Friday, 10 June 2011


Whether Obama wins re-election or a Republican candidate manages to defeat the incumbent, the US economy will languish from 2013-until 2017, owing to structural problems with the weak currency, balance of payments deficits, immense public and private debt, and intense competition from Asia. There are signs today that the US economic recovery may take much longer not necessarily because the public sector as many economists argue - both federal and state governments are swimming in red ink - but because of the immense private sector debt and a huge drop in home equities. 

The average home equity in the US has dropped from about 60% ten years ago to 38% in 2011. Although asset values for Americans stand at $58 trillion in mid-2011, those numbers are deceptive because average household wealth stands at 11.5% below 2007 levels, and most of the increased worth since 2009 represents stock market rises since 2009, when in reality the real economy is lagging and unemployment remains above 9%. Moreover, US household are in the red for $11.5 trillion, a number that has risen considerably from last year (2010). This does not signal a quick or robust recovery for the next three to five years, and the IMF has already predicted that by that time (2016), China will have surpassed the US as the world's number one economy.

With housing prices remaining low, suffering the lowest drop since the 1930s, and in most cases continuing to drop, equities are also dropping and paper assets remain very low for the average American household. This is partly due to the regressive fiscal structure that is designed to sustain welfare capitalism and a strong defense. More than half of homeowners are continuing to swim in debt or near debt levels, which means that they have no disposable income for discretionary consumer spending. An estimated 4.2 million mortgages are delinquent, of which more than two-thirds have not been paid for a year. As long as the high level of foreclosures continues, the housing market and all derivative industries cannot recover from this lingering recession.

With consumer spending representing 70% of the economy, it may take a few more years before we see a real recovery and structural unemployment below 5%, especially considering that private household debt amounts to 119% of disposable income, or $119,000 on everything from mortgages to credit card debt. Having received the message that the credit economy is destructive for the average American, middle class and working class people are reducing debt; that is, if they have not fallen victims to foreclosures already.

While we generally experience economic growth during an election year, this may not be the case for 2012. Although there will be enormous spending by political campaigns in 2012, federal and state government spending will be limited owing to inordinate debt and the need to contain it so that the dollar can maintain its relative value as a reserve currency. This spells slow growth for the next five years, with emphasis on export growth and paying down debt, instead of consumer-led growth.

Regardless of who wins the White House, Senate and House in 2012, the US economy will remain structurally weak. It can make a comeback, but it would require massive defense cuts, massive cuts in welfare capitalism, jobs-oriented economic growth, and the state absorbing surplus capital from the private sector and using it to stimulate horizontal economic growth by strengthening the middle class and workers. This is not a prescription that either the Democrats or Republicans will follow, so the result will be downward social mobility continuing for the rest of the decade.

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