Tonight president Obama will give the State of the Union and the topic will be jobs, jobs, jobs.  He'll highlight several (minor) new jobs initiatives, once again champion the (already dead) stimulus, and talk about how urgent it is that we make some (major) cuts to the budget.  But even though the focus will be on how to get the economy going again, the real subtext will be all about sacrifice.  And that means those at the bottom sacrificing so that those at the top can maintain their position.

There are several reasons why all the high talk about recovery will prove to be disappointing in the coming year.  Let's talk about the three most important ones.

First of all, there has been a nearly unprecedented loss of total value in the national economy.  Between late 2007 and today upwards of $12 trillion has been shaved off through various avenues.  The most noticeable was the collapse of the banking system, its subsequent infusion with government funds, and its miraculous "comeback" thanks to a steeply climbing stock market.  But the largest investment institutions still carry untold billions in bad assets, mostly in the form of bad securities that are still backed by mortgages tied to valueless and unsellable homes.

The latest predictions put the number of foreclosures in the coming year at just over 1 million, rivaling last year's record statistic.  In addition to this continuing drain on value, there are problems in the refinancing sector which has seen banks parceling out and passing around paper at an alarming rate.  Many of the bad loans previously held by smaller lenders are now in the hands of one of the big five banks, and those are being further devalued by the length of time houses stay on the market.  The only areas that have seen a decrease in time are those where homes aren't selling at all, or so few of them that the metric has become meaningless.  (There are always properties that will sell, just too few of them, and even they're going at a steeply cut rate.)

The second downward pull on the economy comes from business.  The much talked about--even on the left--trillion dollars in profit American businesses are supposedly hanging onto, mostly comes in the form of new stock value.  That is, businesses that lost big over the last two to three years or so are more heavily financialized than before, since stocks are one of the few bright spots.  And since they can't touch that money without driving the value of their stock down, and the market they so desperately need right now along with it, don't expect any vast infusion of funds from the business sector anytime soon.  Certainly there are those players waiting on the sideline to reinvest in new product and new labor once the government indicates a willingness to cut the budget (thereby relieving them of the worry that future spending will be coming out of their pockets in the form of higher taxes).  Once those hard, and brutal, decisions have been made, there may be some mild uptick in the general economy.  But it won't last for long, and here's why...

The longer a recession goes on, the more the economy takes on a different form than what it looks like during a short downturn.  If a recession lasts a year or eighteen months (which up until recently was thought to be a long event), some businesses fail, but they tend to be the ones that entered into the crisis with heavy debt.  Healthy businesses--measured in this instance not so much by their productivity, or even their revenue, as by their overall indebtedness--tend to survive such short-lived recessions.  But during a long crisis, a really long one like the one business has been experiencing since the beginning of the credit crunch in '06, healthy businesses start to fail.  And that's what has been happening over the last 8 or 9 months or so, at an alarming rate.

One way to measure the failure rate, or near failure rate, of healthy businesses, is to look at what's happening with hiring at small businesses.  (We're talking about legitimately small businesses here, and not the type registered at tax time as "small," which thanks to a lot of loopholes actually includes plenty of large businesses that just don't like paying large taxes.)  At businesses with less than 200 employees, jobs have been falling away rapidly.  While the national hiring rate saw a slight pre-holiday surge (mostly in the form of temporary work at big box retailers and shippers), small businesses have been shedding jobs steadily for several quarters now.  So, what's happening?  What makes a long recession so different from a short one?

Well, as a recession goes on and on and on, several phenomena emerge that simply do not exist during a good economy, or for that matter during a regular recession.  Since the number of failed, or effectively "frozen," businesses early on due to indebtedness was quite large in this case, that meant that the customers and suppliers of other, healthier businesses weren't paying them.  This happens in a short recession too, but healthy businesses can usually fend off the worst of the effects by taking out additional lines of credit. (Notice how over time, several such successive events will create more indebtedness, and fewer healthy businesses, in the economy in general.)  That's fine, though, according to the logic of the system, since this means that the "weak" will be separted from the "strong," and only the best run businesses will survive.

However this isn't how it works in practice, since many of the firms that carry the heaviest debt are suppliers and wholesalers, and their failure often causes the domino-effect failure of a large number of perfectly fit businesses that were dependent on them.  This is true even in a short recession.  The phenomenon is intensified and extended during a long one.  On top of this, long recessions, which in the present case includes a frozen credit market, cause both more businesses to be unable to pay their customers and vendors, and more healthy businesses to fail because they can't get the needed relief from lenders who are scared that their money will go to waste.  This means that the trillion dollars which American business is supposed to be hanging onto--and which even if they could spend it (which they can't), would still be only a little more than the stimulus and a far cry from the total lost value--is probably better left where it is, sunk into stocks and bonds, where at least it can prop up some 401k's and pensions and be of some real help to real people.

Still getting business to reinvest that money is the stated goal of almost everyone in Washington today.  The theory runs like this: Tax relief provides some assurance both to lenders and to big businesses that they won't face the additional burden of a higher levee in the near future, which would be necessary in a downturn if the government wanted to maintain its pre-recession level of spending.  Reduced revenues during a downturn mean that government can either dig in, or cut and run.  With the stimulus, the Obama administration at first signaled that they were digging in, and that they would protect certain government programs--including healthcare and Social Security, along with the vast majority of defense spending--while continuing to try and get the economy going again through the direct creation of jobs (a la FDR).  However, much of the stimulus came in the form of tax cuts, so it actually had the effect of further reducing revenue that went to important areas.  The "shovel ready" projects program never produced enough jobs to make a big difference in the unemployment numbers either.  (One can argue about what would have happened, but of course that has very little weight in real life.)

The stimulus, despite its critics, was quite large.  Certainly much bigger than any increase in domestic government spending that would have gotten a hearing on Capital Hill before the crisis.  Still, there are other things weighing down the economy...and that brings us to the third and final reason why, regardless of what the president says tonight, we won't see any big recovery anytime soon.

Back in late December, Matthew Craft at Associated Press wrote an interesting article about the bond market. Craft pointed out U.S. investors had pulled $8.6 billion out of bond funds in one week in December, and that they'd pulled an average of $3 billion out of bonds every week since mid-November.  The worry amongst investors was that a falling bond market would endanger fixed investments like retirement funds which are commonly invested in long-term, regular-yield bond as a relatively safe way of stowing away money.  But much like healthy businesses that through no fault of their own are now facing failure, Americans who thought their retirement savings were safe in low-risk bonds may now face the prospect of either losing money or having to see their nest egg be reinvested by desperate bond funds in much riskier stocks. 

Another possible side effect of the steady dribbling away of money from bonds noted by Craft is that corporations and municipalities that depend on bond funds to borrow money will have to pay more to do so.  This means that states and cities, already strapped for revenue, will have few options if they near default.  Over the past few weeks, there has been a lot of talk about possible defaults at the state level.  Although this is unlikely, with sharply reduced revenues, and the federal government indicating its own change in direction toward budget cuts, the only solution for local governments will be to cough up the extra cash to bond funds for a now inflated product.  This could produce the next bubble in the American (and the global) economy: an overpriced bond bubble waiting to burst when investors decide that stocks have reached their peak and it's time to head back in the direction of bonds, thus rapidly deflating the paper held by municipalities--that is, us.

The amount of money involved is quite staggering.  As Craft notes, a record $376 billion flowed into bonds in 2009, allowing many big companies to avoid defaults during the crisis.  But while the real amount invested in the bond market during that time was much larger, and the recent pumping up of the market by the Federal Reserve with their purchase of $600 billion worth added more on top, fixed-income funds are another matter.  The leak in the market will probably continue well into next year, while at the same time states search for some solution to their problems, and discover that without the support of more federal funds, they'll have to borrow money big-time.  One can see a scenario emerging where the biggest holdup in history at the federal level--the banking industry's heist of a trillion public dollars--is followed by a sequel at the state and city levels, with Wall Street institutions demanding "restructuring" deals be put in place across the country.  Neoliberalism has come home.

The entire system, it is becoming increasingly clear to a growing number of people, is dedicated to preserving the wealth of those who are already obscenely wealthy, especially during a crisis.  And while the rest of us are asked to sacrifice, the ruthless game of capitalism goes on--there is no pause, no "coming together," and no sacrifice, at the top.  The extended crisis is seen as an even greater opportunity to extort even more wealth from those at the bottom, and not as some Kumbaya moment.  Remember this as you listen to the president prattle on this evening about how we all have to work together to get through this emergency.  As leftist economist Ellen Meiksins Wood once noted, sacrifice is the official credo of the bourgeoisie.  And you know how much credos are worth in the market, right?