The Virtual US Recovery is in Trouble
by William Engdahl
Most newspapers are filled with reports of a growing US economic
recovery after nearly three years of recession and stagnation.
President Bush speaks of steady growth beginning. The Federal Reserve
head, Alan Greenspan, says much the same. Wall Street stocks are rising
on hopes of future boom. The sober reality, however, is that the
economy of the United States is on artificial life support. The Bush
Administration is doing everything possible to feed the illusion of
recovery, what we might well call a virtual recovery, until the
November elections. He is doing this at a huge cost to not just the US,
but also to the entire world economy.
In normal postwar US recessions, companies reduced debts, laid off
workers and prepared to go forward with a better debt-to-revenue basis.
Private households have normally reduced their debts and cut back in
spending in a normal recession. This is no normal recession. The
situation is alarming, and not at all the usual recovery. For the first
time since the Great Depression in the 1930's American families are
dramatically increasing their private debts during and after the
so-called end of recession, officially announced back in November 2001.
Instead of the usual period of savings and caution, families have
borrowed to record levels. The central bank of Greenspan has encouraged
the biggest consumer debt orgy in world history, since the collapse of
the dot.com bubble in March 2001.
Personal debt levels rise, jobs vanish
Since the end of 2000 private consumer debt has exploded from 70% of
Gross Domestic Product (GDP) today to 82% today. As of April 2003,
total private consumer debt, mortgage and other debt (auto, credit card
etc.) stood at $ 9.3 trillion. This is a huge rise. Most of the debt
has been concentrated in the debt for home mortgages and related loans.
Here total household debt has risen to just over $ 7 trillion. That is
$ 25,000 debt for every man woman and child. Average credit card debt
alone is $ 12,000 and rates paid to banks for that debt are well above
14% a year.
Families can add debt, if their income to pay that debt rises. The
opposite is the case, however in the US today. Last year personal
income rose by 2 % officially. Individual debt rose by near 10 %.
Personal debt for autos, credit cards and such rose to $ 2 trillion for
the first time. Including home mortgage debt, total private household
debt rose $ 925 billion in 2003 and wages and salaries rose by a mere $
190 billion. Americans are sinking into debt to keep the economy going.
One poll shows 28 % of Americans consider their debt as the biggest
problem. Only record low interest rates have made this dangerous
situation possible this long. It cannot last. Bush hopes it lasts at
least to November's elections.
To prevent a collapse of the US economy after the collapse of the IT
economy, Greenspan cut interest rates more than 13 times to a 43 year
low today of 1%. This encouraged families to buy new homes or larger
homes. That in turn pushed prices of all homes higher. In the past year
average home prices have increased 14% for existing homes, and 18% for
new homes nationally.
While personal debt is rising, personal income to pay off the debt has
not risen. Since the stock market crash and recession in late 2001, the
US GDP has risen 7.2% in total, while personal wage and salary income
is up only 2% before inflation, and 0.6% after, almost nothing. Yet
personal debt has exploded. Such a situation can last only so long
before people are unable to pay debts on a car, credit card or even a
Greenspan again gave a speech on January 28 promising not to raise
interest rates any time soon. Yet he insists the economy is in a
healthy recovery. If the recovery is healthy, why is the interest rate
level not going back to normal? The answer is, it is not a healthy
recovery. Some economists are calling it the second great depression,
whose serious effect is hidden only by record low interest rates and
huge deficit spending by the Bush Administration. That, combined with
the continued Japanese and Chinese willingness to buy hundreds of
billions of dollars of US government debt to finance the Bush deficit
when Americans cannot.
Jobs across America are vanishing at a record rate. Officially some 2.7
million jobs have gone since 2001. Unofficially the number is likely
near 7 million according to a former Federal Reserve economist. Entire
industries are being lost to cheap imports from places like China or
Mexico or Indonesia. Chinese textiles and furniture imports have become
so large in the past two years that entire sectors of the US are
becoming industrial ghost towns. And not only blue-collar jobs are
being destroyed. In the past 18 months or so major US banks and large
companies have outsourced entire parts of their computer and related
services to centers in India or elsewhere at a fraction the cost. This
includes for the first time very high paid white-collar jobs as
software programmers or engineers or accountants.
But, you say, unemployment is falling? That depends how you count.
Under US Labor Department methods, you are not counted as unemployed
unless you are actively looking for a job. If you have given up finding
one, you simply disappear as a statistic. Hundreds of thousands of jobs
have vanished in this way, yet official unemployment is listed as 5.6 %
of the active workforce.
The government has different measures of employment. If we add
underemployed who would take a full-time job if offered, and add those
who simply have given up finding any job, total US unemployment would
be 10.9 %, not the headline 5.6 %. And that is only using official US
government data, Table A-12, 'Alternative Measures of Labor
Underutilization.' But that number is never reported to the press.
Private economists suggest the real number is even significantly
higher. And even using other official measures of new job creation, the
job gain is lower than in any post-recession since the War.
For those Americans lucky enough to have found a new job in the past
three years, most have not been lucky to find a better job. A recent
study by the Economic Policy Institute finds that industries that are
adding jobs are paying on average 21 % less than the industries cutting
jobs. In Michigan, the US auto industry is losing well-paid production
and engineering jobs while new jobs in health care and similar fields
there pay 26% less. More Americans are forced to take part-time jobs,
often without getting health insurance or other benefits. Some 4.8
million people are working part-time because no full job is available.
The most dramatic change is the permanent vanishing of US manufacturing
jobs since 2000. US Manufacturing has lost jobs for a record 42 months
in a row. Today, in what is hailed to be recovery, US industry is
working at only 76 % of capacity, near depression levels. Goods are
being made in Asia instead. Asian central banks, especially in Japan
and China, in turn, support the US market, their largest, by buying US
Government bonds and such with their huge trade dollar surplus. The
effect of this is to create new jobs. Jobs not in America where they
are vanishing, but in Asia. The issue has become an explosive political
Housing bubble about to pop?
With real unemployment rising to near 11 %, wages stagnant or even
falling, it is not surprising that some families are having trouble
surviving. Personal bankruptcy filings are at a record high. And now
there are signs for the first time that, despite lowest interest rates
in 43 years, families are starting to have trouble paying their home
mortgages. Today the ratio of household debts to personal asset worth
is at an all-time high of 22.6 %. Many families are forced to work two
or even three jobs to pay bills, especially cost of the mortgage on
Home prices have climbed dramatically in the past 3 years as low
interest rates have encouraged banks to lend to even high risk
families. Government or semi-government agencies with names like Fannie
Mae or Freddie Mac take the risk off the hands of the local lending
bank onto the US taxpayer. For more than one hundred years, US banks
lent money for buying a home based on very conservative rules that
required a significant initial cash payment, usually 25-30 % of the
value of the mortgage loan, and proof that the family had collateral or
assets worth more than the home in event of payment trouble. Today,
using new financial derivatives and government guarantees, banks lend
without even thorough checks of credit. In some cases loans are for 125
% the value of a home. And the US Congress is planning to introduce a
law, 'The Zero Down Payment Act of 2004' that would allow certain
buyers to buy without a penny of cash first. They are playing with fire.
With interest rates on 30-year home loans at a 43-year low of 5.7%, and
banks throwing cheap credit at homebuyers, with no end in sight from
Alan Greenspan's generous credit policy, no wonder home sales broke all
records in 2003. The problem is that with unemployment rising and wages
stagnant, signs of an end to the home buying bubble are evident.
In Colorado Springs, one of the strongest areas in that state, mortgage
foreclosures, a process where the bank or government takes possession
of a house for non-payment, are at a 12-year high, up 21 % in a year.
The region has lost some 9,000 high-paid technical IT jobs since 2001.
In Portland Oregon, the rate of foreclosures is the highest in the
country, and in that single area each month 50,000 people are late
paying their mortgage debt. The reason is usually job loss. Nationally,
foreclosure rates are the highest since the deep recession of the early
Even in areas where rising home prices have been greatest, many
families are having difficulty. This is because cities impose property
tax based on market values of the home. In Seattle, home of Microsoft
and one of the strongest home markets in the nation, older retired
families are being forced to sell their homes that they have long owned
because local property taxes have risen too high to pay on their fixed
Families with too much debt have only three choices: increase income,
borrow more, or default and declare personal bankruptcy. Bankruptcy
filings are at alltime high levels. Yet interest rates remain at
historic lows. Once rates again begin to rise, and they must at some
point soon, if only to stop the dollar fall, economists fear a flood of
new bankruptcies and home mortgage defaults as families are unable to
pay rising interest costs. That in turn, would trigger a new wave of
unemployment, company closings, wage cuts and stock market failures.
The problem this time is that the US has already done everything it
could in normal recessions and more.
The Greenspan Fed has cut and cut like never. Jobs have vanished at
record rates and families have borrowed at record rates. There will be
perhaps one last spending binge as American families get a last tax
rebate from last year's tax cut stimulus this April.
This is an explosive mix. The period after November is pre-programmed
to be one of the most dramatic in US economic history. The Federal
Reserve will then try to print dollars like crazy to control the
collapse. The impact of the new US economic decline will be worldwide.
It will hit just as the first alarming signs of oil peak production
impact the world.