The crisis is worsening for America's poor.

QE2 is sailing the US into stormy waters

Ambrose Evans-Pritchard
January 11, 2011
The crisis is worsening for America's poor.

THE US is drifting from a financial crisis to a more insidious social crisis. Self-congratulation by the US authorities that they have avoided a repeat of the 1930s is premature.

There is a telling detail in the US retail chain store data for December. Stephen Lewis from Monument Securities points out that luxury shops had an 8.1 per cent rise from a year ago, but discount shops catering to America's poorer half rose just 1.2 per cent. Tiffany's, Nordstrom, and Saks Fifth Avenue are booming. Sales of Cadillac cars have jumped 35 per cent, while Porsche's US sales are up 29 per cent. The luxury goods stock index is up by almost 50 per cent since October. Yet Best Buy, Target, and Walmart have languished.

Such is the blighted fruit of Federal Reserve policy. The Fed no longer even denies that the purpose of QE2 (its second round of quantitative easing) is to drive up Wall Street. Ben Bernanke's ''trickle-down'' strategy risks corroding America's solidarity before it does much to help America's poor.

The number of people on food stamps - worth about $US140 a month - has reached 43.2 million, a record high 14 per cent of the population. The US Conference of Mayors said visits to soup kitchens are up 24 per cent this year. About 643,000 people need shelter each night. Jobs data released on Friday was dire, again. The only reason headline unemployment fell from 9.7 per cent to 9.4 per cent was that so many dropped out of the system.

The ''labour participation rate'' for working-age men over 20 dropped to 73.6 per cent, the lowest since the data series began in 1948.

It is no surprise that America's armed dissident movement has resurfaced. Time magazine's ''Locked and Loaded: The Secret World of Extreme Militias'' describes an underground stint with the 300-strong Ohio Defence Force: citizens who spend weekends with M16 assault rifles and an M60 machinegun, training to defend their constitutional rights by guerrilla warfare.

Raghuram Rajan, the International Monetary Fund's former chief economist, says the subprime debt build-up was an attempt - ''whether carefully planned or the path of least resistance'' - to disguise stagnating incomes and to buy off the poor.

''Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,'' he said.

Extreme inequalities are toxic for societies but there is a body of scholarship suggesting they also cause depressions. They create a bias towards asset bubbles and over-investment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.

Today, multinationals can exploit ''labour arbitrage'' by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs in America and Europe.

Asia's mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.

So we limp on, with large numbers of people trapped on the wrong side of globalisation, and nobody doing much about it.

Would Franklin Roosevelt have tolerated such a state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?

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