First Deflation, Then Inflation

American workers have seen a 0.5 percent decline in the inflation-adjusted value of their paychecks over the past year. That decline is a worrisome development since the Consumer Price Index increased 1.7 percent over the 12 months ending in June.

Both data points are indicators of a struggling economy and raise the specter of deflation.

Though the inflation rate averaged 2.35 percent over the first six months of the year, the rate has gone down each and every month, dropping from 2.93 percent in January to 1.66 percent in June. That decline has paralleled the slowdown of the economy.

The inflation rate was below 2 percent in both May and June, a slower pace than the Federal Reserve would like. Historically, from 1914 to 2012, the United States inflation rate has averaged 3.36 percent.

Europe is already in recession, the U.S. economy has been slowing for six months, and the larger global economy is gradually losing steam right along with it. Recessions are, by definition, deflationary. That's the primary concern of the Federal Reserve at present.

While the falling prices associated with deflation might not seem like such a bad thing to the average consumer, falling wages are another thing altogether. Falling wages make debt repayment all the more difficult, and Americans are still saddled with onerous debts. Though total household debt fell from $12.7 trillion in 2008 to $11.4 trillion as of the first quarter of 2012, it is still enormous by any measure.

Given that the Fed has pumped trillions into the economy and banking system over the past few years, the typical concern should be price inflation. Yet, it is rather tame at the moment and is, in fact, declining.

To fend off signs of a double-dip recession, the Fed will continue to print money — lots of it. And it will continue buying Treasuries as well — lots of them. QE3 is just a matter of time. Through its purchases of additional government debt, the Fed hopes to prevent money from draining out of the financial system in a deflationary spiral.

But after lowering short-term rates to nearly zero, funneling oodles of money into the Big Banks and buying enough mortgage-backed bonds to drop mortgage rates to record-low levels, the question is, What more can the Fed do?

Even if money is made cheap and readily available, the Fed cannot force Americans to borrow. People with huge debts, falling wages, no jobs, or the fear of becoming unemployed, will not be persuaded to borrow.

And therein lies the problem: our entire economy is predicated on borrowing and lending for economic growth to occur. Money is created through borrowing. Without borrowing, there is less money and no growth. Absent growth, there are no jobs. And without jobs, there is no recovery.

The fear of so many economists is that the U.S. might be following Japan's path into a "lost decade" of our own.

That is a disturbing and worrisome possibility.

At some point, the Fed will have to mop-up, or extract, all those trillions of dollars in excess liquidity from the economy. If it is unable to do that quickly enough, and at will, then the focus will shift back to inflation — perhaps lots of it.

Deflation: Making Sure "It" Doesn't Happen Here

The trend is abundantly clear; the U.S. economy has been slowing for more than six months and is perilously close to contraction.

After growing at a robust 4.1% clip in the last three months of 2011, gross domestic product fell to 2% growth rate in the first quarter, before falling again to 1.5% in the second quarter.

Using monetary policy, the Federal Reserve has made repeated attempts to stimulate the economy and raise it from its listless state. The Fed has held short term rates at a remarkably low level of between 0% and 0.25% since December 2008. It has also purchased nearly $3 trillion worth of Treasuries and housing-related assets to lower long-term interest rates and try to spur the economy.

If these efforts have worked at all, they have so far averted a double-dip recession. Yet, these extraordinary measures have not resulted in an economic recovery. To the contrary, things are getting worse.

Clearly, the economy is contracting, or deflating. Recessions are technically defined by two consecutive quarters of contracting GDP. Though we aren't there yet, the current trend is worrisome. Recessions are, by definition, deflationary. Above all else, the Fed fears deflation; it is harder to control than inflation and once it takes hold, deflation can be crippling.

The U.S. economy is built on a perpetual growth model. Deflation aside, even stagnation is debilitating. Growth is imperative.

The Fed likes inflation because it makes debts easier to repay. But inflation also devalues the money in everyone's pockets and bank accounts.

At a rate of three percent annual inflation, your money loses 30 percent of its buying power over the course of a decade. For example, inflation was 27% from 2000 to 2010. That's a hidden tax on all Americans, young and old, rich and poor. So, inflation is also a pernicious thing.

With that in mind, what follows are highlights from a speech given by Ben Bernanke on Nov. 21, 2002. This is the infamous speech that earned Bernanke the moniker "Helicopter Ben."

As you read the speech, bear in mind that it was given a full six years before the financial collapse, which led to the federal funds rate being reduced to its present level of 0% to 0.25%. It was also four years prior to Bernanke being nominated as chairman of the Federal Reserve.

As you'll see, Bernanke had a plan, a vision and a philosophy — all of which explains what is going on today, monetarily. You can see Bernanke's utter fear of deflation. Concerns about inflation? They hardly exist. In fact, Bernanke makes clear that central banks seek an inflation rate between 1 and 3 percent per year.

Bernanke also outlines the "special problems" that central banks face when the federal funds rate reaches zero due to deflation. This should cause the reader to wonder how bad the problem could become, considering that the rate is already effectively zero. As Bernanke notes, a zero interest rate places a "limitation on conventional monetary policy."

However, in Bernanke's view, even when the interest rate has been forced down to zero, the Fed "has most definitely not run out of ammunition."

There is a singular strategy always at the Fed's disposal, according to Bernanke, providing it "considerable power to expand aggregate demand and economic activity" and allowing it "to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero."

What is that strategy, you are surely asking?

Printing money.

The problem is that printing large sums of money, without any relation to a corresponding increase in the amount of goods and services in the economy, devalues all of the money in circulation.

"By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so," said Bernanke, "the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."


Note: The bolded areas are my emphasis. The italicized areas are Bernanke's.

Deflation: Making Sure "It" Doesn't Happen Here

The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.

The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand — a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending — namely, recession, rising unemployment, and financial stress.

However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero. Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."

Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be. To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.

Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern — the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate — the overnight federal funds rate in the United States — and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.

Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"— that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.

However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero.

There are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation. First, the Fed should try to preserve a buffer zone for the inflation rate. That is, during normal times it should not try to push inflation down all the way to zero. Central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year.

Under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

Fear of Recession / Deflation Will Compel Fed Into QE3

The bleak economic news continues to emerge on a weekly basis. The U.S. and global economies are slowing and the numbers behind it are troubling.

U.S. retail sales fell 0.5% in June, the third straight monthly decline. Consumers cut spending on most goods and services, reflecting a sharp slowdown in economic growth in the second quarter.

The last time the U.S. experienced three straight monthly drops in retail spending was in the second half of 2008, midway through the Great Recession.

As a result of the pullback in spending, the U.S. grew at a 1.5% pace in the second quarter. That’s down from 2% in the first quarter and 4.1% in the last three months of 2012.

It is clear that American consumers do not have the capacity to spend the U.S. into recovery. Consumer spending accounts for about 70% of the economy. Without stronger retail sales, the U.S. economy cannot expand fast enough to lower the unemployment rate. Yet, absent more jobs, such spending cannot occur. We're stuck in a vicious cycle.

The Labor Department reported the U.S. economy created 80,000 jobs in June, less than many economists expected. Hiring slowed sharply in the second quarter, with job growth averaging 75,000 a month versus 226,000 in the first quarter.

In another signal of a slowing U.S. economy, the services sector grew at its slowest pace since January 2010. The Institute for Supply Management said its services index dropped to a reading of 52.1% in June from 53.7% in May. Though readings above 50% indicate expansion, that margin is now getting uncomfortably slim.

Yet, the ISM services index was not as worrisome as the ISM manufacturing index, which in June dropped into contraction territory for the first time in three years. This trend, along with declining retail sales, may be the most worrisome of all.

Bill Gross, co-founder of PIMCO, Tweeted on Monday that the U.S. economy is "approaching recession when measured by employment, retail sales, investment, and corporate profits."

Gross told Bloomberg last week that he thinks the U.S. economy will grow an average of 1.5 percent per year, on average, over the next decade. That would be really bad for the U.S., which needs economic growth of at least 2.5% annually just to keep up with the growing labor force.

Nouriel Roubini, the famed economics professor at NYU, Tweeted this week that the U.S. economy is "at stall speed" and that it could grow at an annualized rate of "well below 1 percent" between July and September.

All of this troubling news has gotten the attention of policy-makers, who seem to have similar concerns.

Speaking to Congress on Tuesday, Fed Chairman Ben Bernanke stressed that the central bank was prepared to take further action to try to give the struggling economy a jolt.

That has many economists wondering if the Fed will embark on another round of quantitative easing as soon as the next Federal Open Market Committee meeting. The FMOC meets again on July 31-August 1. Others believe the Fed will wait to launch more easing at the September 12-13 meeting.

The Fed has expanded its balance sheet by nearly $3 trillion buying Treasurys and housing-related assets to try to lower long-term interest rates and spur the economy.

The Fed pushed short term rates down to a range between 0% and 0.25% in December 2008 and has kept them there ever since. The central bank has even pledged to keep rates extraordinarily low until late 2014.

Those unprecedented efforts have led many of us to ask, what more can the Fed do?

Besides buying more bonds, the Fed also could change the forward guidance on how long rates will remain close to zero, Bernanke said.

Will the Fed Chairman promise to keep rates historically low through 2015? Despite rates that are already phenomenally low, the Fed hasn't been able to compel Americans to borrow en masse.

The Fed also could lower the interest rate on the reserves that banks keep parked at the central bank. The idea would be to compel banks to put that money back into the economy, instead of leaving it to sit idle at the Fed.

Whenever the Fed ultimately elects to engage in even further quantitative easing, it will be creating hundreds of billions of additional digital dollars with computer key strokes. This will be yet more money backed by nothing, created out of thin air, without regard to the amount of goods and services in the economy. This sort of money/currency inflation, as history shows, usually leads to price inflation.

However, the greater concern for policy-makers — for the moment, at least — is deflation.

The global economy has been slowing for months. Europe is already in recession and the fear is that the U.S. could soon follow. Recessions are, by definition, deflationary.

In a deflationary environment, prices fall and money becomes more valuable. People hang onto their cash waiting for prices to fall even further before making major purchases. That creates a sort of economic death spiral.

It is for this reason that, as soon as the Fed smells an oncoming U.S. recession, it will most assuredly fire up the printing presses once again, flooding the economy with even more money — on top of the $3 trillion already pumped into the system. It has no other choice. Such action is the last, best weapon in its dwindling arsenal.

Since much of this money will invariably find its way into the equities markets, Wall St. must be salivating right now, just thinking about that prospect.

As I've said repeatedly, the problem is that despite all of the extraordinary and historic interventions already undertaken, the Fed hasn't been able to prevent a looming double-dip recession.

The sense of powerlessness to halt an oncoming economic storm has got to be alarming to Fed policy-makers. And it reinforces the reality that there are limits to their powers. Some things can't be controlled.

It appears that the Fed is finally out of bullets, and out of ideas, in its war against economic forces that are clearly beyond its reach.

Dysfunctional US/China Trade Imbalance Dangerous to Both Nations

Even if the U.S. government somehow managed to balance its massive budget deficit, it would still have a huge trade deficit to grapple with. And that trade deficit may be an even tougher problem to solve.

For decades, the U.S. has consumed more than it has produced, imported more than it has exported, and borrowed more than it has saved. The trade deficit is the unfortunate result of all that imbalance. And then there's the problem of China's suppression of its currency, the yuan, which makes a bad situation even worse.

The U.S. trade deficit rose to $558 billion last year, up 11.6 percent from 2010 and the largest imbalance since 2008. As demand fell during the Great Recession, imports also fell, trimming the trade deficit. But the deficit has once again resumed its upward trajectory, which is bad news for the U.S.

Exports add to GDP, while imports reduce it. That's why it's critical for the U.S. to increase exports and decrease its reliance on cheap consumer imports. Simply put, a trade deficit creates a drag on the economy.

Though U.S. exports have increased over the past couple of years, the problem is that imports continue to outpace exports. This means that billions of dollars continue to flow out of the United States on a monthly basis. And the problem is worsening.

The U.S. current account trade deficit grew to its widest imbalance in three years during the first quarter, jumping 15.7 percent to $137.3 billion. That was up from $118.7 billion in the final three months of last year, according to the Commerce Department.

The current account is the broadest measure of trade. It tracks the sale of merchandise and services between nations as well as investment flows. Economists expect the deficit to keep rising in 2012 due to the European debt crisis, which will result in a decline of U.S. exports to the region.

The flood of imports into the U.S. is displacing American workers and costing us jobs. In short, we're buying tons of foreign goods instead of making them here at home.

According to a 2011 Economic Policy Institute report, the growth in the U.S. trade deficit with China displaced 2.8 million U.S. jobs between 2001 and 2010 alone.

The U.S. had a particularly massive (and record) $295.5 billion trade deficit with China in 2011, its largest with any individual country. This means that China accounted for more than half (53 percent) of the total U.S. trade deficit.

The Chinese currency, the yuan, has long been artificially suppressed by the Chinese government, keeping it from rising to a higher natural value.

China has undervalued the yuan in relation to the dollar for years to keep its products artificially inexpensive in the U.S., while discouraging U.S. exports into China.

This controversial currency policy is contributing to high unemployment in the U.S. A stronger dollar in relation to the yuan makes U.S. goods costlier and less competitive in China, undermining U.S. exports.

For the trade deficit to become more balanced, the Chinese must end the yuan's dollar peg. Short of that, Americans will have to save more and spend less, while the Chinese will have to do exactly the opposite. That combination appears highly unlikely in the foreseeable future.

A Chinese currency revaluation would raise the cost of Chinese goods sold by U.S. retailers to U.S. consumers. Higher prices would be a shock to millions of Walmart shoppers. But that would ultimately be a good thing for the U.S. economy.

The U.S. hands the Chinese billions of dollars every month in exchange for its cheap products. The Chinese are then forced to buy our Treasury debt with all those green backs. In essence, they are involuntarily compelled to lend us their excess dollar reserves. After all, what good are dollars to the Chinese? They don't use them in China.

Though the Chinese can purchase oil and other dollar-denominated assets on global markets, they are still left with a huge surplus of dollars.

Even with Treasury rates at historically low yields, the Chinese have little choice but to continue buying U.S. debt. That makes China's trade surplus with the U.S. a double-edged sword.

At current historically-low yields, Treasuries don't even keep up with the rate of inflation. Combined with the fact that the U.S. is so interminably in debt, Treasuries cannot possibly look like a smart buy to the Chinese.

China is already saturated with U.S. debt, which doubled between 2007 and 2010. In fact, in September 2008 China surpassed Japan to become the number one holder of U.S. government debt. Consequently, the Chinese previously signaled that they will begin reducing some of their U.S. holdings.

However, quite the opposite has happened. China's U.S. Treasury holdings increased $1.5 billion in April, rising to $1.15 trillion in total. China now holds one-quarter of all outstanding U.S. debt.

Last year, it was discovered that China was buying more U.S. debt than it was disclosing. It is now known that beginning in 2009, China was regularly doing deals that had the effect of hiding billions of dollars of purchases in each Treasury auction.

Where else is China going to put all those billions of export dollars each and every month?

As long as the Chinese continue flooding the U.S. market with exports, their only alternative to Treasuries would be the purchase of hard U.S. assets, such as land, golf courses, resorts and huge commercial properties — the sort of thing that Japan was doing in the 1980s.

That would surely set off quite the political firestorm here in the U.S.

In the meantime, China's monthly exchange of export dollars for Treasuries allows the U.S. government to continue its deficit spending. Whether willing or unwilling, China has become the U.S. government's buyer of last resort, further complicating an already complicated relationship.

The U.S. and China are engaged in a simpatico partnership: China's export-driven economy is heavily reliant on the U.S. Meanwhile, America's consumption and debt-based economy and government are equally reliant on China.

Both countries have become dysfunctionally dependent on the other, to the point of mutual detriment.

Monetary and Fiscal Policy Have Hit the Wall

By now, even the casual observer has surely heard the news; numerous signs indicate that the U.S. economy is again slowing.

For example:

• The productivity of U.S. workers and businesses dropped 0.9% in the first three months of the year.

• U.S. factory orders have declined for two consecutive months, dropping 0.6% in April and 2.1% in March, according to the Commerce Department.

• State and local government spending fell a revised 2.5% in the first quarter, more than double the initial estimate of a 1.2% decline.

• Though the U.S. trade deficit narrowed in April, a drop in exports was outpaced by an even larger decline in imports. The decline in both sides of the equation is a signal that global demand is slipping. Of greatest concern, imports fell despite an increase in the volume and price of oil imports.

• While it was initially reported that the US economy grew at a 2.2% annual rate in the first quarter, the Commerce Department has revised that figure down to 1.9%.

Yet, of greatest concern, things may actually be getting even worse.

After adding more than 500,000 jobs in the first two months of this year, the economy has added a mere 289,000 in the past three months, not even enough to keep up with the nation’s growing working-age population, much less lower the unemployment rate.

One of the Federal Reserve's three mandates is to achieve and maintain maximum employment (the others are stable prices and moderate long-term interest rates). Clearly, the Fed is failing to achieve maximum employment. But after all of its rather historic undertakings, the question is, what more can the Fed possibly do?

The central bank has pumped $2.3 trillion into the financial system since 2008, slashed short-term interest rates to near zero, held them there since December 2008, and made the unprecedented promise to keep them that low “at least through late 2014.”

Yet, despite the Fed's best efforts, the economy is sputtering. It seems that monetary policy has finally found its limits. This is the best it can do.

How about fiscal policy?

The federal deficit for fiscal 2008 was a record $459 billion, more than double the previous year’s figure. Then, in the midst of the financial crisis that year, the government tapped a $700 billion Treasury fund to buy toxic mortgage-related securities.

In fiscal 2009, the deficit was $1.4 trillion. That was followed by $1.3 trillion deficits in both 2010 and in 2011. And this fiscal year, the government will run a $1.2 trillion deficit.

All of this spending was intended to keep the economy afloat after the financial collapse and the Great Recession, which began in December 2007.

Despite these massive monetary and fiscal interventions, the economy is slowing, stagnating, and perhaps even shrinking.

As Martin Wolf wrote in the Financial Times, "The fact that unprecedented monetary policies and huge fiscal deficits have not induced strong recoveries shows how powerful the forces depressing economies have been."

The U.S. economy and monetary systems are predicated on debt. All money is loaned into existence, making debt inevitable. In essence, money is debt. And without an expansion of debt, the economy cannot grow. Debt (or credit) is the economy's life blood.

However, we seem to have finally found the limits of debt expansion.

Total U.S. household debt reached a whopping $13.8 trillion by 2008. By the end of 2009, total household debt was nine times what it was in 1981 — rising twice as fast as disposable income in the same period. For decades, Americans were spending money they didn't have by taking on ever-increasing amounts of debt.

However, the Great Recession put the brakes on previous levels of debt expansion. Fed data shows that by the end of 2011, household debt was down to $13.2 trillion. Yet, total disposable income was just $10.7 trillion.

Household net worth—the difference between the value of assets and liabilities—was $58.5 trillion at the end of 2011, after having fallen close to 3/4 percent, the first annual decrease since 2008.

Though household net worth has fallen, debt is again rising — albeit more slowly than in the past.

Since the recession ended in June 2009, total U.S. debt has risen at the slowest pace since the Fed began keeping records in the early 1950s. While this can be viewed positively, total debt has nonetheless risen. It's just rising more slowly now.

In the 11 quarters since the recession officially ended, total domestic debt has risen by $702 billion, or 1.4%, compared to the 28% increase in the previous 11 quarters.

However, though debt has declined due to the deleveraging of families, banks, non-financial businesses and state and local governments, debt is still exceptionally high by any measure.

Total debt has fallen from 373% of GDP to 336%. But that is still stunningly high. Though total debt is going in the right direction, a debt level that enormous is, nonetheless, really bad news.

U.S. household debt has fallen to 84% of GDP from a peak of 98%. Non-financial corporate debt has fallen to 77% from a peak of 83%. Financial sector debt has dropped from 123% of GDP to 89%.

However, public debt has risen to 89% from 56%. That's because the government has been stepping to fill the spending gap, thereby averting another depression. But that's a double-edged sword.

As a result of consumer retrenchment (due to unemployment and the housing collapse), government spending is the only thing presently under-girding the economy. The problem is that this is creating continual trillion dollar deficits.

However, if the government reduces spending to balance its budget, that action will have a negative effect on GDP. In past recoveries, the growth of the private sector has overcome that negative effect. But the private sector isn't truly recovering and it cannot recover unless consumers recover. It's all a big, vicious cycle.

The deficit certainly needs to be cut. But cutting the deficit too fast could also throw the country into an even deeper recession. Deficit reduction will also reduce GDP. That means the government will collect less taxes, which makes the deficits worse, which means the government has to make more cuts than planned, which means lower tax receipts, and so on and so on.

The key takeaway from all of this is that after historic levels of deficit spending by the federal government, coupled with equally historic levels of Federal Reserve interventions on the money supply and interest rates, an economy grappling with the specter of recession (or worse) is the best our fiscal and monetary 'masters' can do.

Whatever the eventual outcomes of all these massive interventions — and they will surely turn quite negative at some future point — it is clear that they have at least prevented another full blown depression — at least to this point.

How long we can continue to avoid that outcome is anyone's guess. But one thing is certain; there are limits to trillion dollar deficits, near-zero interest rates and massive increases to the monetary base by creating money out of nothing.

Such interventions are clearly finite. And when they end, the blowback will be harsh and it will be heavy.

Symptom of the Economic Crash: One in Seven Americans Now Receiving Food Aid

The number of Americans receiving food aid stood at 46.5 million as of December. This means that more than one out of seven Americans is currently getting food stamps. That figure is a historic high, though the U.S. population of 313 million is substantially larger today than in past decades.

The surge in food stamp recipients has largely been a consequence of the Great Recession, which technically began in December 2007. That year, 1.4 million people were added to the ranks of food stamp recipients, while 4.4 million were added in 2008, triple the 2007 figure.

During George W. Bush's presidency, the number of recipients rose by nearly 14.7 million. And during the Obama years, an additional 14.2 million have been added. Yes, the Great Recession and its lingering after effects have been quite brutal to millions upon millions of Americans.

It should come as little surprise, then, that the number of Americans receiving food aid is essentially identical to the number living in poverty. An Indiana University study finds that 46 million Americans are living below the poverty line – up 27 percent since start of recession. Most worrisome, the report warns that the ranks of the impoverished will continue to rise.

It is very telling that so many of our fellow citizens require assistance to meet some of their most fundamental needs. The U.S. is the richest country on the planet after all. This is supposed to be a nation of equal opportunity, but clearly that isn't so. It's tough for people to pull themselves up by their boot straps when they can't even afford boots.

Food aid exemplifies the classic "safety net" program. Generally, those with incomes at or below 130% of the official poverty level, and savings of $2,000 or less, may receive food aid. The income level is currently just under $29,000 a year for a family of four.

Typically, able-bodied adults without dependents can collect food stamps for only three months out of any three-year period. However, according to USDA, 46 states have been able to continue the longer benefit period under special waivers granted because of high unemployment.

Another reason for the rise in food stamp recipients has been the public outreach efforts of the states. According to the USDA, only 54 percent of those whose income was low enough to qualify actually signed up in 2002. But by fiscal 2009 the number had risen to 72 percent.

That's because states increased outreach to low-income households, simplified the program and streamlined the application process, making it easier for eligible individuals to apply for and receive food stamp benefits. It's worth noting that more than a quarter of those who are in fact eligible for the program still aren't enrolled, meaning the numbers could still rise further.

Much of the former stigma associated with food assistance has been removed since the program discontinued the use of paper food stamps. Instead, plastic debit cards, known as "Electronic Benefit Transfer" or EBT cards, are now in use. These cards look pretty much like an ordinary credit card when used in a supermarket checkout line.

The change from paper to plastic has also caused the fraud rate in the program to plunge to just 1%, says the Government Accountability Office. Critically, food stamp dollars can only be used to buy food — not cigarettes, alcohol or even cleaning supplies, for example.

The demographics of those in the food program are quite revealing.

According to the USDA, as of 2010, nearly half (47%) of beneficiaries were children under age 18, and 8% were age 60 or older. Interestingly, 41% of recipients lived in a household with earnings from a job — the so-called "working poor." In fact, working families actually outnumber unemployed families in the program.

Among recipients, 36% were white (non-Hispanic), 22% were African American (non-Hispanic) and 10% were Hispanic. Because participants are not required to state their race or ethnic background, 18.9% are listed as "race unknown."

The average household received a monthly benefit of $287 in 2010, or an average of $9.25 per day. Clearly, these folks aren't eating steak.

To qualify, a single person needs to earn less than $14,000 annually. For a family of four, it's less than $29,000 annually. That's just above the threshold for two single persons.

Last year, 85% of the households receiving food stamps lived below the federal standard for poverty. So, the food stamp program, now officially known as SNAP (Supplemental Nutrition Assistance Program), is doing what is was designed to; providing assistance to the poor.

The problem is that the ranks of the poor have been exploding.

The federal poverty level has a very conservative definition and is set according to the number of persons in a family. The government's official 2012 designations for poverty are as follows:

1 person: $11,170
2 persons: $15,130
3 persons: $19,090
4 persons; $23,050

For a family of four, $23K doesn't go very far. Clearly, millions of additional American families are just above that threshold and are also living in poverty, though they are not officially recognized as such by the government.

Though the program has become increasingly politicized, large numbers of "red state" residents are also beneficiaries. Mississippi (red) reported the largest share of its population relying on food stamps, more than 21%. One in five residents in New Mexico (blue), Oregon (blue), and Tennessee (red) were also food-stamp recipients.

As of 2011, the ten states with the highest percentage of population using food stamps were (in ascending order): South Carolina (red), Maine (blue), West Virginia (purple), Kentucky (red), Louisiana (red), Michigan (blue), New Mexico, Tennessee, Oregon and Mississippi.

As a recent New York Times piece detailed, even Americans who vigorously oppose the whole idea of government “handouts” receive benefits of one kind or another.

Over the past four years, food stamp spending has doubled to $106 billion. That equals 0.028% of the $3.796 trillion federal budget for fiscal 2012. Clearly, spending on the food aid program amounts to a miniscule portion of the overall budget. Food stamps are not a budget buster and they are not tipping the fiscal balance.

What is putting the budget in the red is a lack of jobs — especially good, full-time jobs — that allow people to substantively contribute to the federal income tax base.

Remarkably, the latest census data shows that nearly one in two of the U.S.'s 313 million citizens are now officially classified as having a low income or living in poverty. One in five families earns less than $15,000 a year.

The growth of the poor can be traced to a lack of jobs and, more specifically, a lack of well-paying jobs. Even before the Great Recession took hold, the American middle class had already been in long-term decline. Worker's paychecks have been stagnant for decades.

According to Census figures, the $47,715 median annual income earned by a male, full-time, year-round worker in 2010 was less than the $49,065 a male earned in 1973, adjusted for inflation.

This means that median incomes have actually gone backward over the previous four decades. That's simply stunning.

The median paycheck (half made more, half less) fell again in 2010, down 1.2 percent to $26,364. That works out to $507 a week, the lowest level, after adjusting for inflation, since 1999.

Meanwhile, inflation was 27% from 2000 to 2010. That's a hidden tax on all Americans, young and old, and it impacts the poor most acutely.

Given all these factors, it's easy to reconcile Indiana University's projection that the ranks of the impoverished will continue to rise.

The rising number of impoverished Americans, as well as those needing food assistance, are signs of an economy that is very sick and very weak. The evidence is all around us.

Unemployment a Symptom of a Bad Economy; The Bad Economy a Symptom of High Unemployment

Today we learned that the U.S. economy created just 69,000 non-farm jobs in May, the smallest gain in a year. While it came as a surprise to many, it shouldn't have.

If you're unemployed and looking work, you surely know just how competitive the employment search is. Last year, there were almost seven applicants for every job opening in the U.S., a ratio that is double the historical norm.

The unemployment problem is so dire that just 75.7 percent of Americans between the ages of 25 and 54 have jobs, a full 5 percent less than before the recession, according to the Washington Post.

But joblessness had already been a growing problem long before the Great Recession took hold. In fact, job creation has been slowing for decades.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were generated.

The trouble stubbornly persists.

Fewer Americans between the ages of 25 and 54 have jobs than at any point in the 23 years before the recession, according to government data cited by the Washington Post.

It's been widely noted by labor experts that the longer a person is unemployed, the more their job skills erode — to say nothing of their confidence and self-esteem. Because so many people in their prime working years are currently unemployed, many of them long term, it will have lasting effects on the economy as a whole.

There are vast numbers of people who are not productive or contributing to the tax base. That is a major drag on the economy. Worst of all, millions of job seekers have become so despondent after lengthy job searches, that they have simply given up looking for work. These people are no longer counted as unemployed, hence the falling unemployment figure over the past year.

The labor force participation rate (the percentage of the working-age population either working or looking for work) was 63.8 percent in May, its lowest level in 30 years, according to the Labor Department.

A record 88.4 million people are considered "not in the labor force," according to the Bureau of Labor Statistics (BLS). That's a stunning figure.

The bursting of the housing bubble led to lower demand and less consumption, followed by mass layoffs and a severe recession. The economic expansion of the previous 30 years had been fueled by debt. But that fuel is now spent, literally and figuratively.

From 2003 to 2007, Americans extracted $2.2 trillion from their properties in the form of home equity loans and cash-out refinancing — about 20 percent of which went to fund personal spending. Those days are long gone. Fake equity led to fake demand. As a nation, we were fooling ourselves. People were never as rich as they thought they were. The economy was a house of cards and now it's fallen down.

This isn't a problem with a political solution. It matters not who wins the election in November. The unemployment problem and our vast economic troubles will persist no mater who is in the White House. Don't kid yourself by thinking otherwise.

Everyone is searching for a cure, a way to fix all that is broken. The only way back to the past is to re-inflate the bubble and expand our massive debts even further. But that didn't work out so well the first time around. It's how we got into this mess in the first place.

The problem isn't a matter of excess regulation or taxes being too high. Those are simple political arguments, but they aren't solutions to a national hangover from a massive debt binge.

Since the previously low unemployment rate and private sector consumption were driven by unsustainable debt-expansion, and were therefore entirely misleading, perhaps we need to reconcile ourselves to era of less — less consumption, less demand, less economic growth and less prosperity. Maybe that's not such a bad thing. Did buying all that "stuff" makes us happier as a nation? I don't think so.

America is presently confronting a new reality, and it is a really painful one.

The U.S. still has nearly 5 million fewer jobs than when the recession began in December 2007. Job losses in the recession were the deepest since the Great Depression.

More than 5 million people have been unemployed for 27 weeks or more, and the average length of unemployment is more than 39 weeks, according to the BLS.

However, the labor market continues to add low wage jobs at places like retailers and temporary services, the likes of which don't typically provide benefits. But there are already too many low paying jobs — the kind that thwart demand and consumption, while preventing the economy and the tax base from growing nearly enough.

Among OECD (developed/industrialized) countries, the U.S. had the highest share of employees toiling away at low-wage work in 2009, according to OECD data. One in four U.S. employees were low-wage workers that year, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

This is why the middle class has been shrinking for decades. How can the economy get ahead with so many people in low wage jobs? These folks don't have nearly enough disposable income to propel the economy or lift the tax base and help the government cease its chronic deficits.

The number of employees working in low-wage jobs has been rising since 1979, according to to John Schmitt, senior economist at the Center for Economic and Policy Research. And low-wage workers are better educated than ever. The percentage of low-wage workers with at least some college education has spiked 71 percent since 1979 to 43.2 percent of all low-wage workers, according to Schmitt's analysis.

In May, the average length of the work week fell to 34.4 hours. Employers often give workers less than 40 hours a week to avoid providing them with benefits, or the possibility of overtime.

Even after widespread layoffs, U.S. companies have been able to get their remaining workers to do more with less. Fear of losing one's job is quite a motivator. Worker productivity has been booming in recent years. Output per hour in American manufacturing has increased by 13% in the past five years and 21% in the five years before that.

Despite that impressive increase in productivity, wages for many manufacturing workers are not keeping up with inflation. Consumer prices increased by 7% in the three year span between 2009 and 2011. That is putting a squeeze on workers' incomes and spending, which, in turn, hurts retailers and the broader economy.

Neither the long term or short term employment trends look promising.

The number of new jobs created in April was slashed to 77,000 from an original estimate of 115,000. Job growth in March was revised down to 143,000 from 154,000.

This means the three-month average for job growth is just 96,000 jobs per month. That's not enough to keep unemployment from rising. As it stands, the job market is already in a very deep hole.

It's important to remember that even if the economy simply kept up with population growth by adding 125,000 jobs each month (for a total of 1.5 million new jobs this year), it still wouldn't help the millions of Americans who are already unemployed or under-employed, meaning they can only find part-time work. It would only help the new entrants into the labor force, such as high school and college graduates.

When you add the 8.1 million persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) to the 12.7 million persons the government officially recognizes as unemployed (the U-3 figure), you find that nearly 21 million Americans are under-employed. And this ignores all the millions who have simply dropped out of the labor force altogether.

What we are now witnessing is the outcome of America's long term decline. It doesn't matter which indicators you look at: the automation and off-shoring of jobs that have led to long term unemployment problems; an aging, non-productive population that draws from the government but no longer pays taxes; a massive trade deficit fueled by a reliance on foreign oil and cheap goods; a massive federal debt and persistent deficits; an exponentially growing money supply that is fueling inflation; a housing bust with no true signs of recovery, etc.

People fear the potential, if not likelihood, of a double-dip recession. But that doesn't need to occur for the nation to remain mired in its economic malaise. The country could just muddle along at a 2 percent annual growth rate, which would not allow for nearly enough job creation. Growth must be at least 2.5 percent just to even keep up with annual population growth.

Historically, from 1947 until 2012, the United States GDP growth rate averaged 3.3 percent. For perspective, the U.S. hasn't grown at that rate since 2004 and prior to that, 2000.

Once again, the trends are not good.

What we're now faced with is a chicken and egg conundrum.

Employers won't hire until the economy improves. In essence, the unemployment problem is a symptom of the poor economy.

On the other hand, the economy won't sustainably improve until hiring increases to the point that the 21 million unemployed and under-employed Americans have jobs, and are measurably contributing to the tax base and the nation's gross domestic product.

That's quite a conundrum. Which comes first?

The American Condition: Debts Remain High, Disposable Incomes & Savings Remain Low

The U.S. is a consumption-based society. It is also a materialistic society. After all, we have entire TV networks dedicated to shopping.

In addition to overwhelming debt, our consumption and materialism produced another rather remarkable result: In 2005, the savings rate actually turned negative for the first time since the Great Depression, and it stayed that way for about two years.

However, after the financial collapse in the fall of 2008, the U.S. savings rate started to climb. Although those who lost jobs or took pay cuts had nothing to save, most Americans began to change their spendthrift ways.

The savings rate jumped from 1.3 percent in January of 2008 all the way to 6.9 percent in May of 2009 — the highest level in 15 years.

The resulting fear and panic from the Great Recession led people to stop the frivolous spending of the bubble years and instead begin paying down debts and saving. Those were wise and, perhaps, expected choices given the economic environment.

Historically, savings rates tend to increase during times of recession.

During the early 1980s, when the economy was in a severe double-dip recession, the annual personal saving rate (effectively, income minus spending) averaged around 10%. But by the time of the 1990-91 recession, it had fallen to an average of 7%.

However, that savings rate now seems quite high, given how far it fell over the next 15 years, or so.

By 2001, the rate had fallen below 2 percent and as the decade progressed it fell below 1 percent multiple times. Finally, in 2005, at the height of the American spending and debt binge, the savings rate turned negative. Americans were actually spending more than they were earning.

All of that spending and consumption resulted in a whole lot of debt; total U.S. household debt reached a whopping $13.8 trillion by 2008.

A higher savings rate is critical because it makes more money available for business investment. And it can reduce the need to borrow from overseas. The downside is that it also leads to a slow down in a consumption-based economy.

Since consumer spending accounts for 72 percent of our GDP, it's a good indicator of how the economy is faring. If people are saving instead of spending, the economy will tend to shrink — unless the government leaps in to fill the void, as it did with the stimulus in 2009 and 2010.

Consumers have long been the engine that continually powered the ever-expanding U.S. economy. However, for many years, American consumers propelled the economy with debt-based spending. If Americans don't maintain their high-level of spending, the economy will fall into recession once again.

In the previous decade, Americans fueled their spending binges with home equity extractions.
From 2003 to 2007, people extracted more than $2 trillion from their properties in the form of home equity loans and cash-out refinancing — about 20 percent of which went to fund personal spending.

The obvious question now is, Where will Americans find the money to continue spending at a rate that will keep the economy humming along at a sufficient level?

According to the Federal Reserve, household real estate assets rose by more than two-thirds from 1999 to 2005. Americans used all that home equity to finance an unprecedented spending spree. Those days are long gone and now the economy has come back down to reality as a result. All bubbles eventually burst.

By the end of 2009, total household debt was nine times what it was in 1981 — rising twice as fast as disposable income in the same period.

Fed data also shows that the end of 2011, household debt was down to $13.2 trillion. Meanwhile, total disposable income was $10.7 trillion.

Household net worth—the difference between the value of assets and liabilities—was $58.5 trillion at the end of 2011. Though that was about $1.2 trillion more than at the end of the third quarter, for 2011 as a whole, household net worth fell close to 3/4 percent, the first annual decrease since 2008.

Perhaps falling wages and salaries have driven Americans to save less and instead spend what they must on necessities. The U.S. savings rate plunged from 4.7 percent in December to 3.7 percent in February, the lowest level since December 2007's 2.6 percent.

The lower savings rate is problematic for a number of reasons. For instance, it leaves people unprepared for retirement, or even an emergency.

The percentage of workers who said they had less than $10,000 savings grew from 39 percent in 2009 to 43 percent in 2010, according to the Employee Benefit Research Institute's (EBRI) annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

Consequently, the EBRI found that many workers' retirement saving will run out too soon.

In this year's Retirement Confidence Survey, 60 percent of workers reported that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.

Perhaps this is why just 14 percent of Americans polled in this year's survey said they were “very confident they will have enough money to live comfortably in retirement.”

A recent study by LIMRA, a life insurance and financial services research organization, found that nearly half of American workers are not contributing to any form of retirement plan.

Outside of those who work in government, most people no longer have an employer pension plan to fall back on. The shift from defined benefit to defined contribution retirement plans has put the responsibility for saving solely on the employees. Apparently, that's not working out so well.

Even more worrisome, just 36 percent of workers said they had $1,000 in emergency savings in 2011. This means that nearly two-thirds of workers don't even have $1,000 set aside for an unplanned expense. That could prove crippling should an unexpected medical cost, home repair, or personal disability arise.

In another survey last year, 24 percent of respondents said they had no emergency savings whatsoever.

With interest rates running well below the rate of inflation, money in a savings account or other deposit vehicle is actually losing purchasing power with each passing day. Perhaps that's part of the reason that Americans aren't saving.

As interest rates have fallen, many Americans have sought a higher rate of return form other investments, shifting out of savings accounts in the process.

Other Americans simply have nothing left to save; adjusted for inflation, wages have been stagnant since the 1970s.

It's clear that the hard times we're living in have made it quite difficult for many Americans to plan for retirement, or even a family emergency. Long term unemployment has long since dried up the savings of millions of Americans who now live day to day.

According to financial planners, most people need three to six months of living expenses in emergency savings, amounting to about half of one's gross income.

However, for a vast majority of Americans, it seems this is nothing more than a pipe dream.

And when you're struggling to get by, trying to make ends meet from week to the next, retirement can seem a long way off... until it isn't.

Then what?

Economic Growth Is Predicated On Debt

Though the national debt already exceeds $15.7 trillion, and is bigger than the entire U.S. economy, it is projected to just keep on growing.

According to the latest estimate from the Congressional Budget Office (CBO), the government will run a $1.2 trillion deficit for the current fiscal year, which ends September 30. The new projection is about $100 billion higher than the previous estimate and is due primarily to the renewal of a 2 percentage point cut in payroll taxes and extended jobless benefits for people languishing on unemployment rolls for more than six months.

There have been persistently large deficits every year since the start financial crisis and subsequent Great Recession. Tax revenues fell nearly 17 percent in fiscal 2009, the biggest decline since 1932. That year, the deficit was $1.4 trillion, followed by $1.3 trillion deficits in both 2010 and in 2011.

According to the CBO, President Obama‘s proposed budget would produce a deficit of $977 billion in fiscal year 2013.

The problem stems from a huge collapse in personal and corporate tax revenues and a commensurate rise in safety net payments for things like unemployment, food stamps and Medicaid.

Last year, federal spending amounted to nearly 24 percent of GDP. However, federal revenues fell to 14.8 percent of GDP, the lowest intake relative to GDP in 60 years. The shrunken receipts were part of a continuing trend; revenues were 14.9 percent of GDP in 2009 and 2010.

It's evident that Washington has a revenue problem in addition to its spending problem.

U.S. corporations now contribute just 6.6 percent to the federal tax base. In the 1950s, US corporations contributed a 30 percent share.

Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s. However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010.

Confronted by these historically low revenues, Congress will seek a combination of budget cuts and tax hikes. However, due to strong Republican opposition, the latter may amount to nothing more than allowing the already legislated expiration of the Bush tax cuts at the end of this year.

But, as Europe is painfully learning, austerity (aka budget cuts) can push a struggling economy right off the rails. The U.S. economy has become heavily reliant on government deficit-spending to maintain growth. Absent government deficit-spending, our economy would still be in recession (more likely a depression) and would have entered one years earlier, long before the financial collapse of 2008.

Think about what would happen to the economy if federal spending were halved right now, from 24 percent of GDP to just 12 percent. Even if spending were cut by a quarter, the economy would grind to a halt. Sadly, the U.S. economy has become wholly dependent on government deficit-spending.

As it is, economic growth remains sluggish. The U.S. economy expanded at a 2.2 percent annual rate in the first quarter after expanding at a 3 percent annual rate in the fourth quarter of 2011. That's not nearly good enough.

Growth would need to equal 5 percent for all of 2012 just to lower the average jobless rate for the year by 1 percentage point. Clearly, that's not going to happen.

Too many Americans are unemployed or have dropped out of the workforce altogether. In April, the number of people not in the labor force rose from 87,897,000 to 88,419,000, a whopping increase of 522,000. This is the highest on record. The labor force participation rate recently dipped to a new 30-year low of 63.6%.

Until employment improves considerably and genuinely (not some phony government accounting that ignores all the millions who have dropped out of the workforce), tax revenues will remain perpetually low.

So, without jobs there will be no economic growth. But if the economy isn't growing, companies won't hire. It's a chicken and egg conundrum.

To make matters worse, the U.S. will find it increasingly difficult to service its mammoth debt without robust economic growth.

The U.S. paid $454 billion in interest on its publicly held debt in fiscal 2011, which ended September 30. However, the National Commission on Fiscal Responsibility and Reform, better known as the 'debt commission', projects that the interest on the debt could reach $1 trillion by 2020 if Congress doesn't act immediately.

With a debt so massive, the U.S. desperately needs growth. Yet, the private sector isn't capable of doing it alone.

Despite this, Congress plans significant budget cuts next year, in addition to allowing the payroll tax holiday and the Bush tax cuts to expire. That combination will lead to a recession, the CBO announced on Wednesday.

If these planned tax hikes and budget cuts aren't changed, the CBO says it will result in a fiscal contraction (commonly referred to as a "fiscal cliff"), that will shrink the economy by 1.3% in the first half of 2013 (a technical recession) before expanding 2.3% in the second half.

However, the CBO projects that this combination of tax hikes and budget cuts will reduce the budget deficit by 5.1% of GDP. Yet, last year, the CBO projected a budget deficit of $1.1 trillion in 2012, or 7.0 percent of GDP.

So, even if those budget cuts and tax increases are enacted as planned, they would still result in a continued deficit and even more debt.

How's that for an outcome? This fiscal "solution" would not only result in a recession, but would still leave the federal government with a budget deficit as well. That's what you call bad medicine.

Our economic system is predicated on debt. Since all money is loaned into existence, money equals debt. The economy can't grow without an expansion of debt, meaning that debts can never be fully retired. If debt isn't accumulating, then money isn't being created and the whole system locks up and shuts down.

It's for this reason that you can expect continued deficit spending and a perpetual expansion of the federal debt. It's been going on for many decades, with the exception of a brief respite during the Clinton years. When the government finally runs out of foreign lenders, the Federal Reserve will just ramp up its printing and further devalue the dollar.

This fiscal mess comes at a particularly bad time for a nation confronting a long term wave of retirements by its Baby Boomers, one-quarter of the population. This will dramatically raise expenditures for things like Social Security and Medicare, even as the nation's productivity suffers a parallel and resulting decline.

Such a decline in productivity is a recipe for disaster to a nation so reliant on the perpetual-growth economic model.

As I've said repeatedly, there are no good solutions to our economic woes; only very difficult choices. We have entered a debt trap that presents an enormous conundrum; do we continue to mortgage our nation's future by becoming even more grossly indebted? Or, do we show fiscal restraint and suffer the consequences of lowered growth, economic stagnation or even the possibility of another depression?

My guess is that the government maintains its deficit spending because it has no other choice. The economy must grow or it will die. Stasis equals death. Some entity must attempt to spend the economy into a more robust pattern of growth, which will result in even more debt. If it's not the private sector, then it will be the public sector.

There are some really serious and difficult challenges ahead us as a nation. And I'm not talking about ten years from now either. Some really unpleasant realities will have to be confronted starting next year, and again each year thereafter.

You could say there's a shit storm a brewin'.

European Crisis Has Global Consequences

What has been clear to me for quite some time is that Greece is going to exit the eurozone, either willingly or unwillingly. The nation is in a full-on depression and there is no way for it to ever repay its debts.

The Greek unemployment rate was last measured at 21.7 percent in February, a new record. More than half of young people (15-24) are without a job, a recipe for social disaster. In a population of 10.7 million, 1.1 million are jobless and only 3.87 million are employed, a decline of 8 percent, year-over-year.

Even the nation's population is in decline, which will thwart any lingering hope of long term economic growth. Absent a growth in population, energy supplies and credit, there can be no economic growth.

As it stands, the Greek economy is projected to contract by about 20 percent from 2008 to 2012. That's just brutal.

There has been a wave of corporate closures and bankruptcies across Greece. Tax collections, already poorly enforced prior to the economic meltdown, have collapsed.

Under these conditions, there is no way for Greece to grow its economy and service its debts.

Fearing a banking collapse, Greek depositors withdrew €700 million ($890 million) from the nation’s banks on Monday. This is creating a self-fulfilling prophecy and putting enormous strain on the Greek banking system, which will need even more funding from the European Central Bank.

The ECB is just one of the entities to which Greece is heavily indebted and will likely be unable to repay. At a minimum, given its plight, Greece may simply refuse repayment since this payment scheme will keep it permanently indebted.

At its heart, a debt crisis is really a crisis of confidence. In Greece, and elsewhere in Europe, there is no confidence whatsoever.

The failure of Greek party leaders to reach an agreement to form a unity government is raising fears that Greece could soon be ousted from the euro zone. It may even choose to leave voluntarily. Such a possibility is rattling global financial markets. There is no legal mechanism for a nation to leave the euro zone and that is a vexing problem. Apparently, the architects of the euro zone never imagined such a scenario.

Any sign that Greece is preparing to exit the euro zone would trigger contagion in the more vulnerable euro zone bond markets, such as Spain and even Italy. The trouble in Europe is expanding and worsening. Leaders have been delaying some rather ugly outcomes for years, but they are now running out of time. They can no longer kick the can down the road because they have finally run out of road.

This week, Moody's downgraded the ratings of 26 Italian banks. But that's only half the story.

Moody's also downgraded 16 Spanish banks in what was the latest blow for a country already facing economic recession, surging unemployment and a property bust. There is a legitimate fear that the run on Greek banks will shift to Spain next.

The contagion in Europe has been continually spreading, from Greece, to Ireland, to Portugal, to Spain and even Italy. The yields on Spanish and Italian government debt are again rising to unsustainable levels. If unchecked, that could raise the crisis to an entirely new magnitude. Italy and Spain are the third and fourth largest economies in the euro zone.

As it is, there are now debt and/or bank problems in countries that have been traditionally viewed as safe and stable: Holland, Austria, Switzerland and Sweden, for example.

The continent's recession will have global consequences. It will dampen demand and hurt exporters that rely on the European market, such as the U.S.

The European sovereign debt crisis and slowing global economy have driven the dollar to its longest rally since 1985, as investors seek to reduce risk. The strength of the dollar is weighing on dollar-priced commodities such as gold and oil, making them more expensive for holders of other currencies.

In essence, the purchasing power of the dollar is rising, making commodities cheaper. So, commodities aren't really going down in value; the dollar is going up in value.

On the one hand, this is good for the U.S. and American consumers. Lower pump prices would be a welcome outcome. However, while oil/gas prices are dropping here, they are rising elsewhere in the world. That will hurt other economies, and this is ultimately a global issue.

Furthermore, the strength of the dollar will make U.S. goods more expensive overseas, ultimately hurting American exporters. That's not good for the country's whopping trade deficit, or the economy in general. So the rising dollar can be viewed as a tradeoff, or a mixed blessing.

The global economy is just creeping along, reacting to one crisis after another. Even the giant Chinese economy is slowing. That's bad news. The world needs robust economies to spur trade and growth.

Ultimately, the nations of the world are grappling with unsustainable debts. And the whole world needs economic growth to service all those cumbersome debts. The trouble is, there can be no growth without debt. Growth equals debt. In order to grow, the world's economies will have to incur even more debt. But that's like adding more disease to an already sick patient.

Furthermore, there can be no economic growth without an abundant supply of oil, particularly cheap oil. Neither exists.

The global economy is inextricably linked due to trade, finance and the competition for finite resources, such as oil. That's why the pain in Europe will be felt worldwide.

Not every nation can be a net exporter, meaning that huge trade imbalances will not only continue, but will worsen. This is simply unsustainable.

As credit risk rises, lenders will become increasingly scarce and the cost of borrowing will reach unmanageable levels, as is already the case in parts of Europe.

When the price of oil drops, that means the world economy is slowing or stagnating. That's a bad tradeoff. And, as previously stated, if oil prices are dropping only in the U.S. due to a rising dollar, that has an opposite effect to the rest of the world, which must buy oil in dollars.

We are witnessing a slow motion train wreck, or even collapse. Europe's leaders, as well as the central bankers around the world, are attempting to hold back the tide.

How this ends is open to speculation, but one thing is certain; it won't end well.

U.S. Will Bounce From One Economic Crisis To The Next

The U.S. economy appears to be stalling.

Gross domestic product rose at a 2.2% annual rate between January and March, slower than the 3.0% pace in the prior three months. The first-quarter growth reading was lower than expectations.

Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower won't even keep up with population growth.

The Commerce Department reported that durable goods orders tumbled 4.2 percent in March, the largest drop in three years. Durable goods range from appliances to aircraft. And recent data also showed that industrial production was flat in March for a second straight month. These are sure signs that the U.S. economy is slowing.

Even before this latest round of bad news, the nation was already grappling with the worst recovery since the early years of the Depression era. For tens of millions of Americans, there has been no recovery at all. And consumer sentiment reflects this.

Consumer confidence remains stuck in recession territory. The consumer-confidence index fell to 69.2 in April from a revised March reading of 69.5, according to the Conference Board. Generally, when the economy is growing at a good clip, confidence readings are at least 90.

Here's the central problem for the U.S. economy: the middle class — the nation's economic engine since the end of the Second World War — is vanishing. And the economy is suffering as a result.

The long term erosion of the middle class has triggered a major loss of purchasing power. The result is chronically inadequate demand for goods and services. Consequently, the economy struggles to grow, leading to further shrinking of what's left of the middle class.

The nation's relentless unemployment issue is only one part of the problem.

From January through April, the economy added an average of about 200,000 jobs a month. Though job growth of any size is obviously a good thing, that pace is not nearly fast enough to recover the losses from the Great Recession and its aftermath in the foreseeable future.

At that rate of job growth, it would take us until 2019 to get back to full employment. The trouble is, the country should actually have even more jobs given population growth and the current size of the economy.

Here's some perspective: the U.S. labor market started 2012 with fewer jobs than it had 11 years ago in January 2001. The only reason the unemployment rate keeps dropping is because people continue dropping out of the labor force. They're too discouraged to continue looking for work. Most worrisome, the largest drop in U.S. labor participation is coming from men 20 years of age and older.

That's a troubling trend.

Believe it or not, the U.S. economy is now producing more goods and services than it did when the recession officially began in December 2007. However, it is doing so with about five million fewer workers. Employers have learned how to produce more with fewer workers. That's good for employers, but bad for workers and the unemployed.

Unemployment aside, the other major issue is stagnant or declining wages for those who still have their jobs.

U.S. corporations are reporting record profits. In fact, they are sitting on a huge pile of money — an excess of $2 trillion — and yet the unemployment / underemployment rate stubbornly remains at 22%.

Clearly, there is still plenty of money in the U.S. economy. The problem is that far too much of it is concentrated at the top and is not being spent into the economy.

American CEOs saw their pay spike 15 percent last year, after a 28 percent pay rise the year before. That's in line with a trend that dates back three decades.

CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a recently released study by the Economic Policy Institute. That means CEO pay grew 127 times faster than worker pay.

Last year, CEOs earned 209.4 times more than workers, compared to just 26.5 times more in 1978.

As long as all of that money remains concentrated at the top, instead of being fairly paid to workers in the form of salaries and wages, the nation will remain in decline.

Wealthy Americans spend a much smaller portion of their incomes than does the large, but shrinking, middle class. There are only so many houses, yachts and exotic sports cars the wealthy will buy.

Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt, says the Wall Street Journal.

An analysis by the Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis.

But judging by the way the economy is performing, and by the number of people requiring unemployment and other government assistance, you'd never know it. These huge corporate profits haven't translated into an adequate number of good-paying jobs.

Instead, companies have driven their employees — fearful of losing their jobs — into becoming increasingly more productive.

Overall, the Journal found that S&P 500 companies have become more efficient, and more productive. In 2007, the companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.

While corporations and CEO's prosper, ordinary Americans continue to suffer, many of them toiling away in low wage jobs.

Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.

One-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

There are far too many low-wage earners for the economic well-being of the country. That's not good for a country in which 70 percent of the economy is driven by consumer spending. That sort of consumption seems unsustainable.

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

Again, as long as the middle-class continues to shrink and doesn't have adequate wages to spend back into the economy, this predicament will not only continue, but will worsen.

There is a widespread feeling of foreboding that the economy is not just stalling, but may in fact be headed for yet another contraction, resulting in a double-dip recession.

Famed economist Nouriel Roubini said the U.S. economy could fall into stagnation in 2013 and ultimately put the nation into the second half of a double-dip recession. Roubini, who correctly predicted the housing-market crash and recession of 2008-09, noted that real wages for U.S. workers are not growing and that America’s crushing debt is strangling growth. Roubini said that GDP will be “lucky” to grow 2% this year and the U.S. could retreat into near-zero growth next year.

And prominent Yale economist Robert Shiller, the designer of the Standard & Poor’s/Case-Shiller house price index, says that the global economy is mired in a "late Great Depression", despite the stimulus policies of central banks. Shiller says the world is in a “new age of austerity" and also says housing prices will drop by a further 20 percent as the downturn gripping the United States deepens.

All of that sounds quite stark. Yet, these two guys know what they're talking about. They've made accurate calls in the past. Both men can see the writing on the wall. And it isn't good.

Due to the financial crisis, the Great Recession and the subsequent stagnation, the federal government is dealing with a huge falloff in revenues. Meanwhile, there has been an enormous increase in consequent safety net payments for unemployment, food stamps and Medicaid. This is the reason for our continued annual deficits.

Government spending has actually fallen for six straight quarters as Recovery Act funds have been exhausted and state and local governments have struggled with tax revenue shortfalls.

Congress will be forced to act to address its fiscal crisis, or else the nation's credit rating could be downgraded yet again. Such a downgrade may inevitable no matter what Congress does. Yet, the legislative branch is now so dysfunctional that it would surprise no one if they fumble yet again.

The failure of Congress and the White House to agree on taxes and spending next year could spell doom for the economy.

Early next year, the government is set to enact huge budget cuts, while allowing the Bush tax cuts and the payroll tax cuts to expire. The likely result will be a choke hold on the already struggling economy.

We are finally seeing the limits of fiscal and monetary policies.

The Fed has pumped $2 trillion into the financial system, slashed overnight interest rates to zero and made the unprecedented promise to keep them there for an extended period. Yet, this is the best that monetary policy can do.

For good reason, Americans have little confidence in any of the institutions pulling the strings on the U.S. economy: Congress, the Federal Reserve or corporate America.

Europe is already in recession, and the U.S. is almost certain to follow. It is against this backdrop that the U.S. braces for yet another storm. We can only hope that we are not dashed upon the rocks like an old ship.

Given our structural deficiencies, it now seems that the U.S. is doomed to bounce from one economic crisis to the next. This seems to have become a way of life for us. It's a tough thing to get used to.