Zombie Economy – Living Bubble
By Chris Kanthan/ Nation of Change/ December 4, 2013
Imagine the reaction you would get if you walked into an off-the-hook fraternity party and shouted, “Stop this party! There are too many drunk people and some of you are going to get hurt.” That’s the same reaction you get when you try to tell people about an economic bubble. It doesn’t matter if people were burned before because it is different this time. Actually, it is very different this time. We have a zombie economy that is artificially kept alive through blood transfusion, or if you prefer something more benign, think of the movie “Weekend at Bernie’s.” And there is a living, growing bubble that is ripe for a big burst.
Of course, one might retort, “We are the wealthiest nation in the world, the stock market just reached record highs, the housing is booming, the inflation is low and the unemployment is reasonable. What are you talking about?”
Let’s take a look at the economy first.
If you look at the overall GDP, yes, the U.S. is still #1. And even under the GDP per Capita, the U.S. is ranked 10th or so in the world, depending on the metrics. Not bad. However, the “average” statistics can be misleading. If I have $999 and you have $1, then on the average, we have $500 each, but that fact is not going to help you buy a coffee at Starbucks.
If you have not watched the viral video on wealth/income inequality in the U.S., please do so.
This inequality has only grown more rapidly since the crash of 2008, as Paul Krugman explains in the New York Times. To understand what is happening, imagine $1000 being distributed to 1000 people. In a socialist world, everyone will get $1. In the current version of the capitalist system, this is what is happening:
1 guy gets $600, 9 other people get $39 each, and the remaining 990 peasants get 5 cents each.
If the Forbes 400 move to an island and establish their own country, it will have the 9thlargest GDP in the world, ahead of Russia, Canada, Australia and 185 other countries.
If all the 2200 billionaires of the world decide to move to that island, it will be the wealthiest country in the world with a GDP twice that of the U.S.
So how are the American workers doing? About 25% of workers make $10 or less an hour. Another 25% make under $15/hr. Thus, half of all American workers make under $28,000 per year.
Good jobs are hard to come by. About 60% of the jobs created since the Wall Street crash of 2008 are low-wage jobs. Consider that more than 300,000 college graduates are working for minimum wage. In 2013 alone, 75% of the jobs created were part-time jobs. The real unemployment rate, including those who have stopped looking for jobs, is closer to 14%, twice the official rate. Another factor that is helping the government rate is the fact that about10,000 baby boomers are retiring every day and dropping out of the labor force.
With all these facts, it is not surprising that about 75% of all Americans are living from paycheck to paycheck. Half of the households carry an average of $15,000 in credit card debt. Americans are also saving at an abysmal rate of less than 3% of their disposable income.
Young Americans are in deep trouble as well. The total student debt is now more than $1 trillion, even more than the total national credit card debt.
In a nutshell, you can safely say that 0.1% of Americans are swimming in money, 1% are wealthy, 9% are comfortable and another 15% are truly middle class. The next 25% think they are middle class, but they are not. The rest – 50% – are just financially screwed.
Adding pain to all of this is the rising cost of living. Gas, health care expenses, rents, college tuitions have all been rising briskly every year. Even the famous “Big Mac Index” has gone up by 5% every year since 2008. According to some experts, the real inflation rate is around 11%. Thus, Americans have less and less disposable income every year. However, ask the Fed, they will tell you the inflation rate is about 2%. Fuggedaboutit.
Whoa! If we really have an anemic economy, how do we explain the stock market setting records day after day? And the booming housing market?
To understand that, we have to understand “quantitative easing” or “QE” – the unusual and monetary policy that the Federal Reserve Bank (Fed) has been engaging in for the last five years.
The official goal of quantitative easing is to inject money into the flailing economy to give it some life. What would you do if you had the task of giving more money to Americans? The simplest way would have been to enact a payroll tax cut since people would immediately see their paychecks go up.
But that would have been too logical. It will also violate the dogma that everything must involve the banks who would act as the middlemen skimming some cream off the top.
In a nutshell, the Fed has been doing two things: A) Buying government bonds and thus letting the government get into more debt, and B) giving free money – at 0% interest – to banks who have been primarily passing it on to billionaires and corporations at low interest.
(By the way, where does the Fed get all the money from? In the Bible, God said, “Let there be light.” In our world, the Fed says, “Let there be trillions of dollars.”)
Even when it has to buy bonds from the U.S. Treasury, the Fed does not buy them directly. Instead, it goes through Goldman Sachs who takes a cut of $45 billion every month just for a few clicks on the computer to buy and sell those bonds.
Corporations have been using the low-interest money in one big way: buying back their own shares. Since 2008, they have been buying back their own shares at a rate of about $1 trillion every year. Of course, regardless of who buys the shares, the rules of supply-demand make the share prices go up. Also, reducing the number of shares automatically makes the value of existing shares go up. So, the math is simple: borrow a few billion dollars at 3%, buy back your shares and make the price go up by 100%. See, you really don’t need an MBA from Harvard.