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American Vote-Bank Politics and Great Credit Contraction

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The blog covers following topics:

  1. Dysfunctional America Driven Market Crash
  2. High Unemployment Rate
  3. Immigration  Policy
  4. Global Jihadi Terrorism and Extremism
  5. Bubbles driven Economy
  6. Housing Bubble and Great Credit Contraction
  7. References and Notes 

Dysfunctional America Driven Market Crash

American under Obama administration is politically dysfunctional. Republicans in general and Tea Party extremists in particular are totally opposed to the Obama healthcare reforms. They are, as per their ideology, also against the workers rights to unionize. In more than a dozen Republican governed states politicians are enacting legislations to retract workers rights laws to bust unions. For a brief overview of political ideologies to carve out vote-banks, etc by Republican and Democrat’s, see, references and notes.

Before the deadline of August 2 for raising debt ceiling politicians for several months argued against raising any taxes holding the administration hostage to a set of non-negotiable demands. Showing weak leadership the President essentially agreed to the Republican drafted legislations just before the end of August 2 to raise debt ceiling limit that in a long run will not solve America’s growing debt crisis.

The markets crashed on August 4, 5 and 8. In three days Dow Jones lost more than 1,500 points and in previous 10 days it had lost additional 500 points making a total loss of more than 2,000 points or 18% for two weeks.

Blaming political stalemate in Washington DC, the US sovereign credit ratings on August 5 were lowered by the S&P agency from ‘AAA’ to AA+ and a host of government-linked institutions, including mortgage service providers Freddie Mac and Fannie Mae.

The S&P agency’s credibility in 2008 was diminished, if not destroyed; it had stamped AAA ratings on rip-off mortgage backed securities cited for the crash of 2008. Public memories are short and speculators are out to exploit the opportunities with down grading of the US sovereign ratings. The rebuttal of the rating by President Obama did not reassure the markets.

Around the world, markets imploded because of the dangerous fragility of the global economy and Europe’s profound debt crisis. The timing of American crisis coincided with global economic uncertainties, adding fuel to the global fire. Countries facing economic problems need to increase consumer purchasing power by creating jobs. Improved job market is also the solutions for consumers burdened with the mortgage and personal credit card debts that have destroyed balance sheets of millions of households.

High Unemployment Rate   

Another pressing problem is lack of jobs for the blue collar workers. Unemployment rate is 9+%.There are plenty of vacancies for the highly skilled creative and innovative workers in technology driven sectors but not enough jobs for the blue collar workers. The unemployed workers seek non-existing manufacturing related jobs as they are not sufficiently trained for jobs offered by the technology driven businesses.

As of August 2011 there were 3 million openings in technology sectors with giant companies like Microsoft and Siemens to name two. These companies deliver high value computer and engineering goods. While these jobs go unfilled, number of unemployed is 14 million.

The number of Americans without full and part time jobs for last 3-4 years has steadily increased, not declined. One crucial measure is the ratio of employment to population (310 million in 2010). In June 2007 about 63% (195 million) adults were employed; in June 2009 it was down to 59.4% (184 million) and as of June 2011 the number was 58.2% (180 million).

It is not a rocket science to understand that less employment means lower revenues collected to run the government. The high unemployment rates also reduce consumer demands. America has over capacity for producing consumer products. The high wages for blue collar workers makes American products expensive relative to imported Chinese  products.

If America continues depending on Chinese imports to meet consumer demands then it may take a long time for appearance of sufficient and sustainable supply of jobs suitable for the blue collar workers. Under such job markets America is destined to economically decline.

The unintended consequence of exporting blue collar manufacturing jobs (1980-present)  to China, India and Eastern Europe, etc is that now for maintaining its established trajectory of growth Americans are required to study harder, invest wiser, innovate faster, upgrade the infrastructure quicker and work smarter.

America is in a slow decline and politically stalemated to make required changes to match the future it wants by duplicating its envious recent past (second half of last century). The slow decline is a product of two inter-related problems. First, its politicians are not enacting policies for enforcing the five basic pillars of growth – education, infrastructure,  immigration of high-IQ innovators and entrepreneurs, rules to incentivize risk-taking and startups, and government-funded research to spur science and technology.

For the school drop outs and those without college education it is obvious, in most cases due to a lack of adequate interest in education, etc these are impossible tasks. Most unemployed fall into this segment of Americans.

Given that unemployed Americans lack necessary intellectual preparations for creative technology driven innovations America is required to allow immigration of highly educated  creative foreign workers. American politicians are divided on the immigration legislation.

If high unemployment becomes a fixture of American life and if a decline in growth of economy becomes permanent, most likely the politics, culture, and the character of the US society may be adversely influenced for years to come. Given an economic decline, a stage will be set for multi-polar world.

Immigration Policy 

The vote bank rhetoric of politicians is against liberalizing immigration policies. Not only creative highly educated immigrants but also hard working job seekers – illegal immigrants – mostly from south of the border would like to legally be in America.

The existing legal frame work of America is such that with political nod or enforcement agencies looking the other way, the businesses do hire illegal workers with fake documents to take most of low paid seasonal farm work as Americans are not interested in such farm jobs.

Many illegal workers with fake documents are hired by small and large industries. The illegal workers are willing to accept lower salaries for otherwise high paying jobs required to keep American blue collar workers The vote-bank driven politicians have yet to figure out how to keep jobs of potential blue collar voters away from undocumented immigrants.

Many undocumented immigrants work as household services providers. The well-to-do as well as two income families appreciate the value of reliable household help at affordable prices. Many contractors in housing industry hire immigrants for construction jobs at wages lower than that demanded by the union workers. It is a politically unacceptable but business sense wise acceptable reality. The media have reported from time to time scandals of hired illegal domestic workers by want-to-be elected politicians and nominees to bureaucratic and judicial benches seeking congressional approvals.

Global Jihadi Terrorism and Extremism 

For a decade America has faced challenges from terrorism, extremism and jihadism. Neutralizing global network of al Qaeda terrorists is a war of necessity. Taliban co-linked al Qaeda ruled Afghanistan for years 1996 – 2001. The master-minds of the 9/11 terrorist attackers were in Afghanistan before they were driven out (2001-02) in the ‘War on Terrorism by heavy American bombings. The surviving Taliban and al Qaeda operatives have regrouped in the safe heavens of the Af-Pak tribal region.

It is taking more than a decade to stabilize the Af-Pak region as President Obama gave American and NATO troops in Afghanistan time until 2014 to stabilize it and handover defense to a well trained Afghan army of estimated 300,000 troops to counter potential threats from its neighbors. America must not forget the lessons and the consequences that followed the events of the 9/11 attacks by the al Qaeda terrorist trained in the Af-Pak region. If the Afghan army is not up to the challenges, American pull out from Afghanistan may offer an opportunity for Pakistan army and its surrogate jihadi Taliban to again roam freely in the Af-Pak region.

Bubbles driven Economy 

In last 30+ years America experienced two bubbles followed by two related financial busts. The busting of the dot.com bubble was serious and the present mortgage crisis is even more so. Venture capitalists created the dot.com bubble. American financial institutions created the mortgage mess and they are paying a serious price to stem the crisis they precipitated.

The government actions are forcing the financial institutions to resolve the crisis. The financial institutions actions are slow to resolving credit card and home mortgage loans for millions of unemployed Americans since 2007-09 crises. In the tough job market millions of unemployed home owners are unable to pay the debts. Credit card payment defaulters face bankruptcies and home mortgage loan defaulters force banks to initiate the mortgage loan foreclosure process.

With the securitized home mortgages without proper loan papers the banks have added additional pains to the process. Many home owners are victims of fraudulent actions by banks forcing them to leave home. Cleaning up the mess is taking a long time and causing avoidable pain to home owners.

Housing Bubble and Great Credit Contraction 

During the Bush administration period (2000-08) American economy was boosted with massive amounts to credit card holders as well as new home buyers, who in past were not qualified for such loans. This enabled millions to buy homes they could not afford. Housing demands created construction and retail jobs that required limited education. Europeans on other side of Atlantic Ocean also went on a similar binge.

All this debt blew up in 2008 in the United States and Europe, creating credit default problems. Homeowners, firms, banks and governments are all now “deleveraging” or trying to – meaning that they are saving more, shopping less, paying off debts and trying to dig out from mortgages that are under water. The behavior is inhibiting American economic growth.

Harvard Professor Kenneth Rogoff argued that America and Europe are facing Second Great (Credit) Contraction, not a Great Recession. According to Rogoff the global economy is badly overleveraged and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. For Rogoff’s explanation of a conventional great recession see the references and notes.

If Rogoff arguments are accepted the challenge is to deleveraging the economy as fast as, while, at the same time, getting back to investing as much as possible in the real five pillars of growth to build recovery by the sustainable businesses and not just on another round of credit injections.

Regarding deleveraging, Rogoff suggested, for example, that the government facilitate the writing down of mortgages in exchange for a share of any future home-price appreciation. Regarding growth, the need is for a much smarter long-term fiscal plan than the one that just came out of Washington. Spending cuts are needed in areas that will hurt the least. Tax increases are also needed in ways that will hurt the least (a gasoline tax rather than payroll taxes). Some of these revenues should be invested in the pillars of the growth, with special emphasis on infrastructure, research and incentives for risk-taking and start-ups.

If juggling all these needs at once sounds complicated, it is. Something this big and complex cannot be accomplished by one party alone. It will require the kind of collective action usually reserved for national emergencies. The sooner we pull together the better.

References and notes:

  1.  Vote-banks are cultivated by both parties in America. Republican ideology is driven by conservatives, evangelical fervor and loop-wholes imbedded tax structure tilted to benefit rich and very rich, etc. Democrats are for providing workers rights to unions and for a safety net of Social Security and Medicare, etc to protect interests of middle and disadvantaged classes.
  •  After WWII a robust American economy helped create a three class society with a top few percent (less than 5%) very rich that control about 50% of American wealth and rest of wealth is distributed among a majority middle class (about 80%) and disadvantaged class living in poverty. The poverty threshold for a family of  four is an annual income of $ 21,756 by the US government definition; see http://en.wikipedia.org/wiki/Poverty_threshold.
  •  In addition to the broad categories, both parties consistently try for political advantage by frequent redistricting for electing the party’s candidates. Immigration policies and laws are frequently manipulated. Most immigrants and union members aspiring to join middle-class generally tend to vote democratic.
  •  In addition to party affiliated voters up to 40% of voters are independents, who vote for politicians that promise resolution of issues favored by independents.
  • Most income taxes are paid by businesses, the middle and upper class rich. All American households pay sales tax, property taxes if property owners, indirect taxes on gasoline, etc and also state income taxes in more than 40 of 50 states.
  • American experience is that it enjoyed economic growth after each of two World Wars. America also was engaged in other wars in 20th century: Korean War, Vietnam War, and Cold War. After the terrorist attacks on two American cities – New York and Washington D.C. – America started a war of necessity in Afghanistan, a war of choice in Iraq (2002 – 08) and returned in 2008 to the Af-Pak region to conclude the war of necessity to stabilize Afghanistan with a democratic government and neutralize al Qaeda and its
    co-linked Taliban in the safe heavens of Pakistan.
  • America has announced that American and NATO forces will leave the Af-Pak region by 2014 provided it is sure that it is no longer threatened by jihadi terrorism and extremism. Some facts and observations to consider follow:
  • Contrary to claims otherwise, since 2001, economically America is losing ground judging from its rapidly rising public debt, substantially decreasing revenue collections, high unemployment rates and busting (2007 – present) of housing and consumer markets bubbles and associated bubbles in the financial markets.
  • International economy, especially in America and Europe, is severely shrinking as a result of the “great credit contraction” of 2007 – 09. Defaults by nations of South Europe are on the rise andAmerica is not far behind these defaulters.
  • Concerned economists are raising a possibility of the repeat of 1931 type great depression for America and Europe and any economy such as that of China that is co-linked. For last ten years with the on-going
    Af-Pak warPakistan is also to a degree co-linked to American economy.
  • World has witnessed WWII (1939 – 44) before the global economy turned around.
  • America’s public debt increased from less than $6 trillion in 2000 to $14.7 trillion in 2011 and it now continues to increase at a rate of about $2 trillion a year.America took a $6 trillion dollar hit between 2007 and 2011.
  • Forty cents of every dollar US spends in 2011 is borrowed money; some now view theUS as a parasite on global economy.

 

  1. Following the actions of August  2, 2011 on its debts ceiling, confidence in stability of the US Treasury Bonds has slipped; China downgraded rating from A+ to A.
  • Judging from a fact that in a decade America has spent $4 trillion on two wars or about $400 billion a
    year. Coupled with losses in market crash of 2007 American treasury is rapidly getting exhausted.
  • Terrorists continue to attack American forces in Afghanistan and are threatening to repeat the even of 9/11 from their safe heavens in thePakistan.
  • India already witnessed second terrorist Mumbai attacks on7/13/2011; the first was Mumbai massacre of 2008.
  • America may take action against Pakistan. Since America is denied facilities for drone attacks as well as CIA
    intelligence gathering missions byPakistan in the Af-Pak region,America may be forced to teachPakistan an economic lesson. Your guess is as good as mine.
  • My guess is that America may consider attacking Pakistan’s financial centers to cripple its economy further to force it to fail. Such a military action will not only cripplePakistan but accelerate its downfall as a failed state.
  • A failed Pakistan next to India is bad news forIndia.
  • A key to current American economic problems is to extricate itself from potential wars. Another key is to provide manufacturing jobs for 9+% unemployed workers that are skilled but not technology-wise elite.

 

  1. Once a political system reaches stalemate and is incapable of responding to challenges faced by a nation, markets react negatively. A riskier credit profile generally leads to increase in borrowing costs. The S&P on August 4 directly blamed the politicians.  Markets reacted on August 4, 5 and 8. S&P down graded:
  •  Credit ratings on 10 out of the 12 Federal Home Loan Banks (FHLBs) in the country, as also for the FHLB System from ‘AAA’ to a notch below at ‘AA+’. The two remaining FHLBs of Chicago and Seattle were
    already rated ‘AA+’.
  • The ratings on Fannie Mae and Freddie Mac were lowered to ‘AA+’ from ‘AAA’.
  • The rating agency also lowered the ratings on as many as 126 Federal Deposit Insurance Corp-guaranteed
    debt issues from 30 financial institutions under the Temporary Liquidity Guarantee Program (TLGP) and four National Credit Union Association-guaranteed debt issues from two corporate credit unions under the Temporary Corporate Credit Union Guarantee Program (TCCUGP) to ‘AA+’ from ‘AAA’.

 

  1. Kenneth Rogoff,  “The Second Great Contraction,”  http://www.theglobeandmail.com/news/opinions/opinion/the-second-great-contraction/article2117504/
  • “In a conventional recession,” Rogoff noted, “the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend. The aftermath of a typical deep financial crisis is something completely different. … It typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. … Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a ‘Great Recession.’ But, in a ‘Great  contraction,’ problem No. 1 is too much debt.” Until we find ways to restructure and forgive some of these debts from consumers, firms, banks and governments, spending to drive growth is not going to come back at the scale we need.

 

  1. Don Peck, “Pinched” Crown (August 9, 2011); ISBN-10: 0307886522
  • How the Great Recession Has Narrowed Our Futures and What We Can Do About It?
  • The Great Recession may be over; this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults, leave an indelible imprint on many blue-collar men, could cripple marriage as an institution and may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp the politics, culture, and the character of our society for years to come.
  • Don Peck, “How a New Jobless Era Will Transform America?”  http://www.theatlantic.com/magazine/archive/2010/03/how-a-new-jobless-era-will-transform-america/7919/

 

  1. Kishan Bhatia, “Global Economic Powers Comparison America, China And India(3,553 words); http://www.indiacause.com/blog/2011/08/06/global-economic-powers-comparison-america-china-india/
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