Friday, June 20, 2008

the reality of our economy

The Washington Post, recently published an article called "Why We're Gloomier Than The Economy." In the article, the author points out how Americans are overwhelmingly pessimistic about the state of our economy: " Consumer confidence is at its lowest level in almost 30 years [and]Only 12 percent of Americans think the economy is in good shape."

But at the same the article asserts that " according to most broad measures of how the economy is doing, it's not all that grim." The article claims that "employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising" and inflation hasn't been as bad as compared to previous recessions. Thus setting up the crux of the article why their is this supposed divide between the reality of the economy and people's perception of it. The article concludes that "coming off two decades of prosperity and low inflation, Americans have come to treat low unemployment and inflation as givens. We have gotten so used to things being good, in other words, that even when conditions become somewhat bad, it feels terrible."

Yet the fact is, though the indicators the Washington Post article, make the economy seem not so bad using those numbers compared to previous recession, in other ways its much worse. The article doesn't mention the fact that people are losing their homes in record number because of subprime crisis. Moreover, the formula of the Consumer Price Index which is supposed to measure inflation in the US actually understates it. So, as Kevin Phillips describes it, "the federal government's CPI measurement doesn't capture the pain many Americans are feeling today." Furthermore, as economist Dean Baker of the Center for Economic and Policy Research states, "most of the last two decades have not been especially prosperous. Wages did not keep pace with inflation over most of this period, with the notable exception being the years from 1996 to 2001." Even before the subprime collapse, many Americans were hampered with debt due to such stagnation of wages that forced them to rely more heavily on credit to get by. Thus the economic downturn reinforces and exacerbates the financial squeeze many Americans had been already feeling for a while.

So if there is a disconnect between reality and the perceptions of the economy, it lies with the Washington Post and this article that downplays the economic crisis we're facing now. As the Mcclatchy News reported recently, "the soaring cost of core essentials like gasoline, food and housing now account for 57 cents of each consumer dollar spent" which "leaves Americans with a record-low 43 cents out of each dollar for discretionary spending." Such a trend "helps explains why new vehicle sales in the U.S. are at a 10-year low and why consumers are buying less clothing, shoes and big-ticket items like furniture and computers." According to the Boston Globe, food prices have risen at the fastest rate since 1990. Prices for staples such as bread, milk, eggs, and flour are rising sharply, surging in the past year at double-digit rates. But these increases in the cost of food as well as oil aren't as much about a lack of supply but that of speculation in the global markets of commodities. According to a report called "making a killing from hunger" about the current global food crisis by an international NGO called GRAIN:

"hedge funds and other sources of hot money are pouring billions of dollars into commodities to escape sliding stock markets and the credit crunch, putting food stocks further out of poor people’s reach. According to some estimates, investment funds now control 50–60% of the wheat traded on the world’s biggest commodity markets. One firm calculates that the amount of speculative money in commodities futures – markets where investors do not buy or sell a physical commodity, like rice or wheat, but merely bet on price movements – has ballooned from US$5 billion in 2000 to US$175 billion to 2007."

Thus this shift from stocks to commodities by investment firms in speculation have driven up the cost of food along with oil. That change is a result of the financial crisis stemming from the subprime mortgage collapse which has, according to a report by Bank of America, caused a loss $7.7 trillion worldwide in stock market value. Worse than the financial crisis of 1929 and the crises since then. The economic downturn both in the US and globally are quite deep and interrelated, more than even the the Washington Post is willing to admit.

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