Wednesday, 3 August 2011


The US raised the debt ceiling by $2.4 trillion to hold off any crisis until after the election of 2012, and the cuts coming on the backs of the middle class and labor will be $7 trillion - not the expected $10 trillion if taxes were raised on upper income groups. What a victory indeed for the Tea Party, and what a disaster for Liberal Democrats who promised the stars and delivered a paper moon.

It is indeed ironic, given that the day of the deal, some corporations were reporting quarterly profits higher owing to lower taxes, but the stock market plunged owing to a drop in consumer confidence. Although government is continuing corporate welfare policies, as the fiscal measures of US and EU clearly indicate, the markets are not ebulliently enthusiastic as one would expect. Not just the US markets, but world markets are not sure what to make of the US raising the debt ceiling on the backs of the average American, while continuing to treat the privileged social class as sacred.

Why the pessimism in the markets? Is it because the rating agencies have threatened a downgrade of US bonds; is it because the EU periphery public debt problem has already impacted French and German banks; is it because investors see a slower than expected recovery; is it that consumer demand will keep profits in check for the balance of the decade; is it as some right-wing analysts warn that US will be just like Greece in a couple of years, namely, a de facto default situation; is it because the US is using the dollar as a reserve currency and it is enjoying a parasitic economic rise as Vladimir Putin admonished?

In previous postings, I have argued that there are a number of converging factors that will result in a double-dip recession toward the end of 2012-moving toward 2013. The markets are discounting the inevitable downturn in the economy now and taking no chances, unless of course the real economy and public finances take a positive turn for some reason.

How can the real economy and public finances improve?  Is it the IMF-Tea Party prescription of draining the middle class and labor classes to the detriment of killing consumer demand? Just as the IMF-Tea Party answer is political and not 'objectively economic' as apologists of free enterprise argue, so is the answer political on how to achieve healthy and sustainable growth that would keep a strong middle class.

Governments would have to absorb the massive surplus capital -$2 trillion in US corporations alone - and use it to stimulate horizontal economic growth based on job growth and higher wages. The illness of the economy is super concentrated capital; the solution is for the state to absorb such capital and restore faith in the faltering credit economy. This cannot happen as long as politicians of all stripes take the campaign money of the wealthy who insist on super-concentration of capital. The result will be an inevitable double-dip recession. In the end, the problem with perpetual recessionary cycles is that they undermine the social fabric and public confidence in 'democratic' institutions.

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