The upheaval in financial markets has left many Americans stunned. How could this have happened? Even worse, how could this have happened with so few people giving us any kind of warning that it was possible? I certainly did my best to tell everyone, but in the end there’s only so much anyone can do. Now I’d like to explain why I think this happened and why the Five Crises are so tightly related – and what we can guess this will mean in an election year.
To begin with, we need to look at how economic growth since 2001 has been driven by government spending. When George W. Bush took office, the budget he inherited was based an economy with a GDP of $10.2 trillion and a total debt of $5.8 trillion. That’s where we ended fiscal 2001, in October of that year. But we all know what happened at the end of that period, as the 9/11 attacks created a recession and a new war.
Since that time, the economy has grown to an estimated $14.4 trillion, but the debt will be at least $9.6 trillion if only $300 billion of the rescue plan is realized in October. That works out to an annual compounded growth of 5.1% in the economy but a full 7.5% in debt. By year, it breaks down like this:
Real growth in the economy has hovered between 1 and 2 percent since 2001, after the effects of excess Federal spending are taken out. Sometime this year, the net growth has plummeted to less than the Federal outlays, taking the bailout partially into account. Real growth after this effect is on the order of –2.0% and falling.
This chart shows that there has been little real growth in the economy, and that the Recession of 2008 looks much more like a Depression, at least in terms of the magnitude of the contraction. Once the full $700 billion bailout is taken into account, nominal growth less Federal excess will likely be on the order of –4%.
This is not a significant problem in itself. After all, Keynesian Economics is the process of the Federal government injecting money into the economy during a downfall to lessen the effects. The problem here is that this Recession has been made so painless that the restructuring common to recessions has not taken place; it’s just business as usual. In addition, the bailout comes to over $6,200 per household, compared to the $700 “stimulus checks”. The priorities have clearly been tilted towards protecting the weak financial sector and keeping the party going on rather than real economic reform that will make a strong recovery. That is why the proposed authorization for the bailout contains language to restrict the ability of anyone outside of the Executive Branch to monitor or otherwise counter the plan (Section 8).
If we are already in something like a Depression, why haven’t we heard this from the candidates or the press? The reason is subtle, but important. This has been kept from us so far and voters are unlikely to reward the bringer of bad news. Consider for a moment the platform that FDR ran on in 1932. This has a shadow of the reforms that the New Deal brought, but only barely. One plank even calls for a balanced budget, and another for free trade. Social Security is called for as a state program. If FDR could not honestly tell people what was coming, what can we expect in a time where we have yet to even admit we have a potential Depression on our hands?
Do not expect frank speaking through this election. What comes along in terms of additional failures and the potential remedies will be something of a surprise, unless you learn how to read the signs. This is an inside game, but the dice that are being rolled tell the future of this entire nation. Stay alert.