In the process Reich illustrates how air dropping money on the financial sector, combined with favorable legislation, has - as Joseph Schumpeter might say - created a group of market players who would rather play monopoly rather than build them. Here's a few of the indicators Reich is looking at:
* GDP Growth Up to 5.9%? Chalk it up to factors like rising health care prices, bailout/stimulus cash inflows, and rising government expenditures.
* Growing Sales for Companies in the Standard & Poor 500 Index? These guys are global, and selling to the fastest growing markets in the world (e.g. India, China, and Brazil).
* Fatter Profits? Bigger profits are a product of companies cutting both jobs and capital expenditures. Fewer expenses in the short-term equals more profits.
* Corporate Debt (bond) Sales Up? Two points. The money is borrowed cheaply (the Fed is keeping rates down). Second, they're using the money to acquire other companies and to buy their own stock back. The first means more layoffs (to cut redundancy), while the latter boosts executive compensation packages by pushing stock prices higher.
These developments do little for Middle Class America. More importantly, they make it clear that economic activity alone does not necessarily translate into better prospects for everyone in the economy. Why? Because structural changes in the economy have created a market system that focuses on rewarding financial activity rather than actual production. Favorable legislation, bailouts, and cheap money are at the heart of all this.
Making matters worse is that small businesses - the real heart & soul of America's econmy - are falling behind because they have to sell in a domestic market made worse by a lack of credit, job loss, and lagging consumer confidence. To be sure, U.S. household debt (which includes mortgages and credit card balances) fell 1.7% last year. This is the first drop in consumer debt since 1945. But all is not good on this front either. Reich reminds us:
Much of the debt-shedding has been through default – consumers simply not repaying and walking away from homes and big-ticket purchases.
Reich ends by noting that once the stimulus spending is over, and the Fed begins to tighten credit, we're looking at an already difficult situation getting worse ... but only for America's middle class. He writes:
Where will demand come from to get Main Street back, create jobs, raise middle class wages? Not from big businesses. Certainly not from Wall Street. Not from exports. Not from government.
Think about it. Wall Street is thriving, yet middle class America is in bunker mentality mode. Big business is borrowing and has access to all the money they need, yet there are no jobs (so much for supply-side economics). Exports? Forget it, we've been up-side down for decades. Finally, the government is already spending at a record clip, but it's misdirected and Americans are getting tired of who's getting the cash (it's one of the greatest transfers of wealth in human history). What we're seeing in America is wealth extraction, not wealth creation.
Long story short. The recovery is a sham. Read the article for the details.
- Mark
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