than it was in the 3rd quarter of 2007. And all experts agree that the 4th quarter of 2008 will be much worse.  Since real per capita GDP is a much better gauge of how the economy impacts individual Americans, I use this for my definition of a “recession.”  By this definition, America has now endured a full year of recession, and it promises to get much worse.

The trade deficit continues to be a huge drag on real per capita GDP. Were it not for the trade deficit, 3rd quarter real per capita GDP would have been 6.0% greater at $40,733 per person. (Imports are a subtraction from GDP in the BEA’s calculation.) If the next president is looking for a way to turn the economy around, the trade deficit would be a great place to start.

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* – Annualized 3rd Quarter Actual GDP, expressed in current dollars, was $14.420 trillion, compared to $14.295 trillion in the 2nd quarter.  However, “real” GDP, which is adjusted for inflation and expressed in 2000 dollars, was $11.712 trillion, compared to $11.727 trillion in the 2nd quarter.

Volcker Group to “Raise Wages and Living Standards”

http://www.reuters.com/article/newsOne/idUSTRE4AP1E920081126

Former Federal Reserve Chairman Paul Volcker will chair a new economic advisory panel created by President-elect Barack Obama and designed to stabilize financial markets, the Wall Street Journal reported on Wednesday.

What caught my eye about this article was the following:

The panel will have several jobs, the paper said, including: helping design and implement programs to jump-start the economy; raising wages and living standards; and confronting the housing crisis.

This is the first time in a very long time I’ve heard anyone talk about “raising wages and living standards.”  Until now, the government has literally waged a war against such things.  The Federal Reserve has been positively paranoid about the possibility of rising wages adding to inflation.  In fact, it’s been one of the “benefits” of “free” trade that have been touted –  that the downward pressure on wages has helped to hold inflation in check.  Never mind that wages have fallen faster than the prices of imported goods or that falling incomes contributed to the foreclosure crisis.  Those are dirty little secrets that the government is too uncomfortable discussing. 

It’s just refreshing to hear that someone “gets it” – that rising wages and living standards go hand in hand and that we can’t just cost-cut our way to prosperity.  I know, I’m grasping for any signs of hope here, but at least we’re beginning to see signs at which we can grasp.

Obama Should Look Beyond the Budget to Find Cuts

http://www.usatoday.com/news/politics/2008-11-25-obama-economy-tuesday_N.htm

It seemed surreal yesterday to hear President-Elect Obama talking about scouring the federal budget for savings at the same time that the Federal Reserve was literally gushing money into the economy, another $800 billion in one day.

Some are saying that the federal budget deficit could reach $2 trillion next year.  Not surprising when the Federal Reserve announces a new program to pour a trillion dollars into the economy on a weekly basis.  So what’s the point?  Does it really matter if a few wealthy farmers collect farm subsidies for which they weren’t eligible?  Will that money have any less effect on the economy than if it had been rat-holed into another bankrupt financial institution?  Isn’t that the whole premise of supply side economics – to just lavish money on the wealthy so that they’ll toss a few peanuts to the peons? 

But enough of my cynicism.  Give Mr. Obama credit for being so old-fashioned as to still believe in fiscal responsibility.  But, if he’s looking for wasteful programs, I’m afraid he’ll find the pickings pretty slim if he confines his search to the federal budget.  There’s lots of savings to be had, but he needs to look beyond to the “current account” spreadsheet.  It’s no mere coincidence that our cumulative trade deficit since 1975, $9.1 trillion, closely matches our national debt of about $10 trillion. 

Yes, I realize that the trade deficit is funded by the sale of treasuries and corporate stocks and bonds, and that only the sale of treasuries adds to the national debt.  (Until recently, treasuries were a small component of the funding, but they now account for the majority.)  But regardless of whether trade dollars come home to buy stocks or treasuries, federal spending must be boosted to offset the negative consequences of the trade deficit on the economy.  Unemployment compensation is just one example, where hundreds of billions of dollars are spent as a direct result of jobs being lost to parasitic trade predation.  The same is true of other federal programs to address poverty.  All are a direct result of our misguided trade policy.  I’m not saying that all poverty is due to trade, but it would certainly be reduced dramatically if we brought six million manufacturing jobs home. 

Mr. Obama, you cited the issue of health care as an example of where savings could be made.  Is it really that our health care is so expensive, or is the real problem that incomes haven’t kept pace with the cost of living?  Your economists will tell you that incomes have, until recently, kept pace with inflation.  But inflation, as calculated by the government, is not a cost-of-living calculation by its own admission.  Is health care the problem, or is it really a matter of governmental self-delusion about where the problem really lies? 

So, Mr. Obama, if you’re truly interested in finding some real savings in the budget, don’t just skip over the line items like unemployment insurance and say “well, we certainly can’t cut that, so let’s move on to the next budget item.”  Instead, stop and ask yourself “why.”  “Why do we spend so much to offset the effects of unemployment?  What’s causing such high unemployment?”  Then be willing to look beyond the federal program to the root cause.  Take a look at the current account spreadsheet and a savings of $700 billion per year will jump right off the page at you.

Federal Reserve Branches Out into Retail Lending

http://www.reuters.com/article/newsOne/idUSTRE4AO1DB20081125

I’ve been wondering how long it would be before the Federal Reserve became impatient with banks’ reluctance to return to their irresponsible lending of the pre-housing bubble days.  It seems that day has arrived and, although there’s no details yet, the Federal Reserve has announced plans to make loans directly to consumers – auto loans, student loans, credit cards – whatever. 

U.S. Treasury Secretary Henry Paulson plans to announce on Tuesday the formation of a program to increase the availability of auto loans, student loans and credit cards, the Wall Street Journal reported, citing people familiar with the matter.

The lending facility, which will be operated by the Federal Reserve, is expected to provide loans to investors who want to buy securities backed by credit cards, auto loans and student loans, the people told the paper.

Are you kidding me?  Securities backed by credit cards, auto loans and student loans?  Unless the interest rate on such securities is somewhere around 100%, I think I’d feel much safer buying credit default swaps backed by sub-prime loans!  Who in the world would buy such a risky security?  Oh, wait, I know!  The Federal Reserve will buy them!  They’ll sell them to themselves and then, taking a cue from Wall Street, will slice them and dice them, get some patsy ratings agency to give them a AAA rating, and then sell them China, Japan, Europe and Saudi Arabia.  Brilliant! 

Is it just me, or does anyone else get the feeling when hearing Paulson speak that our Treasury Department isn’t run by the sharpest tool in the shed?  When he and Bush meet to discuss the economy, how much of the conversation is spent exchanging long “uuhhhhh”s?  What does Bernanke bring to the table aside from the keys to the printing press? 

It’s unclear whether there will be restrictions on the types of investors who are able to borrow money, how the Federal Reserve will judge their credit worthiness and how the government will ensure they are using the loans to buy the intended assets, the Journal said.

I think it’s safe to say they’ll give the money to anyone for any purpose.  They don’t give a damn what happens to the money.  It’s just taxpayer money.  It’s not as though it’s something they have to treat responsibly. 

I’m seriously considering moving all my investments to an off-shore account somewhere, safely out of the reach of these idiots.  Hurricane season is over.  Grand Cayman Island would be a nice place to spend the winter.

$350 Billion for Citigroup – Not a Penny for the Auto Industry!

http://www.reuters.com/article/ousiv/idUSTRE4AJ45G20081124?sp=true

The double standard and hypocrisy in Washington simply defies belief!  When the domestic auto industry, upon which one out of every ten jobs in America is directly or indirectly dependent, needs a helping hand – a mere $25 billion – to survive the financial crisis, they are forced to appear before Congress for three days of hearings and are berated, belittled, mocked and sent home without a penny – with nothing more than a demand for a “turn-around plan.” 

Then along comes Citigroup.  Without a single congressional hearing or a request for any kind of plan, the government lavishes them with $350 billion!  ($25 billion already given to them, followed by $306 billion to back up their bad debts and another $20 billion injected in the form of capital.)  Not a peep of protest about Citigroup’s corporate jets or excessive executive compensation.  No turn-around plan.  Nothing.  

Add this to the AIG bailout and you have a total of $500 billion for just two companies, twenty times what the entire domestic auto industry has requested.  Yet the government won’t provide a penny to help them.  Obviously, the Big Three would have been much better off going to Citigroup and asking for the money.  Why should Citigroup deny them?  They can pass out money like candy and the government will be there to bail them out, no questions asked! 

The anti-manufacturing bias of the U.S. government is clear.  They force trade policies down our throats designed to destroy our manufacturing base, mock us as “protectionists” when we complain, and subject us to public humiliation when we ask for a little help.  On the other hand, they bow down before the financial industry as though they were gods, regardless of how badly the industry is mismanaged, completely ignoring the fact that they are 100% responsible for the global economic melt-down.

What is the “plan” that Congress wants to see from the auto industry?  The following three-step plan would surely do the trick:

1. Donate as much money to congressional election campaigns as financial companies have.
2. Double donations in the following elections.
3. Double them again.

I’m sure that’d do the trick.

Cause of U.S. Economic Melt-Down Captured in One Photo

http://www.reuters.com/article/ousiv/idUSTRE4AJ7LF20081123?sp=true

Check out the photograph at the top of this linked story.  Bush is flanked on either side and holding hands with Japanese Prime Minister Taro Aso and South Korean President Lee Myung-bak at the meeting of APEC leaders in Lima, Peru yesterday, November 22nd.  This photo captures perfectly the root cause of our economic melt-down, the leaders of two of the most parasitic economies in the world standing hand-in-hand with the leader of their “host” economy.  And everyone is all smiles.  Bush is all smiles because he’s clueless about the global trade welfare state that he supports on the backs of working Americans and is just happy to be fawned-over and well-fed.  Aso and Myung-bak are all smiles because the leader of the host economy upon which they feed is all too willing to keep the blood flowing.

U.S. President George W. Bush, Chinese President Hu Jintao, Japanese Prime Minister Taro Aso and other members of the 21-nation Asia-Pacific Economic Cooperation group, or APEC, said they would refrain from raising trade barriers over the next 12 months.

… Bush joined APEC peers in rejecting protectionism even if economies worsen.

Isn’t this the very definition of madness, to keep doing the same thing while expecting different results?  Of course, how could we expect anything else from Bush when his economic team of Paulson and Bernanke never utter a peep of protest about the trade deficit? 

But not everyone is happy.

Before the group met, Canadian Prime Minister Stephen Harper and Mexican President Felipe Calderon blamed the United States for starting the crisis and called for better banking regulations.

“Our closest neighbor and largest trading partner is the epicenter of the financial earthquake and global slowdown,” Harper said in a speech to business leaders.

Calderon said structural problems in the global economy were allowed to fester before spiraling out of control.

Of course, Calderon’s protests are a bit like a parasite complaining that the blood of its host tastes funny.  Mexico never complained while they racked up huge trade surpluses with the U.S. year after year.  But now that the parasitic economies like Mexico have sickened the host, all of a sudden it’s our fault.  Well, in a way it is our fault, in the same way it’s an owner’s fault for not giving his dog a flea bath, allowing it to be sickened by the parasites.  Our government is the owner of our economy and it has kept the flea powder of tariffs on the shelf for far too long.

We’ll be fortunate to survive another two months of Bush.  Obama seems like a very smart man.  Is he smart enough to understand the role of the trade deficit in bankrupting the nation?  If he is, does he also have the guts to do something about it?  He’ d better, while the nearly lifeless carcass of our economy still has an ounce of blood left.

Obama Economic Plan Falls Short

http://money.cnn.com/2008/11/22/news/economy/Obama_economy/index.htm

Saturday, November 23rd, President-Elect Obama announced that he has tasked his economic team with creating 2.5 million new jobs by the end of 2010. 

“We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children and building wind farms and solar panels, fuel-efficient cars and the alternative energy technology that can free us from our dependence on foreign oil and keep our economy competitive in the years head,” he said.

I certainly hope there’s more to come because, although this would be a nice start, it will fall far short of what’s needed to breathe life back into the economy.  Two and a half million jobs in two years may sound substantial until you understand that our labor force grows by approximately three million workers in the same amount of time, due simply to populaion growth.  So, if this is all there is to Obama’s plan, we’ll fall behind by another half million jobs in the next two years, which will raise the unemployment rate by another 0.3%.  Since the year will end with unemployment somewhere near 7.0%, is Mr. Obama saying that the best he can promise is 7.3% unemployment midway through his term of office? 

There’s certainly nothing visionary about building roads and bridges and refurbishing schools.  Anyone could have come up with that.  Putting people to work building solar panels, wind “farms” and fuel efficient cars sounds good, but Mr. Obama hasn’t explained how this will be done without raising the ire of the WTO (World Trade Organization).  It’s not as though none of these devices aren’t already available on the global market.  Is he talking about the Chevy Volt, the electric car which is supposed to be available in 2010?  Why will people flock to that car in particular when, at the same time, virtually every import brand is expected to introduce their own electric car?  Does Mr. Obama have a plan for guiding electric car demand disproportionately to the domestic brands?  Similarly, Denmark is the world’s leader in manufacturing wind turbines.  Why would our power companies choose to purchase American-made turbines disproportionately over Danish machines or those from other foreign manufacturers?  The same goes for solar panels. 

If his plan is to somehow steer domestic demand toward domestic producers, the WTO will see it as a violation of trade rules and will quickly move to put a stop to it.  Then what?  The point I’m making is that anything that Mr. Obama attempts, beyond public works projects, to put Americans back to work in manufacturing any product of any kind will quickly get him cross-ways with the WTO.  Frankly, I hope that’s exactly what happens because a showdown with the WTO is long overdue.  Perhaps only such a confrontation will finally drive home the point that unfettered free trade is what lies at the root of our economic problems and that only a system of protectionist measures offers any hope of salvaging our economy. 

C’mon, Mr. Obama.  We’re expecting better.  With 25 million people filing for unemployment every year, we need to create 20 million new jobs, not 2.5 million.  We need to return to manufacturing everything we use, not just a few things.  If someone has sold you on the idea that transforming to a “green” economy  will put everyone back to work, then you’ve been mislead.  A green economy that still experiences a $700 billion per year trade deficit is still a fundamentally unsound economy that is doomed to collapse, just as our current economy has.

Japan Posts Tiny Trade Deficit in October. Poor Babies!

http://www.google.com/hostednews/ap/article/ALeqM5gN_kUngERLcfGYFHR3q1grHfn_kAD94IFUVG0

Here’s a little bit of good news.  Japan posted a $0.67 billion trade deficit in October as their manufactured exports failed to keep pace with their oil and food imports. 

Japan famously mocks the United States any time Americans express concern about our enormous $60 billion per month trade deficit.  They, the all-knowing gods of global trade, talk down to us as though we are economic buffoons, incapable of understanding the complexities and ethereal benefits of free trade, in the same manner that Enron executives belittled financial analysts who couldn’t understand their business plan.  “Trade deficits have nothing to do with your economy in general or unemployment,” they tell us.  “You Americans are too dumb to understand.  We are the global masters of free trade.  Believe us when we tell you that trade deficits are irrelevant.”

But see how fast they start wringing their hands if they have one!  I wonder what kind of shape their economy would be in if they ran a $25 billion monthly trade deficit (the equivalent of ours for a nation their size) for decades, like we have.  I say, let’s find out!  Let’s impose the 40% tariff I proposed in Five Short Blasts on every manufactured product coming out of Japan.  Why should they care?  A trade deficit doesn’t matter, right?  That’s what they always say.  Let’s do that for about thirty years, after which we can get together and have a candid discussion about trade deficits.  That is, of course, if there’s anything left of their economy to talk about.

Government Accuses Auto Industry of “Mismanagement?!?!”

As I watched the leaders of the domestic auto industry take their beating from the Senate Banking Committee on Tuesday, I couldn’t help being struck by the absurdity of these senators accusing the Big Three of mismanagement. These senators who chided the Detroit execs for making bad decisions are the same people who voted for the Iraq war. These very same senators who accuse the CEOs of mismanaging shareholder funds are the very ones whose policies have ruined America’s economy. These same senators who charge the Big Three with caving in too easily to the demands of the UAW are the same ones who rolled over like submissive puppies when the financial industry came looking for $700 billion and AIG needed $150 billion. They who complain that Detroit doesn’t build cars that people want are the same people who showed callous disregard for the people of New Orleans as they wallowed in muck for months on end following Katrina. These same senators who deride executive compensation packages are themselves lavished with lobbyist gifts and favors while they shrug off single-digit approval ratings. Never has such a level of hypocrisy been on such public display. I wonder how fast these same Senators would be on their knees before China, begging for money were it not for their ability to crank out new money on their own printing press to cover up their screw-ups.

Certainly, the Big Three are not without their faults. But considering that the American car market is sliced and diced into ever-tinier pieces and passed out to every foreign car-maker who comes along, for nothing in return, it’s really quite remarkable that they haven’t lost even more market share and that they’ve survived for as long as they have. If Congress insists on continuing to pursue such destructive, idiotic trade policy, then the least they can do is give the domestic car makers a helping hand.

Frankly, when you look at the performance of the Detroit automakers vs. the performance of Congress, we all may be much better off if we placed the operation of the federal government under the management of the Big Three.

Another Gigantic Stimulus Being Pushed Already

http://www.usatoday.com/money/economy/2008-11-18-ceos-urge-stimulus-package_N.htm

The ink is barely dry on Bush’s signature on the $700 billion “TARP” legislation bill and already there is talk of another nearly as large.  CEOs are already urging the Obama administration to implement another quickly:

A group of business executives on Tuesday urged President-elect Barack Obama to “quickly implement” a large stimulus package soon after taking office.

The stimulus should be in the range of $500 billion, said Roger Ferguson, chief executive of asset management company TIAA-CREF, an amount much larger than has been mentioned by Democrats in Congress.

The recommendation on the stimulus echoes comments made by a top Obama adviser late Monday. In a speech to the conference, Larry Summers cited a report by Goldman Sachs that suggested the stimulus should be in the range of $500 billion to $700 billion.

Earlier this month I made the following prediction for 2009 (see 2009 Predictions):

10.  The federal government will find another huge bail-out necessary as the economy teeters on the brink of recession.  This time the package will top a trillion dollars.  Much will be devoted to infrastructure and renewable energy projects.

Predicting that another stimulus package would be coming isn’t that much of a stretch, but I doubt that many would have predicted a trillion dollars.  OK, so what’s being asked for here approaches $700 billion, but that will come early in the year.  If that’s all it is, I look for more down the road.

It’s easy to make these calls when you understand the following:

1. The U.S. is completely bankrupt.
2. The trade deficit continues to drain $700 billion per year from our economy.
3. The only way to keep the economy afloat is for the government to print at least that much money to make up the difference. 

Restoring a balance of trade is the only action that can break this cycle.