Fun week... learn about economics, Part V! by gimleteye

It's the end of our week of learning, and you've been a very good class! But mostly quiet. It's OK. I understand. On a fundamental level, people really don't want to know the full scale of the economic disaster unfolding in the United States. There are very powerful forces at work to keep happy faces on grim statistics.

For instance, the US equity markets seem unfazed by the credit crisis. Any bit of news that is not as bad as it might have been is seen as a cause for optimism.

And yet, in this election year, consumers are facing the highest energy prices since the 1970's. Food inflation is beyond alarming. (Neither energy nor food costs are directly reflected in core inflation numbers reported by the federal government). Housing prices are falling at a rate and volume with no historic equivalent. Not to mention what is happening to the cost of insurance. If you are feeling poorer, it is because you are poorer -- and for that, you have to thank the policies of the Bush White House.

Still, the headlines are mostly good: it is now claimed that big deals are starting to get done again, after banks stopped mistrusting each others' balance sheets chock full with toxic debt, mostly formed of mortgage backed securities representing suburban sprawl in the fastest growing parts of the nation.

But it turns out that people, consumers, voters are not getting the whole picture. Partly that is a result of the federal government hiding or eliding the truth: for instance, the poor quality of inflation statistics and the failure to report accurate money supply numbers that would indicate the extent to which currency printing presses are masking the economic crisis.

So, after a week of posting charts you are unlikely to have seen anywhere else but on our blog, I'm going to end our week of fun learning with two charts that are very dramatic and point in the direction of an economic picture more frightening than at any time since the Great Depression.

This chart shows the relative scale of the Federal Reserve intervention in the credit crisis: as a daily average of billions offered directly to banks who were allowed to use toxic debt on their balance sheets as collateral. In other words, the entire mess of the housing bubble has already been foisted off on taxpayers, a form of nationalization that may yet become more apparent by the supposed political party of fiscal conservatism. The intervention is so upsetting that it caused Paul Volker, the former Fed chairman who wrestled the US economy out of its last major economic crisis, to say that the new policies of the Fed had pushed the edge of the law.

But don't expect anyone to go to jail, for what the next chart shows:

Let see if I can get this right, to sum up five days of posts on the economy: at the very moment in time, when globalization has hollowed out the US industrial sector and created conditions of virtual borders for growth through technology, the US is badly lagging its major trading partners in educational standards. The massive asset bubble, first in dotcom stocks and then in housing prices, papered over systemic problems in economic growth, problems also masked by the dramatic fall in value of the US dollar. To respond to the crisis and keep the US banking system solvent, the Federal Reserve -- meaning, the US taxpayer-- absorbed hundreds of billions of toxic debt, embarking on an even more dangerous course: to accept inflation as better medicine than allowing "free" markets to reach an equilibrium.

Here is a representational image of the solvency crisis:

So, we have inflation, political corruption, AND no end in sight to a gathering perfect storm. We can go on a while longer, hobbled by policies that introduced so much risk to our economy. The big difference between now and the 1930's is the extent to which the monetary system can move at the speed of light to plug holes in the dam, so to speak.

But the fact remains, the United States is poorer. We face unprecedented threats to our national security, of which climate change is the most serious. The next president of the United States must find the right words to communicate with Americans: how change requires a commitment to sacrifice. So listen carefully: it is going to be a very interesting election season in America.