The United States economy is officially in recession. The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) acknowledged that the economy peaked in December 2007, thereafter, proceeding to almost freefall.

"The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months," said NBER in a statement

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.

Between trough and peak, the economy is in an expansion. Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity."

Interest rate almost zero

This week the US Federal Reserve took the interest rate almost to zero cutting its target for the federal funds rate, the rate used for private interbank lending, from one per cent to a target range of zero to 0.25 per cent.

This is the lowest rate on record, ever. The Fed has, therefore, cut rates consecutively, for almost a year and a half, saying it would use "all available tools" to jumpstart the economy.

Stock markets rallied but the US dollar lost value relative to the euro. The current situation is reminiscent of Japan's deflationary condition in the 1990s. The difference though is that Japan represented one country's woes - unbelievably as big as Japan's economy is - whereas US deflation equals worldwide deflation, unavoidably.

United States president-elect Barack Obama confirmed at his press conference to name his friend, Arne Duncan, as Education Secretary, that he saw his economic recovery plan - stimulus - as absolutely critical.

Here are his actual words: "I don't think it's good policy for the president or a president-elect to second guess the Fed, which is an independent body. But let me just make an observation that we are running out of the traditional ammunition that's used in a recession, which is to lower interest rates. They're getting to be about as low as they can go. And although the Fed is still going to have more tools available to it, it is critical that the other branches of government step up. And that's why the economic recovery plan is so absolutely critical."

Abandon principles

Regardless of ideological free market purists' criticisms, President Bush claimed he must abandon free market principles in order to save the free market. So where have we reached?

We have bumped full face into a Keynesian liquidity trap. Take interest rates as low as zero and the private sector will not borrow to invest because profit expectations are themselves at zero.

The virtue of savings has become a vice. If folks will not spend, will not consume in the habit of mall rats, the economy will tank.

How strange? In Jamaica high interest rate government paper leads to excess demand - oversubscription at the Bank of Jamaica. It is seen as a brake on private production as funds pour in to take advantage of 'safe non-productive' investment.

In the US, with confidence at zero and confirmed recession, at an interest rate of zero, funds pour in to park at the Fed. Safety, absence of risk, become the mantra.

So stimulus is the only way out. What's the difference between US vs Jamaican stimulus? And why is Jamaica raising interest rates when common sense suggests it should be cutting them?

Little option

Here's the difference. Wealth holders in the United States and the world have little option. The US dollar remains still the currency of choice.

There is gold; there are commodities, hedge funds and other exotic investments. But, apart from gold, these have either lost their lustre or become toxic.

Remember too in a world economy of US$56 trillion, the US produces a quarter, 25 per cent, of that, compared to China's 3.0 per cent.

Whereas Zimbabwe prints money to pay everyday bills,the US economy prints money to avoid depression.

Everyone expects at first sight of recovery that interest rates will rise. There is, therefore, no compelling incentive to run from the dollar. Very strangely, this is part of the problem stimulus has to counter - people still have faith in dollar holdings instead of investing when business confidence is low.

Finally, Jamaica's binding constraint is the balance of payments. Stimulus makes its way into imports; lower interest rates make their impact on the foreign exchange market. Stimulus Jamaican style must find a way to push domestic production. If it is tourism how much of the gain stays home? If government 'projects', how much of final demand is for locally produced output? We've had a similar problem before and not solved it. Remember 1976 and the National Production Plan?

Where in all this is Mr Bernard L. Madoff? He only makes things worse. Madoff ran a fantastic confidence trick and pyramid scheme for more than a decade. Just like our 'alternative investment schemes' that went bust months ago, people ran over themselves to 'get in'.

You had to be invited or invest through an already accepted member. The scheme only falters as crunch time comes and people require all of their money. Newcomers' funds no longer provide cash to pay fictitious interest rate gains of longer standing investors.

US$50 billion, how can it be so large? Because expenses have to be paid, no investments generate the super gains that are promised and paid to keep people happy. The whole scheme funnels money into absolute waste without wealth creation.

EDITOR'S NOTE: The headline on last week's column should have read 'Inner contradictions of capitalism's human roots'.