June 18, 2009
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The Exportation of American Prosperity and the Phantom Economic Recovery By  Rauf Naqishbendi

It all depends on to whom one listens. There are many economists claiming that the bad news is behind us and the economy is in recovery mode. Banks have passed the Stress Test initiated by the federal bank regulators and so accordingly appear to be in good shape. Most major banks have reported last-quarter earnings which surprisingly beat Wall Street’s expectations. The Stock Market recently enjoyed one of its all time record gains in nearly eight decades when it rebounded 40% from its March low as measured by the benchmark S&P 500. Also, many economic observers believe that the decline in the housing market has bottomed or is about to bottom. Consumer confidence inched up last month. The rate of job loss is in decline. Credit market stringency has substantially eased. Inflation, so far, had been well behaved and relatively tame. If these improvements in the economy hold true, then the recession is or is about to be over. But is this rosy portrait of the economic landscape accurate?

To begin, Stock Marketeet gains are often disconnected from the true economy. For instance, the stock market showed profitable gains during the 1991 recession while the overall economy continued to decline. This disconnection is in part the result of one simple fact.  The stock market gyration depends primarily on investors’ sentiments. Furthermore, it is also true that the economy may show growth by certain measures while the populous sentiment remains recessionary.   In the case of the populous sentiment, whether or not it will change depends on where the economic growth is generated and who most benefits from that growth.  The health of the nation’s economy is reported through a host of government statistics pouring in periodically. The accuracy of  these numbers and the methods by which they are derived are debatable. Take for example unemployment rate which is greatly influenced not so much by what is included, but more so by what is excluded.  

The apparent solvency of major American banks and their resilience to further financial meltdown is assessed by the federal bank regulators through the “stress test.”  Based on its name, the public might easily conclude that the test is quite stringent. However, those within the banking industry privately refer to this test as the “feather test.”  Banks were able to report impressive earnings, these reports really serve as more of a trick than a treat. The trick is that the banks were allowed to report earnings without writing off bad assets,  referred to as “toxic assets,” but now to reassure depositors and instill confidence, they have renamed them “legacy assets.” Sadly, this sleight of hand will not lessen the fact that hundreds of billions of dollars of dead or undervalued loans remains in the banks’ misleading balance sheets.  Ironically, this is the same phenomenon that hit the Japanese banking system in the late 1980’s. During this episode, the U. S. frequently expressed its concern with this practice and repeatedly urged the Japanese to reform their banking system.  Now it is us and China. 

A rational look at the real estate market reveals a disturbing picture. Housing prices have been taking a downturn.  The inventory of unsold houses is high and the demand is too low to absorb this high inventory. Additionally, the rate of foreclosures is outpacing the rate of purchases.  With unemployment on the rise, the situation can only get worse.  Increased unemployment leads to more foreclosures and a smaller pool of buyers who can afford to purchase homes. Furthermore, the difficulties in the housing market are intensified by shadow housing, which is the term for those home owners who would otherwise be willing to put their properties on the market but are reluctant to do so because they cannot reasonably expect to make a profitable sell. The recent rise in interest rates only adds another obstacle in the recovery of the real estate market.   

The unemployment rate registered 9.4% for the month of May as reported by the Bureau of Labor Statistics. The U. S. economy lost approximately 346,000 jobs last month.  This number represents a reduction in job loss from the previous month of nearly 200,000. Does this mean the economy is getting better or that the job market is improving? Sadly, the answer is nay. The truth is that the economy is incapable of creating new jobs. This trend can be expected to extend into sometime next year. 

Clearly, the purported economic recovery is merely wishful thinking. Any true recovery is infeasible without the creation of jobs paying a decent wage.  The question is how will these jobs be created? Even during this season of economic hardship, American industries continue to shift jobs overseas.  American workers are laid off while foreign workers are retained. This all happens under the banner of globalization and free trade, both of which serve to lower the American standard of living. These trends have become a means by which other countries unjustly siphon away American jobs and even entire industries. The end result is the exportation of American prosperity and financial well-being.

We must come to realize that the American economy cannot be supported by service sector jobs as once purported. We cannot simply sell insurance to one another or flip burgers to sell in a coffee shop.  We consume goods and therefore must manufacture. Economic prosperity cannot be fostered without the creation of high-paying jobs. Protecting American jobs is not “protectionist” as some Wall Street economist and Republican leaders claim.    Protecting American jobs and industries does not inherently result in “protectionism.” Therefore, the American government should enact legislation regulating the importation and exportation of labor. Should this matter be left to the discretion of corporate America, the recession will only deepen and the possibility of true economic recovery will become more of a fantasy than a reality. 

Rauf Naqishbendi’s memoirs
The Garden Of The Poets
recently  published(Unedited).

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