US Economy Falters as Obama Fiddles with Healthcare

Eighteen months have passed since the market break of 2008 got under way and it became necessary to provide emergency support for the large banks.  During this period, we have seen a progression of patchwork fixes to keep the global and American economies turning over.  This will continue and even the PIGS will have their own EU IMF to lean on.  To some degree it appears to be working in those jurisdictions outside the USA largely because their internal retail lending businesses were either weak to begin with or largely untouched.  Once recapitalized, they were eager to go back to lending and earn back their lost capital.

It is still a nervous recovery and this must last for a long time.  Institutions must digest their losses.  This must take several years and will often need recapitalization.  The large developing economies of India and China are having a period of welcome consolidation in which the huge internal markets can possibly be optimized for the next seven years.  They will surely emerge the better for it.

It is correct to suggest that global demand for goods and services outside of the USA is either stable or beginning to grow again.  This is a welcome development that will provide the capacity to fully repair the global banking system overseen by a newly chastened regulatory regime. It all looks sort of fixable even if certain basket cases like the PIGS will spend years in credit purgatory.

So time will fix it all and internal expansion will slowly sponge up exposed weaknesses. The developing world has discovered that while they were not looking, that their own economies had been modernizing and creating massive internal consumer markets able to carry things when the international banking system went into cardiac arrest.

The problem though is that the US economy remains anemic.  There are a number of reasons, both structural and fallout from the collapse of the mortgage industry.

1                    The mortgage industry has yet to be repaired.  On its own this will take several years and will impoverish US consumers for the duration.  It can be fixed in two years with proactive policies.

2                    The US needs to establish a VAT based tax system in order to level the playing field with all its trading partners.  This should be split between federal and state in order to refinance governments and displace less progressive taxes.

If nothing else is done such as providing loan guarantees to all alternate energy, the smart grid and high speed rail, the economy will still recover smartly with these two steps in place.

What make me terribly unhappy is that the contraction in financial liquidity is awful and internal demand is not good.  US economic contraction is presently still underway.  This suggests that a multi year slump could get underway coinciding with the looming collapse in local and State government revenues.  I see nothing to assure me that this can be averted.

And worse, I see political leadership that lacks any comprehension that this is the problem.  Herbert Hoover had the wits to be nervous as the contraction took hold of the 1931 economy.

So the question is whether or not the banks can keep all these balls in the air during a seven year contraction of the nation’s stock of wealth?

The USA has entered the zone in which a major depression is possible.  We even have a handful of morons in congress attempting to float a beggar thy neighbor tariff policy.  They must think that we need another twelve million unemployed.  And Obama is no where to be seen unless you think the healthcare bill will inspire new capital spending.