Why US stimulus can’t fix unemployment
Why US stimulus can’t fix unemployment

A great post by Richard Alford on Naked Capitalism showing why the US is in a mess and can’t stimulate itself out of it. The key paragraphs being:

“From 1996 to 2001, the effect of the growing trade imbalance on output and the labor market was masked by the irrational exuberance of the tech bubble and the transitory increases in investment and consumption that it drove. When the tech bubble burst, the drag from the trade deficit remained and the US experienced a recession even though final sales to domestic purchasers exceeded potential output.

Post the crash of 2001, the US authorities employed economic policy accommodation to close the output gap. The Fed lowered the targeted Fed funds rate to 1%. It stayed there for 18 months and was then ratcheted up slowly over 17 FOMC meetings. The private savings rate approached zero. The budget deficit grew and the cyclically adjusted fiscal budget became decidedly negative and has remained so.

The stimulus narrowed the gap. However, there was a dark side to the attempt to achieve full employment via stimulative domestic policy. Given the trade deficit in 2005 (the only year in which the output gap was closed), US based economic agents had to demand/spend on final goods and services $1.0572 for every $1.00 of income. Full employment was accompanied not only by an unsustainable external deficit, but also unsustainable asset prices, private debt levels and levels of consumption (and savings) relative to income as well as higher public debt levels. When the public’s willingness to increase its debt load waned as real estate prices fell, consumption, economic activity and employment fell along with it. We are now experiencing balance sheet recession and existing debt levels appear to be a barrier to increased private and public sector debt-financed demand.

Most troubling, but not surprising, the trade deficit is growing again and is unsustainable at about 3.7% of GDP. The external imbalance is not a temporary phenomenon. The simple and sad fact is that an unsustainable trade deficit implies that full employment levels of GDP are also unsustainable”.

The malinvestment needs to be removed. People and money need to be put to use producing things people actually want to buy. That is the only realistic way for the US to get out of the mess it is in. Anything else is a mirage and if it delays the realignment through debt funded consumption, it makes the eventual reckoning worse. Money spent bailing out bankers and used by them on bonuses was money America needed to feed its people. Already 1 in 8 Americans, almost 40 million are on food stamps. They have a long way to go, once they start moving in the right direction.