By Pam Martens and Russ Martens: August 1, 2016
According to the National Bureau of Economic Research, the Great Recession (that was brought on by the implosion of Wall Street) ended in June 2009. What we’ve been in since that time is supposed to be the “recovery” part of the cycle. But for tens of millions of Americans, it has been hard to tell the recovery from the crisis in terms wealth accumulation, wage growth, or ability to earn a decent rate of interest on savings.
On Friday the Commerce Department released second quarter Gross Domestic Product data, showing that the U.S. economy grew at a 1.2 percent annual rate. That tepid number came on the heels of an anemic 0.8 percent rate of GDP growth for the first quarter.
It has now been more than a decade since the U.S. economy grew at an annualized rate of 3 percent or better – the longest subpar growth stretch since the end of World War II.
Long stretches of anemic performance suggest that a “cyclical” situation may have given way to a “secular” or long-term trend. As a result, we are seeing the words “secular stagnation” used increasingly to describe the U.S. economy.
One of the first individuals to go on television and attempt to knock down the rosy spin on the recovery was Steve Ricchiuto, Chief U.S. Economist at Mizuho Securities USA. In February of 2015, Ricchiuto told a CNBC audience the following:
“…there’s also this wrong concept that I keep hearing over and over again in the financial press about this acceleration in economic growth. That isn’t happening. Last month we had a horrible retail sales number. We had a horrible durable goods number. We’re likely to have a very disappointing retail sales number coming forward. This month we’ve had a strong payroll number – we say everything’s great. It’s not great. It’s running where it’s been. It’s been the same thing for the last five years. There’s no improvement in the economy.”
We’ve had throughout this recovery an approximate two percent rate of growth. Now, averaging together the first and second quarters of 2016, we have half that rate of growth – one percent.
Former U.S. Treasury Secretary Larry Summers, whom President Obama attempted to muscle in as Federal Reserve Chair (thwarted by threats of revolt by Congressional Democrats) has been writing about “secular stagnation.”
In the February issue of Foreign Affairs, Summers had this to say:
“The key to understanding this situation lies in the concept of secular stagnation, first put forward by the economist Alvin Hansen in the 1930s. The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates. When significant growth is achieved, meanwhile—as in the United States between 2003 and 2007—it comes from dangerous levels of borrowing that translate excess savings into unsustainable levels of investment (which in this case emerged as a housing bubble).”
Summers was part of the financial deregulation swat team in the Bill Clinton administration that took an ax to the Glass-Steagall Act that had successfully separated insured bank deposits from the greedy hands of Wall Street speculators for 66 years. He was also part of the bullying crowd that protected derivatives from regulation. Both of these actions would lay the groundwork for the biggest Wall Street crash since the Great Depression in 2008.
At the November 12, 1999 signing ceremony for the Gramm-Leach-Bliley Act, the legislation that repealed the Glass-Steagall Act, Summers stated:
“Let me welcome you all here today for the signing of this historic legislation. With this bill, the American financial system takes a major step forward towards the 21st century, one that will benefit American consumers, business, and the national economy for many years to come…I believe we have all found the right framework for America’s future financial system.”
Summers is correct that the U.S. has entered a period of secular stagnation, but he is as wrong on his assumptions about what is causing it as he was wrong on his financial deregulation lunacy in the Clinton administration.
The late Lester Thurow, the prominent MIT economist, explained today’s problem almost 30 years ago. In a foreward Thurow wrote in Ravi Batra’s book, “The Great Depression of 1990,” Thurow explained the economic dilemma of a society in which vast wealth is concentrated in too few hands. Thurow wrote:
“Depression is seen as a product of systematic tendencies for the distribution of wealth to become concentrated among a few. When this happens, demand eventually sags relative to supply and long cyclical downturns commence. Unlike some cyclical analysts, Batra believes that such cycles are not inevitable and can be controlled with social policies essentially designed to stop undue concentration of wealth from developing.
“Essentially, the economic problem is like that of the wolf and the caribou. If the wolves eat all the caribou, the wolves also vanish. Conversely, if the wolves vanish, the caribou for a time multiply but eventually their numbers become too great and they die for lack of food. Producers need consumers, and if producers deprive workers of their fair share of production income they essentially deprive themselves of the affluent consumers they need to make their facilities profitable. One could think of Batra’s argument as a kind of economic ecology where there is a ‘right’ environmental balance.”
The depression that Batra wrongly had in mind for 1990 has become the secular stagnation of today. Its roots, beyond question, stem from concentrated wealth. Equally problematic, you are not likely to be reading about this in front-page newspaper headlines because the billionaires now own the major news outlets.
In the United States, almost 70 percent of GDP stems from consumption by the consumer. When workers are stripped of an adequate share of the nation’s income and wealth, they are crippled as consumers. This leads to corporate downsizing, plant closures, layoffs – which leads to even less consumer spending and a repetitive downward spiral.
This downward spiral has been slowed by three rounds of quantitative easing by the Federal Reserve and a more than doubling of the national debt. Had this massive flow of money not cushioned the fall, we would likely be staring in the face of raging deflation rather than secular stagnation. But the money spigot cannot remain open forever.
The staggering amount of money that the Federal government has thrown at a financial crisis manufactured by Wall Street speculators is unprecedented in the history of the country. When Bill Clinton took office in January 1993, the U.S. national debt stood at $4 trillion. The country was then more than two centuries old; had paid for the Revolutionary War, the Civil War, and financed a multitude of FDR programs to climb out of the Great Depression – caused by the 1929 stock market crash and the Wall Street speculators the prior time they had gotten their hands on bank deposits. The nation had also paid for World Wars I and II and the Vietnam War. Today, the national debt stands at $19 trillion. It has more than doubled since President Obama took office.
Reforming Wall Street and its institutionalized wealth transfer system that operates unabated as a result of the repeal of the Glass-Steagall Act needs to happen very soon before secular stagnation gives way to something far worse.