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Reading newspapers can be a startling experience. On July 26 this year, U.S. papers ran two quite contradictory stories. In the first news article, USA Today reported on its quarterly forecast of economists. The headline read: “Economists’ optimism wanes.” It seems that the combination of “turmoil in Europe, lackluster job growth, a weak housing market and a slowdown in factory output” make it very unlikely that the United States can recover the lost 8.5 million jobs “at a more-than-glacial pace.” In addition, they fear “global financial instability.”

So, quite reasonably, they are not optimistic. One could say that the economists’ congenital optimism about the world market has finally hit the hard rock of reality. Some of us came to this conclusion a lot earlier. So how is it possible that, the very same day, the New York Times ran a front-page story about the “surging profits” of U.S. industries?

The answer is again in the headline: “Industries find surging profits in deeper cuts.” It is not that the industries are selling more products. They are indeed selling fewer. But they have been cutting costs – that is, they have been firing workers.

They have found that, if they fire enough workers and make the remaining workers work harder, they may have fewer sales but they have greater profits. This is called a “triumph of productivity.” Ethan Harris, chief economist at Bank of America Merrill Lynch, is quite honest about it: “Companies are squeezing their labor costs to build profits.”

However, as the Times notes, the result is that “the benefits are mostly going to shareholders instead of the broader economy.” And the industries do not intend this to be a temporary solution. For even if sales improve, they are not planning to hire more workers. On the contrary, according to one chief executive of a large firm, “the last thing we’re worried about is when we are going to have to add more capacity.” Rather, we’re “reconfiguring our entire operational system for greater flexibility.”

So, have U.S. industries (and industries elsewhere in the world) found the magic bullet that will enable them to expand profits ever into the future? You’ve got to be kidding. In the 1920′s Henry Ford famously paid his workers higher wages than was the norm because, he said, he wanted them to be his customers. His successors at Ford today have reduced their North American work force by over 50 percent in the last five years. More profits – but fewer customers.

There’s the little problem of what Keynes and Kalecki wrote about – effective demand. In any medium-run calculation, if there are not enough customers, there will not be enough sales, and very soon the profits will dry up. The industries that are increasing their profits by reducing their work force and squeezing their remaining laborers are going to have surging profits for a very short run until they run into the hard brick wall of serious deflation. And then they’ll crash.

Can’t they see this? Sure, some can, but they are operating on the hedonistic principle of eat, drink, and be merry, for tomorrow we may die. It might be called “Ponzi solitaire.” In ordinary Ponzi schemes, the operator bilks other people until the house of cards collapses – as it did for Bernie Madoff. In Ponzi solitaire, you bilk yourself until you crash. And just as the investors in an ordinary Ponzi scheme (potential victims) hope that the crash will come only after they have gotten their profits, so the players of Ponzi solitaire (industry executives) hope they’ll escape with their personal profits before the whole industry collapses.

Good luck!

As the world’s leaders and pundits continue to deny the reality of the world depression – they won’t even use the word – the impossible choices that are faced by government after government become more and more obvious every day. Consider what has happened in just the last month.

The United States had its worst unemployment figures in quite a while. Yes, there were some new jobs, but 95% of them were of temporary census workers. Private employers added just 10% of the jobs they were expected to add. Despite this, it has now become politically impossible to get further stimulus money voted by Congress. And the Federal Reserve has ceased to buy Treasury securities and mortgage bonds. These had been the two main strategies to increase jobs. Why? The call for deficit cuts has grown too strong.

The most immediate consequence can be seen at the level of the budgets of the separate state governments. The cost of Medicaid has gone up because of the economic crisis. This cost is borne by the separate states. They have been helped in the past year by increased federal subsidies of state spending on Medicaid. Congress won’t renew this. Gov. Edward Rendell of Pennsylvania says this will increase his state’s budgetary shortfall by two-thirds, and force it to lay off 20,000 teachers, police officers, and other government workers. Of course, this is in addition to lost medical services for many people.

In Great Britain, the new Prime Minister, David Cameron, says that cutting down on borrowing is “the most urgent issue facing Britain today.” The Financial Times sums up his proposals in its headline: “Cameron pitches an age of austerity.” Its assessment of this policy: “If the government is to make such steep reductions in spending, it cannot avoid visibly damaging frontline services. The cuts will be more savage than anything contemplated by even the Thatcher government.”

Germany’s Chancellor Merkel has announced her version of austerity: deep public spending cuts immediately, rising in amount each year for the next four years. She has also announced new taxes on airlines, which the world’s airlines immediately announced would seriously hurt their ability to reduce their negative balance-sheets and save them from bankruptcy. Germany’s unemployment rates will increase, but its unemployment benefits will be reduced. Other governments in Europe plus the United States have been urging Germany to spend more and export less, in order to restore world demand. Merkel rejected these demands, saying that debt reduction was her priority.

Japan’s new Prime Minister, Naoto Kan, warned the country that the debt situation is so bad that Japan could face a situation comparable to that of Greece. To remedy this, he proposed some increased taxation, more regulation of the financial arena, and new kinds of public expenditures.

In the middle of all this super-austerity in the North, a most remarkable thing has occurred, which seems to have escaped almost all notice. As everyone knows, Spain is one of the many European countries now in economic difficulty because of very large debt ratios. On May 30, Fitch Ratings joined other ratings companies in reducing Spanish bond ratings from AAA to AA+. The question is why. Just the day before, the Spanish parliament had voted the country’s deepest budget cuts in 30 years.

Budget cuts are presumably what Germany and others have been calling for in Greece, Spain, Portugal, and other countries threatened by too much debt. Spain responded to this pressure. And just because it did, Fitch Ratings downgraded it. Brian Coulton, Fitch’s person in charge of ratings for Spain, said in the statement downgrading Spain: “The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term.”

So there it is – damned if you do, and damned if you don’t. The financial speculators have created a disastrous fall in the world-economy. The ball was then thrown to the states to solve the problem. The states have less money and more demands on them. What can they do? They can borrow, until those who lend money won’t do it, or demand too high a rate of interest. They can tax, and the businesses say that this will cut back their ability to create jobs. They can reduce expenditures. And in addition to the terrible pain this inflicts on everyone, but especially on the more vulnerable, this action also will reduce the possibility of growth, as Mr. Coulton points out for Spain.

Of course, there is one big place to reduce expenditures – the military. Military expenditures do provide jobs but far fewer than if the money were used otherwise. This does not apply only to the biggest spenders like the United States. A virtually uncommented aspect of Greece’s debt problems was its heavy expenditure on the military. But are governments ready to reduce significantly military expenditures? It doesn’t seem too likely.

So, what can the states do? They are trying one thing today, and another thing tomorrow. Last year, it was stimulus. This year, it’s debt reduction. The year after, it will be taxation.

In any case, the overall situation will be worse and worse.

Can China save us? Stephen Roach, Morgan Stanley’s very acute analyst, seems to think so, provided the government “stimulate(s) private growth.” In that case, rising wages will be offset by higher productivity. Maybe. But the Chinese government has been resistant to such a policy up to now, not for economic but for political reasons. Its drive to maintain political stability has been paramount up to now. Furthermore, even Roach has one great fear – China-bashing in Washington leading to trade sanctions. Myself, I think that’s a high probability, as the U.S. economic situation continues to deteriorate.

The way out of all of this is not some small adjustment here or there – whether of the monetarist or the Keynesian variety.

To emerge from the economic box in which the world finds itself requires a fundamental overhaul of the world-system. This will surely have to come, but how soon?