For several months now we have heard or read statements to the effect that the recession is over. There is so far very little evidence, if any, that this is indeed the case. At this point it would be useful to take stock and review what has happened to date and what the future may hold.
The recession started as a financial crisis that transferred to the real economy, in the process generating massive unemployment. As the downturn became more severe unprecedented measures were taken to stop and reverse the downward slide.
These measures were inspired by the analysis of the Great Depression. The main conclusion reached by the Federal Reserve was that in the 1930's the government had not provided sufficient liquidity to the banking system. Had this been done, the reasoning went, financial activity would have returned to normal, providing enough credit for economic growth to resume.
The prescribed cure for the current crisis was thus to insure that abundant liquidity was provided to the banking system. This was done through the printing of money, zero interest rates coupled with deficit spending, and a variety of programs and devices that provided abundant and cheap funding to the financial sector.
The expected result of these measures was to be a rise in the availability of credit, which in turn would lead to increased borrowing, spending, investment and other business activity.
To-date this has not happened. While the financial sector is awash in money, credit to the general economy has in fact significantly contracted. Except when temporary government subsidies have been available, economic activity is still at a very low level, with no sign of a significant improvement.
The above analysis of the Great Depression might have been correct as far as the nineteen thirties went, but in applying it to current circumstances a critical point was overlooked. Whereas the 1929 economy was national, the present one is integrated within a globalized financial system.
The key characteristic of this system is that capital can freely and instantaneously circulate around the globe. Under such conditions it will naturally move to where it will generate the highest return. U.S. authorities have injected trillions into the system, on the presumption that these funds would be mainly put to work in the United States, as they would have been in the thirties.
Conditions in the U.S., however, are not favorable to high returns on capital: interest rates are near zero, the economy is depressed, and growth is sluggish at best. Assets offering far better returns, be they foreign stocks, commodities, or currencies, are to be found all over the planet. That is where the money naturally flows.
The immense funds disbursed by the U.S. government and central bank have essentially leaked out of the country, leaving the national economy struggling, unemployment at high levels and prospects poor. But that is not all. Another pernicious effect is building up.
Budget and trade deficits, liquidity enhancements and the massive creation of money depreciate the currency, while all assets offering the best returns inevitably rise in value. Because of the sheer size of the U.S. economy and monetary mass, the outward flow of money generates dollar inflation wherever it finds something to acquire.
If the U.S. economy were strictly national, the wholesale increase in liquidity would produce internal inflation. The global financial system sees to it that this inflation instead occurs wherever our dollars end up: in foreign stock markets and property values, for instance, or in the dollar price of commodities such as oil and metals.
Since the U.S. imports far more than it exports, this outside inflation will eventually be imported as well. As the dollar depreciates and imports rise in price, domestic consumption will be choked off just at the time it begins to grow again. The U.S. consumer, being and feeling poorer, will further reduce spending, and the economy will remain stalled.
The entire anti-recession effort would have been for nothing. In fact that very effort will have ensured that the recession will continue into the foreseeable future. The only tangible results will be a much higher national debt, a devalued currency, and a financial industry even more addicted to short-term speculation.
What the country needs to recover is a strong emphasis on domestic investment, which alone will create employment. This is perfectly attainable, but requires a radical departure from the current policies.
Jacek Popiel was born in Poland and educated in Africa, Canada, and the US. His career spanned military service and international business development. He is currently a writer and his first book Viable Energy Now is available on Amazon and Barnes and Noble. For more articles and information: http://www.viableenergynow.com
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