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One of the most basic precepts of the U.S. economy is that Gross Domestic Product (GDP) growth depends on the consumer -- some 70% of GDP growth, in particular. The U.S. has created two inter-related industry clusters to assure that consumer spending keeps growing. While one continues in full force, the other is failing fast. This is causing consumers to put their spending into reverse, creating an economy-wide recession diet on steroids.

What are these two inter-related industry clusters? The Celebrity Industrial Complex (CIC) assures that we see images of the wealthiest and most celebrated sliver of society -- creating a desire to close the gap between us and them. And the Borrowing Industrial Complex (BIC) provides the cash we otherwise could not afford to pay for the goods and services that never quite close that gap. The CIC is still going strong, but with incomes down since 2000, household wealth slashed by $6 trillion, and banks scrambling for capital, the BIC is in cardiac arrest.

Consumers have decided to ignore the psychological pull of the CIC and use whatever money they still have to keep their families alive. While official government statistics don't show this -- perhaps they will when it releases third quarter reports -- consumers are cutting back. Gil Colon, sales manager at Villa Reale, a Las Vegas art and furniture store puts it well: "People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything," according to The New York Times.

Much has been written about the add-ons or 'pork' in the rescue package passed by the U.S. Congress and signed President Bush.

The add-ons, which increased the bill's projected cost by $130-$165 billion, depending on the analysis, have been viewed as another example of "special interest lobbying," "sneaky ways to get pet projects passed," "ripping off the taxpayer" and/or as simply un-American.

Well, the truth is, add-ons in the United States have taken place in every Congress since the nation was founded. Further, no one really knows who made the first legislative "deal," but to say that senators in ancient Rome or officials in Greece, did not trade votes for projects or patronage would be a stretch.

"Democracy is the worst system ...

Of course, it's much more ethical -- some would call it virtuous -- to propose a bill, then get a large majority to render a decision on the program/policy/law solely on its merits, driven by whether the bill is in the nation's interest.

And likewise, add-ons/pork can increase federal spending by substantial amounts, which makes it harder for the federal government -- or any government, for that matter -- to live within its means.

The U.S. economy continues to shed jobs. Global economic growth is slowing. And public officials on both sides of the Atlantic are preparing rescue packages to stabilize financial markets wracked by the worst bout of credit 'losses and fear' in generations.

Amid the mounting financial and economic concerns there has been one bright spot: oil prices, which have dropped more than 35% since July and are likely to decline more in the months ahead. Oil rose 40 cents to $94.33 per barrel in Friday morning trading.

'The one positive for U.S. consumers, businesses'

Economist Peter Dawson said falling oil demand in the U.S., from both conservation and (unfortunately) a decrease in commercial activity is a factor, as is a slowdown in oil consumption growth in emerging markets, including giants China and India.

Further, the price decline is "the one positive for U.S. consumers and businesses" this year, Dawson said.

"If the price decline continues, it will be like a mini-tax cut. Think of it this way, for each $10 drop in the barrel of oil, Americans pay about $70-75 billion less per year in oil expenses. That money can be used to pay monthly expenses, pay down debt, or saved / invested," Dawson said. Gasoline prices, currently averaging about $3.60-$3.80 per gallon nationally, should drop to the $3.20-$3.50 range, with some areas seeing prices below $3 in 2009, Dawson said.

Falling stock market; massive credit market stress; bankers reluctant to lend; bank defaults; companies cutting back investment / plant expansions; large budget deficit; large trade deficit; falling currency; stagnant economy; rising unemployment; high cost of food, energy; and a large portion of the public stating that the nation is on the wrong track, economically.

If you think the U.S. economy is presently mimicking that of a third-world country in the 1970s, you're right.

The United States, after nearly a decade of policy errors and business / consumer mistakes, is in its worst condition economically since the stagflation-plagued 1970s, but with credit market problems that dwarf that era's financing challenges.

In a time like this, when new, negative data points occur almost daily, it's difficult to pinpoint when the turning point will occur. But one may occur in as little as four weeks. Are there economists out there who are doubling as soothsayers? No, it's merely the U.S. Presidential and Congressional election, so says economist Richard Felson.

The first order of the day is financial market stabilization. If the U.S. House of Representatives goes along with the U.S. Senate and approves the rescue bill, that's step one toward financial market stability, Felson said. Add ons / companion public programs will further bolster lender and corporate confidence that the credit markets are not going to go the way of the Edsel, he said.

Financial Times columnist Martin Wolf inquires, do Americans understand their financial and economic system?

Anger at Wall Street's - - and regulators' - - lapses is justified, but at the end of the day to oppose the rescue package is at once self-defeating, contradictory, self-punitive, and borders on nihilism, Wolf states. Take your pick regarding which is the most damaging.

Congressional representatives, particularly conservative Republicans, but also others, opposed the flawed rescue plan as a bailout for the rich, and as a statement against 'socialism.' Socialism? Yes, the plan is flawed, Wolf states, but the ruin that will result from rejecting the plan will destroy the legitimacy not of socialism, but of the market economy. Exactly what are the packages' opponents fighting?

The Congressmen/women also say that they are 'taking a stand for Main Street and against Wall Street.' A contradiction, Wolf writes. Wolf: Wall Street and Main Street are streets that meet. That is what streets do.

Then there is the future. What is the opponents' alternative? The loudest voice here appears to be 'let the market sort things out by itself,' under the assumption that the damage, costs, and negative consequences really won't be that bad. Wolf: This is not prudent, if the early 20th century's experiences are a guide.

Fresh statistics reveal an economy that is in grim shape -- and just in time for the election. Jobless claims are higher than they have been since September 2001 and factory orders plunged 4%. If we elect the McCain whose chief economic advisor thinks we're whiners, we can keep this streak going for another four years.

The economic statistics are grim. Initial jobless claims were higher than they've been in seven years. They increased 1,000 to 497,000 last week thanks in part to Gulf Coast hurricanes and staff cuts due to low demand. Meanwhile, the 4% decline in factory orders was worse than anticipated. Economists had forecast a 3% drop after a previously reported 1.3% increase in July. Why so bad? With banks reluctant to lend, companies can't get the funds they need to buy that factory equipment.

Could we be getting whitewashed economic statistics? If GDP growth is reported as positive for the recently departed third quarter, I will be surprised. If you like the effects of deregulation and tax cuts on our economy, there is ample opportunity to keep those policies firmly in place for four more years. With the S&P 500 down 22% so far this year, I am not sure who can afford to vote that way.

But congratulations are in order for their ability to prosper under such difficult economic conditions.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

U.S. initial jobless claims remain at elevated levels, even after factoring out the effect of Hurricanes Gustav in Louisiana and Hurricane Ike in Texas, the U.S. Labor Department announced Thursday.

U.S. initial jobless claims rose 1,000 to 497,000 for the week ended September 27 -- the highest level in seven years -- the Labor Department said. Without the hurricane-related claims, initial filings would have totaled about 439,000, the department said. Claims for the previous week were revised 3,000 higher to 496,000. Economists surveyed by Bloomberg News had expected this week's initial jobless claims to total 475,000.

Also, the 4-week moving average increased 11,500 to 474,000. Economists view the 4-week average as a better indicator of unemployment conditions, as it smooths-out anomalies for strikes, holidays, or other idiosyncratic events.

Economist Peter Dawson said "job losses continue to occur at a troubling rate, even after taking into consideration the act-of-nature events of Hurricanes Gustav and Ike."

"We have an economy whose fundamentals are definitely not sound. The housing sector remains in a severe slump, financial service layoffs and consolidation obviously will continue, and business investment is low," Dawson said. "Exports are about the only positive data point remaining for the economy, but that too may come under pressure if global growth slows."

A problem that originated in the New World is re-exposing some long-standing nuanced opinions in the Old World.

France and Germany disagreed over how to prevent the global credit crunch from further hurting European banks. Germany, Europe's largest economy, does not want to set up a bailout / rescue fund that France is seeking. Luxembourg Prime Minister Jean-Claude Junker said the fund, which France argued should be as large as 300 billion euros or about $415 billion, isn't needed.

Economist Richard Felson said the United Kingdom also is against the idea, with Britain arguing that an ad hoc intervention policy would be sufficient for now. "A lot will depend on how the U.S. rescue package, provide it passes the U.S. House, performs in lowering overnight interest rates and restoring confidence," Felson said. "There's the sense in the U.K. that while the crisis extends beyond America's borders, the bulk of the bad-asset fallout will still be U.S.-based."

The U.S. Senate passed a revised rescue package, 74-25, Wednesday night and the U.S. House is expected to vote on the measure as soon as Friday.

However, the measure had little impact on overnight interest rates, at least initially. The London Interbank Overnight Rate, or LIBOR, rose for a fourth day, up 6 basis points to 4.21% Wednesday night, as banks continued to hoard cash.

With the U.S. Senate expected to debate and vote on a revised bailout/rescue bill in the next day or so (famous last words), two revisions the world's greatest deliberative body should incorporate are bank recapitalization options and funding to refinance mortgages, economists say.

BloggingStocks' Peter Cohan has written extensively on the need to recapitalize banks, and economist Richard Felson concurs. However, Felson argued that the revised rescue bill should give banks and other institutions the option of either offering their distressed/bad debts to the U.S. Treasury in its reverse auction or accepting a mutually agreeable investment by the U.S. Treasury into the institution.

Creating options for stressed banks

"This will give banks more options, and in my view more incentives to participate in the rescue plan. If the plan just contains asset purchase provisions some banks may balk at the prospect of selling some assets at a fire-sale price of 10 cents or 15 cents on the dollar, and that may prevent some distressed assets from being removed from the system, delaying the financial system's recovery," Felson said. "Offering to buy a stake in the bank offers another recapitalization option."

Non-farm private employment decreased a modest 8,000 in September on a seasonally adjusted basis, ADP announced Wednesday in the ADP National Employment Report (pdf).

Meanwhile, the estimated change in employment for August was revised to a decrease of 37,000 from the previously-announced decreased of 33,000 jobs, ADP said.

The service sector of the economy added 64,000 jobs, while employment in the goods-producing sector declined 72,000, its 22nd consecutive monthly decline. Manufacturing employment fell 48,000 in September, its 25th consecutive monthly decline.

Don't read too much into ADP data

Economist Richard Felson said the September ADP private sector report was modest good news, in that it was benign. "We can't project or read too much into the ADP data because it is just a segment of the job market, but at least the job loss numbers were not large," Felson said.

Washington Post business columnist Steven Pearlstein does not mince words: too many people just don't get it.

Moreover, yours truly is not one to alarm, and typically views 'sweeping and dramatic statements' with a journalist's skepticism and a scholar's critical review.

But when the best economists you talk to, and business executives, and others in financial and investment circles, start reaching the same conclusion, from decidedly different vantage points, the dramatic statement begins to take on more weight, becoming more compelling.

'The reality of the facts on the ground'

Further, as Pearlstein incisively points out, there are reasons why a considerable portion of the American people are not 'getting it' regarding how serious the current situation is. Politicians are more concerned about ideology, partisan posturing, and teaching people a lesson -- if you can believe that they could be so irresponsible (my astonishment added, not Pearlstein's). Financiers have been very slow to admit to greed, arrogance, and incompetence. And foreign government leaders still view the financial crisis as 'an American problem.'

But none of the above changes what Pearlstein, and what my closest economist colleagues (David H. Wang, Richard Felson, Peter Dawson, M. Chandler, and Glen Langan) all argue is "the reality of the facts on the ground," to borrow a phrase from Israel's former Prime Minister and Defense Minister Ariel Sharon. Namely, that a massive, global deleveraging is taking place, and that absent a systemic rescue/intervention by the U.S. Government, in conjunction with interventions by other governments around the world, the world risks the bursting of a credit bubble that threatens to bring down the global financial system.

New York Times Chief Financial Correspondent and Columnist Floyd Norris, appearing on the "Charlie Rose" talk show Monday night on PBS, offered an insight that sort of summed up the financial crisis, the need for a rescue bill, and the reason a considerable portion of the American public doesn't like the rescue package.

Floyd Norris said: "At times it does appear that Wall Street is saying 'Bail us out or the U.S. economy is ruined.' And, if you're a citizen of the U.S., it's perfectly normal to be upset and angered by that. The problem is, what Wall Street is saying is true."

No time for perfection

The rescue bill, even the expected, revised rescue bill by Congress, will not be perfect. And yes, it will help some on Wall Street, including (unfairly) those who 'gamed' the system, or whose business mistakes, dubious securitization frameworks, or just plain greed helped create the crisis in the first place. But the nation does not have the luxury of taking six months to compose and pass a 'perfect' bill. The nation needs a rescue package, imperfect though it may be, to stabilize the financial system. And it needs it now.

Should you, the typical investor be upset about that? Sure, it's o.k. and it's a natural response to be upset, but don't let that emotion lead you to believe the nation or the financial system would be better off without a rescue bill; it won't be. And it's not possible to prevent Wall Street institutions from being involved in the solution -- at this time-pressured, critical juncture, they have to be. As The Times' Floyd Norris noted, Wall Street knows it, we know it, everyone knows it. So accept it, and move forward with the necessary work of getting a rescue plan in place.

By almost all accounts, the defeat of the bailout / rescue bill stunned those both inside the beltway, on Wall Street, and across the nation.

Many political analysts projected that the bill would be approved by the U.S. House of Representatives by about a 80-100 vote margin. The reality: bill defeated, 228-205 and the stock market plunged a big seven zero zero and more.

Public policy analysts, professional and otherwise, will spend ample time investigating the reasons why the bill failed, but in a crisis such as this one, congressional leaders, save for reviewing their mistakes, do not have time for the stuff of graduate seminars in public policy: they need to get a rescue bill passed.

Now what?

Well first, don't panic. As George Bailey (Jimmy Stewart) said during the bank run on the the Bailey Building & Loan in the movie, It's A Wonderful Life, "Now just remember that this thing isn't as black as it appears. Now, we can get through this thing all right. But we've, we've got to stick together."

Few economists / analysts would deny that the financial crisis is so complex, with numerous casual factors, that there's more than enough blame to go around: no one party can or should be seen as 'the culprit.' Moreover, what's paramount now is to identify what works, i.e. what helps solve the crisis, and implement it.

The U.S. Congress' bailout / rescue bill (pdf) is one tool: it will help. If it goes reasonably according to plan, the U.S. Treasury, and the companion agencies the rescue creates, will slowly remove distressed / bad assets from the financial system and in the process would both stabilize the credit markets, and equally important, restore confidence in the financial system.

Another tool: mortgage help in the form of refinanced mortgages for homeowners having trouble paying their mortgage / nearing default.

Economist David H. Wang said Congressional Democrats were unsuccessful in their effort to get U.S. bankruptcy laws amended so that judges could adjust the terms of mortgages -- Congressional Republicans were adamantly opposed to it -- but the bailout / rescue package does authorize the U.S. Government to further assist homeowners who face mortgage defaults.

The dollar rose early Monday against the euro, pound and yen, but for all the wrong reasons -- a belief that more banks in the U.K. and Europe will face pressure and Europe's economy will slow further.

The dollar rose almost 2 cents versus the euro to $1.4367 and 3 cents versus the British pound to $1.8035. The dollar also rose about one-quarter yen to 106.25 versus the Japan's yen.

Currency Trader Andrew Resnick said the dollar's merely modest rise against the yen is the telling indicator in this currency market. Typically, a dollar rally would spark a large move up versus the yen as well, not just a minor increase. The fact that it hasn't indicates that institutional investors are paring-back their carry trades on concern the U.S. Congress' $700 bailout / rescue bill may not be enough to check the financial crisis, leading to slower growth in Europe, he said.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) such as Japan [the yen], and buy assets in a country where returns are higher. The investment can take many forms including stocks, bonds, funds, or even the higher-interest currency itself, such as the British pound.