Economists will scoff at the question in the title. But that`s because they are trying to fit the present into the past.
In the past recoveries were routine, because recessions were temporary restraints resulting from the Federal Reserve putting the brakes on an overheating economy. By restraining the supply of money and credit, the Fed caused inventory buildup, layoffs, and a halt to price rises and union wage demands. With the economy cooled by unemployment, the Fed would take off the brakes. Interest rates would decline, money would flow, consumer demand would rise and workers would be called back to the factories.
In those days, when workers borrowed to spend, they were borrowing against rising real wages from rising productivity. In economic downturns, few workers actually lost their jobs. They were laid off from their jobs for temporary periods. Workers seldom lost their homes or cars, thanks to union funds and unemployment benefits.
Today the situation is
different. In the 21st century real wages have
not risen. Workers have spent more by
accepting deteriorating household balance sheets.
They have maxed out their credit cards and spent the
equity in their homes. Imitators of the
The expansion of household debt relative to income created the illusion that the economy was sound. But the consumer economy was as much of a credit-based bubble as the real estate bubble and the financial sector bubble. The economy has lost its real basis.
Today it is difficult to stimulate consumer demand by lowering interest rates. Consumers are too heavily in debt to borrow any more. Financial institutions are too impaired to want to lend to anyone except those who don`t need to borrow. As the Keynesian macroeconomists used to say: "You can lead a horse to water, but you can`t make him drink."
And there`s another problem.
Much of what American consumers purchase today is
made offshore. Stimulating consumer demand in
How does an economy consume more than it produces? Previously, this question applied only to poor Third World countries. These countries would consume by the grace of World Bank loans. From time to time they would pay for their consumption by being put through an IMF restructuring program that would curtail their consumption to make them repay their loans by forced saving.
This ability might be coming to
an end. The
Economists and the
policy-makers they advise are thinking in the past,
a time when low interest rates stimulated consumer
and investment demand, thus lifting the economy.
Today the low interest rates threaten the
dollar, discourage foreigners from lending more to
In the second half of the 20th
century, American economic supremacy was a gift of
World War II, which destroyed the productive
capacity of the rest of the developed world.
American economic supremacy
also owes much to communism in
The situation is different
today. Unlike the
Now that its supply route to
feed its war of aggression in
What we are witnessing is a once great power engaging in fantasy to disguise from itself that it is a failed state.
Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan`s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider`s Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow`s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.