Economic forecasters have underestimated how bad the current crisis is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II.

Sound familiar? Flat wages, weak demand, slow growth and more and more debt? All signs of an aging, hobbled system that’s slipping inexorably into stagnation. This is why the Fed adopted its present policy of bubble making, because the only way to avoid stagnation is by increasing the debt-load. Authors John Bellamy Foster and Fred Magdoff traced the origins of the policy back to the 1970s. They revealed their findings in an article in The Monthly Review titled “Financial Implosion and Stagnation”. Here’s an excerpt:

“It was the reality of economic stagnation beginning in the 1970s, as heterodox economists Riccardo Bellofiore and Joseph Halevi have recently emphasized, that led to the emergence of “the new financialized capitalist regime,” a kind of “paradoxical financial Keynesianism” whereby demand in the economy was stimulated primarily “thanks to asset-bubbles.” Moreover, it was the leading role of the United States in generating such bubbles despite (and also because of) the weakening of capital accumulation proper together with the dollar’s reserve currency status, that made U.S. monopoly-finance capital the “catalyst of world effective demand,” beginning in the 1980s. But such a financialized growth pattern was unable to produce rapid economic advance for any length of time, and was unsustainable, leading to bigger bubbles that periodically burst, bringing stagnation more and more to the surface.“

A key element in explaining this whole dynamic is to be found in the falling ratio of wages and salaries as a percentage of national income in the United States. Stagnation in the 1970s led capital to launch an accelerated class war against workers to raise profits by pushing labor costs down. The result was decades of increasing inequality.” (“Financial Implosion and Stagnation”, John Bellamy Foster and Fred Magdoff, Monthly Review)