2010: The Year of Severe Economic Contraction

Upbeat reports in the financial media, belie the effects of the ongoing credit contraction. Massive injections of central bank liquidity have prevented the collapse of financial markets, but have done little to ease the deleveraging of households or stimulate activity the broader economy. The crisis has stripped $13 trillion in equity from working families who now find their access to credit either cut off or severely curtailed by the same banks that received hefty taxpayer-funded bailouts. The fiscal strangulation of the millions of people who are no longer considered “creditworthy” is progressively weakening demand and spreading pessimism across all income levels. Growing public desperation was the focus of a special weekend report by Bloomberg News:

Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery. Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.

The economy is the country’s top concern, with persistently high unemployment the greatest threat the public sees. Eight of 10 Americans rate joblessness a high risk to the economy in the next two years, outranking the federal budget deficit, which is cited by 7 of 10. An increase in taxes is named as a high risk by almost 6 of 10.

Fewer than 1 in 3 Americans think the economy will improve in the next six months…. Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September.

The near-delirious optimism that followed the 2008 presidential election has fizzled in less than 12 months. While the policies of the Obama administration have improved Wall Street’s prospects for record profits and lavish bonuses, ordinary working people continue to fight to keep their jobs and maintain their standard of living. Recent data show that household debt which surged during the boom years is being pared back at a historic pace. Household debt to disposable income has plummeted from 136 percent to 122 percent in a little more than a year, leaving many families with little to spend at the malls or shopping centers.

Severe retrenchment has triggered a shift towards personal thriftiness which is reducing economic activity and strengthening deflationary pressures. 2010 is likely to be even worse, as mushrooming foreclosures and commercial real estate defaults force banks to slash lending accelerating the rate of decline. This is from Bloomberg:

Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market…

Foreclosure filings exceeded 300,000 for the ninth straight month in November, RealtyTrac said today. A weak labor market and tight credit are “formidable headwinds” for the economy, Federal Reserve Chairman Ben S. Bernanke said in a Dec. 7 speech in Washington. The 7.2 million jobs lost since the recession began in December 2007 are the most of any postwar economic slump, Labor Department data show. Unemployment, at 10 percent last month, won’t peak until the first quarter, Quigley said.

The Obama administration’s $787 billion stimulus pushed GDP into positive territory for the first time in more than a year, but the maximum impact has already been felt. President Obama–under advice from his chief advisors– has shifted his focus from soaring unemployment to long-term deficits. Additional stimulus will be no more than $200 billion, of which, a mere $50 billion will go towards jobs initiatives. At the same time, Fed chair Ben Bernanke will terminate the quantitative easing (QE) program which kept long-term interest rates low while providing financing for the housing market. When the program ends, rates will rise, housing prices will tumble, and liquidity will drain from the system. The end of QE coupled with dwindling stimulus ensures that economy will slide back into recession in the 2nd or 3rd Quarter of 2010.

Policymakers have decided to create conditions that are favorable to financial sector consolidation and the further privatization of public assets. The economy is being strangled by design.

Here’s economist Mark Thoma explaining why consumption will not return to pre-crisis levels:

For the immediate future and likely for much longer than that, slow consumption growth is expected. One way that could change is if the government implements a successful jobs program or uses some other means to increase household income (e.g. a payroll tax cut), and households spend rather than save the extra income…, but the political environment makes a jobs program or further fiscal policy action highly unlikely.

Similarly…the Fed is anxious to unwind its massive policy intervention, not extend it, so monetary policy is unlikely to help much either. Since monetary and fiscal policy authorities are unwilling to provide further help, slow growth is the best outcome we’re likely to get.1

Along with flagging consumption, economists Antonio Fatas and Ilian Mihov show why both investment and employment will not rebound in the way that many bullish analysts expect. By tracking the rate of recovery in the last 5 recessions, the two economists show that demand will remain flat for a prolonged period of time, precipitating a “jobless” and “investmentless” recovery. Their research supports additional stimulus to reduce the output gap and engage the labor force in productive activity. The administration’s policies are the exact opposite of the majority of professional economists who believe that deficits need to increase to effect overcapacity and under-utilization. Obama is deliberately steering the economy into a double-dip recession.

While financial institutions have been propped up with zero-rates, myriad lending facilities and boatloads of Fed liquidity, the real economy continues to on a downward path. As households rebalance accounts and increase savings, the signs of distress are becoming more apparent. In Europe, the ECB and IMF have begun to use the financial crisis to wrest control of the budgets of deficits-plagued nations to apply business-friendly austerity measures. The economic meltdown–that was generated by over-leveraged banks trading dodgy investment paper–is now being used to assert corporate/bank control over sovereign nations. Greece, Ireland, Iceland, Ukraine, Latvia, Lithuania, Portugal and Spain are all presently in the crosshairs of neoliberal restructuring. Surely, the same policies will be applied within the United States under the guidance of supply-side economist and chief advisor to the president, Lawrence Summers. Thus, in 2010, economic contraction will continue to force state and local governments to lay off millions of more workers while public assets and services are made available at firesale prices to private industry.

Debt deflation and deleveraging will continue into 2011, while foreclosures, personal bankruptcies and defaults continue to mount. The public’s frustration with ineffective government policies, is likely to change from pessimism to rage on short notice. The prospect of social unrest or sporadic incidents of violence can no longer be excluded.

  1. Mark Thoma, “Will Consumption Growth Return to Its Pre-Recession Level?moneywatch.com []

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

9 comments on this article so far ...

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  1. Michael Kenny said on December 16th, 2009 at 10:40am #

    An amusing use of a propaganda technique to take a swipe at the EU, even though the article otherwise deals entirely with the US. The EU is never mentioned by name but its central bank is linked to the IMF, as if both were institutions of the same kind. The dastardly cads are naturally trying to ” wrest control of the budgets” of ” sovereign nations”. There follows a list of countries, with EU Member States mixed in with non-memebrs, as if there was no difference between them. Clearly, rabid defenders of the American Empire like Mr Whitney (or, since he’s bombarding us with several articles per day now, whoever actually wrote this piece) are really scared of the EU and its euro!

  2. Don Hawkins said on December 16th, 2009 at 10:51am #

    Mike you have been right on this for a number of years. It does make sense what you wrote so this is the big plan. What a concept and as assets and services are made available at firesale prices to private industry will that include local police and State? Let’s see Xe pronounced Z. Oh dear just on the off chance this could happen.

  3. harry canary said on December 16th, 2009 at 11:55am #

    The point Mr. Whitney is making is not to swipe at the EU or any notional government. He is making the point that the current economic contraction will be used by banksters and the inherited money capitalists to extort resources from the real economy as has been IMF policy in the third world for several decades. This procedure is being ramped up to the former first world, both EU and United States. This has been amply documented in Naomi Klein’s Shock Doctrine and John Perkins’ Confessions of an Economic Hitman.

    Those of us in the real, productive economy are being relieved of our pensions, medical care and other resources in order for the investment banksters to continue to pay out shockingly high bonuses. I believe whoever is pretending to write under the name of Michael Kenny (Since we are being bombarded by several comments a day) realizes this and is just a group of paid shills pretending not to understand.

  4. joed said on December 16th, 2009 at 3:08pm #

    why do you people even pretend to care about this economic disaster?
    you folks are like the lady whose kitchen oven cought fire so she called the fire dept.
    fireman says, lady just put some water on it.
    lady says, i did that but it is still burning.
    fireman says, sorry lady but that’s all we could do is put water on it.
    my point is, why aren’t you guys making a general strike or boycott or something. seems you would get tired of whinning and crying here in the FREE SPEECH ZONE.

  5. Annie Ladysmith said on December 16th, 2009 at 8:20pm #

    There is no upbeat nonsense that is going to change this picture. We are half-way down the slippery slope and building momentum for the crash that IS at the bottom of the pit. THEY HAVE 800 FUCKIN’ FEMA CAMPS IN THE US, how can the future look in any way “upbeat”. What do you think these camps, with incinerators, ARE FUCKIN” FOR????
    Our future is not bright, our future is enslavement or death, whoever cannot read this writing on the wall is STUPID.

    IT IS NOT A ‘CURRENT’ “ECONOMIC CONTRACTION”, IT IS A WORLD CATASTROPHIC ECONOMIC COLLAPSE WHICH WILL AFFECT EVERY MAN, WOMEN, AND CHILD, most are not going to make it out alive never mind their fuckin’ retirement packages.

    There is BIG-TIME TROUBLE coming on the world, if you stick your head in the sand you will be swept along with the system which will put you in a grave for the DEAD. WONDER, THINK, PRAY, REPENT, the Creator of the Universe does not sleep and his wrath is coming on all flesh. The only way out is THE WAY-YESHUA, He is, especially in this day, the only true SANITY you will find living in a world system that is completely and utterly MAD.

  6. Sanford Calef said on December 16th, 2009 at 10:42pm #

    Since all the folks making these disasterous policies are pius Chrisitians I don’t think YESHUA is the way. If anything, a distraction.

    In a race to the bottom it pays to be short.

    So if we can’t get more in the coming year best make do on less. Odd thing about deflation. If you actually do have a job everything gets cheaper. Flat screen TVs which used to be priced at a month of my pay now can be bought with a week’s pay. Rent in my area has gone down. So have hotels and motels. The only thing pricey is homes. Which are propped up by the banks trying to keep forclosures off the market. Once that becomes unsustainable, I may buy a house again. Get a bigger one for less than the old one I couldn’t afford.

    Now if I could only heat it…

  7. Annie Ladysmith said on December 17th, 2009 at 1:54am #

    Dear Calef, I’m not sure who you are talking about when you say “the people” making the “policies”. #1) These are not “policies” these are who lives and who doesn’t that is not a policy but genocide, #2)the elite who actually run this world system, are old tribal-family scions of European society who believe they are the choosen and therefore the illuminated Ones, they are anything but, and #3) you’re obviously a stupid jackass so don’t bother me again with your twitter crap.

  8. Don Hawkins said on December 18th, 2009 at 7:54am #

    I am putting this comment with Mike’s article because it does have to do with the economy. There is a man named Dylan Ratigan on MSNBC his show is called Morning Meeting on at 9 in the morning. This man has moved into the light big time and what he did this morning was one of the best I have seen in a long time. He had on a so called policy maker and Dylan knows where the wild wind blows on the economy and the markets and a few other subject’s. He asked some very hard questions to this policy maker and this policy maker could not answer those questions. It’s starting calm at peace the truth the knowledge.

  9. Don Hawkins said on December 18th, 2009 at 8:58am #

    A credit card here in the States with a $200 credit limit and the interest is only 79.9% interest yes I think it’s starting.