Getting It Wrong in a Really Big Way

Here is a bit from an excellent post by Robert Reich that points out that the big shots at the top of the economy are reading the wrong tea leaves. They are getting it wrong. They are reading the opposite of what is really there:

Much of Wall Street thinks inflation is now the biggest threat to the US economy. As has been the case in the past, the Street is dead wrong. The biggest threat is falling into another recession.

The most significant economic news from the first quarter of 2011 is the decline in real wages. That’s unusual in a recovery, to say the least. But it’s easily explained this time around. In order to keep the jobs they have, millions of Americans are accepting shrinking paychecks. If they’ve been fired, the only way they can land a new job is to accept even smaller ones.

The wage squeeze is putting most households in a double bind. Before the recession, they’d been able to pay the bills because they had two paychecks. Now, they’re likely to have one-and-a half, or just one, and it’s shrinking.

Add to this the continuing decline in the value of the biggest asset most people own – their homes – and what do you get? Consumers who won’t and can’t buy enough to keep the economy going. That spells recession.

Why doesn’t Wall Street get it? For one thing, because lenders always worry more about inflation than borrowers – and, in general, the wealthier members of a society tend to lend their money to people who are poorer than they are.

But Wall Street’s inflation fears are also being stoked by several specifics.

First are price upswings in food and energy. The Street doesn’t seem to understand that when most peoples’ wages are dropping, additional dollars they spend on groceries and at the gas pump means fewer dollars they have left to spend in the rest of the economy. Rather than cause inflation, this is likely to lead to more job losses.

The Street is also worried that the Fed’s easy money policies are pushing the dollar down and thereby fueling inflation – as everything we buy abroad becomes more expensive. But if wages are stuck in the mud and everything we buy abroad costs more, Americans have even fewer dollars to spend. This also spells recession, not inflation.

Finally, the Street worries that if Democrats and Republicans fail to agree to a plan to cut the budget deficit, the credit-worthiness of the United States as a whole will be in jeopardy – causing interest rates to rocket and inflation to explode. Standard & Poors, the erstwhile credit-rating agency, has already sounded the alarm.

The Street has it backwards. Over the long term, the deficit does have to be tackled. But not now. When job growth remains tepid, when wages are dropping, and when the value of most households’ major asset is declining, government has to step in to maintain overall demand.

This is the worst possible time to cut public spending or reduce the money supply.

The biggest irony is that the Street is doing wonderfully well right now, in contrast to most Americans. Corporate profits for the first quarter of the year are way up. That’s largely because corporate payrolls are down.

Payrolls are down because big companies have been shifting much of their work abroad where business is booming. The Commerce Department recently reported that over the last decade American multinationals (essentially all large American corporations) eliminated 2.9 million American jobs while adding 2.4 million abroad.

What the Commerce Department didn’t say is the pace is picking up.

This pig-headed refusal to look at reality and see it for what it is makes life miserable for the bottom 90% of society. Reich sums it up nicely:

America’s jobless recovery is becoming a wageless recovery. That puts the odds of another recession greater than the risk of inflation. Wall Street and its representatives in Washington don’t understand – or don’t want to.

Sadly Obama doesn't "get it". He has never acknowledged that his economic policies are always a dollar short and a day late.