posted December 12, 2017
Is the Bitcoin Bubble the New ‘Subprime Mortgage Bomb’?

Is Bitcoin the new ‘Subprime Mortgage Bond?’ Just as subprimes precipitated a crash in the derivative, Credit Default Swaps (CDS), at the giant insurance company, AIG, in September 2008, setting off the global financial crash that year—will the Bitcoin and crypto-currency bubble precipitate a collapse in the new derivative, Exchange Traded Funds (ETFs) in stock and bond markets in 2018-19, ushering in yet another general financial crisis?

The U.S and global economy are approached the latter stages in the credit cycle, during which financial asset bubbles begin to appear and the real economy appears to be at peak performance (the calm before the storm). This scenario was explained in my 2016 book, ‘Systemic Fragility in the Global Economy.’ And in my follow-on, just published August 2017 book, ‘Central Bankers at the End of Their Ropes’, I predict should the Federal Reserve raise short term U.S. interest rates another 1 percent in 2018, as it has announced, that will set off a credit crash leading to Bitcoin, stock, and bond asset price bubbles bursting. How likely is such a scenario?

Is Bitcoin a Bona Fide ‘Bubble’?

What’s a financial asset bubble? Few agree. But few would argue that Bitcoins and other crypto currencies are today clearly in a global financial asset bubble. Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.
One can debate what constitutes a financial bubble—i.e. how much prices must rise short term or how much above long term average rates of increase—but there’s no doubt that Bitcoin price appreciation in 2017 is a bubble by any definition. At less than US$1000 per coin in January, Bitcoin prices surged past US$11,000 this past November. It then corrected back to US$9,000, only to surge again by early December to more than US$15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. Some predict the price for a Bitcoin will escalate to US$142,000, now that Bitcoin trading has gone mainstream on the CME and CBOE, and offshore, commodity futures exchanges.

Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.

The question of the moment is what might be the contagion effects on other markets?

What’s Driving the Bitcoin Bubble?

If Blockchain and software tech company ICOs are driving Bitcoin and other crypto pricing, what’s additionally creating the bubble?…..Who is buying Bitcoin and cryptos, driving up prices, apart from early investors in the companies? ……the absence of government regulation and potential taxation of speculative profits from price appreciation has served as another important driver of the Bitcoin bubble bringing in still more investors and demand and therefore price appreciation. No regulation, no taxation has also led to price manipulation by ‘pumping and dumping’ by well positioned investors….. Another factor driving price is that Bitcoin has become a substitute product for Gold and Gold futures……But what’s really driving Bitcoin pricing in recent months well into bubble territory is its emerging legitimation by traditional financial institutions………futures and derivatives trading on Bitcoin just launched in December 2017 in official commodity futures clearing houses, like CME and CBOE…..Bitcoin ETFs derivatives trading are likely not far behind……….big U.S. hedge funds are also poised to go ‘all in’ once CME options and futures trading is established…… Declarations of support for Bitcoin has also come lately from some sovereign countries………While CEOs of big traditional commercial banks, like JPM Chase’s Jamie Dimon, have called Bitcoin “a fraud,” they simultaneously have declared plans to facilitate trading in the Bitcoin-Crypto market.

Bitcoin as ‘Digital Tulips

Bitcoin demand and price appreciation may also be understood as the consequence of the historic levels of excess liquidity in financial markets today. Like technology forces, that liquidity is the second fundamental force behind its bubble. To explain the fundamental role of excess liquidity driving the bubble, one should understand Bitcoin as ‘digital tulips’, to employ a metaphor.
The Bitcoin bubble is not much different from the 17th century Dutch tulip bulb mania. Tulips had no intrinsic use value but did have a ‘store of value’ simply because Dutch society of financial speculators assigned and accepted it as having such. Once the price of tulips collapsed, however, it no longer had any form of value, save for horticultural enthusiasts.

What fundamentally drove the tulip bubble was the massive inflow of money capital to Holland that came from its colonial trade in spices and other commodities in Asia. The excess liquidity generated could not be fully re-invested in real projects in Holland. When that happens, holders of the excess liquidity create new financial markets in which to invest the liquidity—not unlike what’s happened in recent decades with the rise of unregulated global shadow banking, financial engineering of new securities, proliferating liquid markets in which securities are exchanged, and a new layer of professional financial elite as ‘agents’ behind the proliferating new markets for the new securities.

Bitcoin Potential Contagion Effects to Other Markets

A subject of current debate is whether Bitcoin and other cryptos can destabilize other financial asset markets and therefore the banking system in turn, in effect provoking a 2008-09 like financial crisis………….Deniers of the prospect point to the fact that Cryptos constitute only about US$400 billion in market capitalization today. That is dwarfed by the US$55 Trillion equities and US$94 trillion bond markets. The ‘tail’ cannot wag the dog, it is argued. But quantitative measures are irrelevant. What matters is investor psychology. ……For example, should cryptos develop their own ETFs, a collapse of crypto ETFs might very easily spill over to stock and bond ETFs—which are a source themselves of inherent instability today in the equities market. A related contagion effect may occur within the Clearing Houses themselves. If trading in Bitcoin and cryptos as a commodity becomes particularly large, and then the price collapses deeply and at a rapid rate, it might well raise issues of Clearing House liquidity available for non-crypto commodities trading. A bitcoin-crypto crash could thus have a contagion effect on other commodity prices; or on ETFs in general and thus stock and bond ETF prices.”

Jack Rasmus is author of the just published, ‘Central Bankers at the End of Their Ropes?:Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the prequel, ‘Systemic Fragility in the Global Economy, Clarity Press, January 2016.He blogs at jackrasmus.com and tweets @drjackrasmus.com. His website is http://kyklosproductions.com.

posted December 5, 2017
The Real Causes of US Deficits and US Debt

With the Senate and House all but assured to pass the US$4.5 trillion in tax cuts for businesses, investors, and the wealthiest 1 percent households by the end of this week, phases two and three of the Trump-Republican fiscal strategy have begun quickly to take shape.

Phase two is to maneuver the inept Democrats in Congress into passing a temporary budget deficit-debt extension in order to allow the tax cuts to be implemented quickly. That’s already a ‘done deal’.

Phase three is the drumbeat growing to attack social security, Medicare, food stamps, Medicaid, and other ‘safety net’ laws, in order to pay for the deficit created by cutting taxes on the rich. To justify the attack, a whole new set of lies are resurrected and being peddled by the media and pro-business pundits and politicians.

Deficits and Debt: Resurrecting Old Lies and Misrepresentations

Nonsense like social security and Medicare will be insolvent by 2030. When in fact social security retirement fund has created a multi-trillion dollar surplus since 1986, which the U.S. government has annually ‘borrowed’, exchanging the real money in the fund created by the payroll tax and its indexed threshold, for Treasury bonds deposited in the fund. The government then uses the social security surplus to pay for decades of tax cuts for the rich and corporations and to fund endless war in the middle east.

As for Medicare, the real culprit undermining the Medicare part A and B funds has been the decades-long escalating of prices charged by insurance companies, for-profit hospital chains (financed by Wall St.), medical devices companies, and doctor partnerships investing in real estate and other speculative markets and raising their prices to pay for it.

As for Part D, prescription drugs for Medicare, the big Pharma price gouging is even more rampant, driving up the cost of the Part D fund. By the way, the prescription drug provision, Part D, passed in 2005, was intentionally never funded by Congress and George Bush. It became law without any dedicated tax, payroll or other, to fund it. Its US$50 billion plus a year costs were thus designed from the outset to be paid by means of the deficit and not funded with any tax.

Social Security Disability, SSI, has risen in costs, as a million more have joined its numbers since the 2008 crisis. That rise coincides with Congress and Obama cutting unemployment insurance benefits. A million workers today, who would otherwise be unemployed (and raising the unemployment rate by a million) went on SSI instead of risking cuts in unemployment benefits. So Congress’s reducing the cost of unemployment benefits in effect raised the cost of SSI. And now conservatives like Congressman Paul Ryan, the would be social security ‘hatchet man’ for the rich, want to slash SSI as well as social security retirement, Medicare benefits for grandma and grandpa, Medicaid for single moms and the disabled (the largest group by far on Medicaid), as well as for food stamps.

Food stamp costs have also risen sharply since 2008. But that’s because real wages have stagnated or fallen for tens of millions of workers, making them eligible under Congress’s own rules for food stamp distribution. Now Ryan and his friends want to literally take food out of the mouths of the poorest by changing eligibility rules.

They want to cut and end benefits and take an already shredded social safety net completely apart–while giving US$4.5 trillion to their rich friends (who are their election campaign contributors). The rich and their businesses are getting $4.5 trillion in tax cuts in Trump’s tax proposal—not the $1.4 trillion referenced in the corporate press. The $1.4 million is after they raise $3 million in tax hikes on the middle class.

Whatever financing issues exist for Social Security retirement, Medicare, Medicaid, disability insurance, food stamps, etc., they can be simply and easily adjusted, and without cutting any benefits and making average households pay for the tax cuts for the rich in Trump’s tax cut bill.

Social security retirement, still in surplus, can be kept in surplus by simply one measure: raise the ‘cap’ on social security to cover all earned wage income. Today the ‘cap’, at roughly US$118,000 a year, exempts almost 20 percent of the highest paid wage earners. Once their annual salary exceeds that amount, they no longer pay any payroll tax. They get a nice tax cut of 6.2 percent for the rest of the year. (Businesses also get to keep 6.2% more). Furthermore, if capital income earners (interest, rent, dividends, etc.) were to pay the same 6.2% it would permit social security retirement benefits to be paid at two thirds one’s prior earned wages, and starting with age 62. The retirement age could thus be lowered by five years, instead of raised as Ryan and others propose.

As for Medicare Parts A and B, raising the ridiculously low 1.45 percent tax just another 0.25 percent would end all financial stress in the A & B Medicare funds for decades to come.

For SSI, if Congress would restore the real value of unemployment benefits back to what it was in the 1960s, maybe millions more would return to work. (It’s also one of the reasons why the labor force participation rate in the U.S. has collapsed the past decade). But then Congress would have to admit the real unemployment rate is not 4.2 percent but several percentages higher. (Actually, it’s still over 10 percent, once other forms of ‘hidden unemployment’ and underemployment are accurately accounted for).

As for food stamps’ rising costs, if there were a decent minimum wage (at least US$15 an hour), then millions would no longer be eligible for food stamps and those on it would significantly decline.

In other words, the U.S. Congress and Republican-Democrat administrations have caused the Medicare, Part D, SSI, and food stamp cost problems. They also permitted Wall St. to get its claws into the health insurance, prescription drugs, and hospital industries–financing mergers and acquisitions activity and demanding in exchange for lending to companies in those industries that the companies raise their prices to generate excess profits to repay Wall St. for the loans for the M&A activity.

The Real Causes of Deficits and the Debt

So if social security, Medicare-Medicaid, SSI, food stamps, and other social safety net programs are not the cause of the deficits, what then are the causes?

In the year 2000, the U.S. federal government debt was about US$4 trillion. By 2008 under George Bush it had risen to nearly US$9 trillion. The rise was due to the US$3.4 trillion in Bush tax cuts, 80 percent of which went to investors and businesses, plus another US$300 billion to U.S. multinational corporations due to Bush’s offshore repatriation tax cut. Multinationals were allowed to bring US$320 billion of their US$750 billion offshore cash hoard back to the U.S. and pay only a 5.25 percent tax rate instead of the normal 35 percent. (By the way, they accumulated the US$750 billion hoard was a result of Bill Clinton in 1997 allowing them to keep profits offshore untaxed if not brought back to the U.S. Thus the Democrats originally created the problem of refusing to pay taxes on offshore profits, and then George Bush, Obama, and now Trump simply used it as an excuse to propose lower tax rates for repatriated the offshore profits cash hoard of US multinational companies. From $750 billion in 2004, it’s now $2.8 trillion).

So the Bush tax cuts whacked the U.S. deficit and debt. The Bush wars in the middle east did as well. By 2008 an additional US$2 to US$3 trillion was spent on the wars. Then Bush policies of financial deregulation precipitated the 2007-09 crash and recession. That reduced federal tax revenue collection due to collapse economic growth further. Then there was Bush’s 2008 futile $180 billion tax cut to stem the crisis, which it didn’t. And let’s not forget Bush’s 2005 prescription drug plan–a boondoggle for big pharmaceutical companies–that added US$50 billion a year more. As did a new Homeland Security $50 billion a year and rising budget costs.

There’s your additional US$5 trillion added by Bush to the budget deficit and U.S. debt–from largely wars, defense spending, tax cuts, and windfalls for various sectors of the healthcare industry.

Obama would go beyond Bush. First, there was the US$300 billion tax cuts in his 2009 so-called ‘recovery act’, mostly again to businesses and investors. (The Democrat Congress in 2009 wanted an additional US$120 billion in consumer tax cuts but Obama, on advice of Larry Summers, rejected that). What followed 2009 was the weakest recovery from recession in the post-1945 period, as Obama policies failed to implement a serious fiscal stimulus. Slow recovery meant lower federal tax revenues for years thereafter.
Studies show that at least 60 percent of the deficit and debt since 2000 is attributable to insufficient taxation, due both to tax cutting and slow economic growth below historical rates.

Obama then extended the Bush-era tax cuts another US$803 billion at year-end 2010 and then agreed to extend them another decade in January 2013, at a cost of US$5 trillion. The middle east war spending continued as well to the tune of another $3 trillion at minimum. Continuing the prescription drug subsidy to big Pharma and Homeland Security costs added another $500 billion.
In short, Bush added US$5 trillion to the US debt and Obama another US$10 trillion. That’s how we get from US$4 trillion in 2000 to US$19 trillion at the end of 2016. (US$20 trillion today, about to rise another US$10 trillion by 2027 once again with the Trump tax cuts fast-tracking through Congress today).

To sum up, the problem with chronic U.S. federal deficits and escalating Debt is not social security, Medicare, or any of the other social programs. The causes of the deficits and debt are directly the consequence of financing wars in the middle east without raising taxes to pay for them (the first time in U.S. history of war financing), rising homeland security and other non-war defense costs, massive tax cuts for businesses and investors since 2001, economic growth at two thirds of normal the past decade (generating less tax revenues), government health program costs escalation due to healthcare sector price gouging, and no real wage growth for the 80 percent of the labor force resulting in rising costs for food stamps, SSI, and other benefits.

Notwithstanding all these facts, what we’ll hear increasingly from the Paul Ryans and other paid-for politicians of the rich is that the victims (retirees, single moms, disabled, underemployed, jobless, etc.) are the cause of the deficits and debt. Therefore they must pay for it.

But what they’re really paying for will be more tax cuts for the wealthy, more war spending (in various forms), and more subsidization of price-gouging big pharmaceuticals, health insurance companies, and for-profit hospitals which now front for, and are indirectly run by, Wall St.

Jack Rasmus is the author of the recently published book, “Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression.” He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

posted November 16, 2017
Review of ‘Systemic Fragility in the Global Economy’, by Dr. Jack Rasmus, Clarity Press, 2016

BOOK REVIEW of: Dr. Jack Rasmus, Systemic Fragility in the Global Economy
(Atlanta, GA: Clarity Press, 2016), ISBN: 978- 0-986769-4-7, 490 pp., $29.95

“Advanced economies are in a rut of slow growth, the new normal (El-Erian), or is it the end of normal (Galbraith, 2014)? Growth was slim before the 2008 crisis and recovery after the crisis has been sluggish as well, with growth around 2 percent in the United States (2.2 percent in 2017, by International Monetary Fund estimates), 1.5 percent in the European Union (EU) (2017), 0.9 percent in Japan (2017). An ordinary period headline is, “U.S. in weakest recovery since ‘49” (Morath, 2016).

Emerging economies and developing countries face a “middle-income trap” and “premature deindustrialization”; energy exporters see oil prices collapse from above $100 per barrel to below $50 (2014) and advanced economies are in a “stagnation trap.”

Explanations of the conundrum are perplexingly meager. Many accounts
are merely descriptive, such as secular stagnation (Summers, 2013) and the “new mediocre” (IMF, Harding, 2016) —noted, but why? (Secular stagnation derives from Alvin Hansen’s 1938 adaptation of Marx’s tendency of the rate of profit to decline, hence real interest rates decline, therefore policy interest must decline, notes Sinn [2016].)Or, uncertainty—which is odd because policies have not changed for years. Or, corporate hoarding—corporations, particularly in the United States, are sitting on mounds of cash, buy back their own stock, buy other companies and reshuffle, but are not investing—noted, but why? Or, a general account is that advanced economies are on a technological plateau, broadly since the 1970s (Cowen, 2011; Gordon, 2016). With the rise of the knowledge economy and the digital economy (along with the gig economy as in Uber, Airbnb, and freelance telework), contributions of Silicon Valley (Apple, Google, etc.), innovations in pharma and military industries, also in emerging economies, and the “fourth industrial revolution,” innovations abound. However, as Martin Wolf (2016) notes, “today’s innovations are narrower in effect than those of the past.” Besides, the shift to services in postindustrial societies means a shift toward sectors (such as health care, education, and personal care) where it is hard to raise productivity. If we consider policies, the picture gets worse because (a) implemented year after year, they clearly do not work, and (b) indications are that they make things worse.

Fiscal policy is generally ruled out because of fear of deficits. The policy instrument that remains is monetary—low interest rates and quantitative easing (QE), implemented in the United States, United Kingdom (UK), (EU), and Japan. Other standard policies are, in the EU, austerity—which may cut deficits but obviously does not generate growth (and, by depressing tax revenues over time, worsens deficits)—and structural reform. Besides privatization, the main component of reform is labor market flexibilization, in other words depressing wages and incomes. This has been implemented in the United States since the 1970s and 1980s, in the UK in the 1990s, in Germany and South Korea in the 2000s, and is now on the scaffolds in Japan, France, and Spain (and possibly Italy). The objective is to boost international competitiveness by depressing wages and benefits, which (a) ceases to have an effect when every country is doing the same, (b) assumes the key problem is cheap supply, whereas supply is actually abundant and what is lacking is demand, and © by depressing wage incomes, it further reduces domestic demand. No wonder these policies make matters worse. Thus, explanations of slow growth fall short and policies have been counterproductive. This is where Jack Rasmus’s book comes in. It offers the most pertinent analysis of the stagnation trap I have seen.

There are many steps to the analysis but it boils down to his theory of systemic fragility. I review the main points of his approach, for brevity’s sake in bullet form.

• Taking finance seriously, not just as an intermediary between stations of the “real economy” (as in most mainstream economics) but with feedback loops and transmission mechanisms that affect the real economy of goods directly and indirectly.

• A three-price analysis—beyond the single price of neoclassical economics (the price of goods), the two-price theory of Keynes and Minsky (goods prices and capital assets prices), Rasmus adds financial assets and securities prices.

• The long-term, secular slowdown of investment in the real economy (chapter 7) and the shift to investment in financial assets (chapter 11). This has been occurring because financial asset prices rise faster than the prices of goods; their production cost is lower; their supply can be increased at will; the markets are highly liquid so entry and exit are rapid; new institutional and agent structures are available; financial securities are taxed lower than goods; in sum, they yield easier and higher profits. Financial asset investment has been on the increase for decades, has expanded rapidly since 2000, and “from less than $100 trillion in 2007 to more than $200 in just the past 8 years” (p. 212).

• In government policy there has been a shift from fiscal policy to monetary policy. “Central banks in the advanced economies have kept interest rates at near zero for more than five years, providing tens of trillions of dollars to traditional banks almost cost free” (p. 220). Low interest rates and zero interest rate policies (ZIRP) benefit governments (by lowering their debt and interest payments) and banks (by affording easy money) while they lower household income (by lowering return on savings and lower value of pensions), so in effect households subsidize banks (p. 471).

• Quantitative easing policies, massive injections of money capital by the US ($4 trillion), UK ($1 trillion), EU ($1.4 trillion), and Japan ($1.7 trillion) since 2008, or “about $9 trillion in just five years” (pp. 185, 262). Add China ($1–4 trillion) and add government bank bailouts over time and, according to Rasmus, the total global liquidity injected by states and central banks is on the order of $25 trillion (p. 263). The injections of liquidity into the system allegedly aim to stimulate investment in the real economy (by raising stock and bond prices), which raises several problems: a) Investment in the real economy is not determined by liquidity but by expectations of profit. b) Funds that are invested in the goods economy leak overseas via multinational corporations (MNCs) investing in economically more developed countries (EMDC), where returns are higher (and more volatile). c) Most additional liquidity goes into financial assets, boosting commodities, stocks, and real estate, and leading to price bubbles (p. 177). “The sea of liquid capital awash in the global economy sloshes around from one highly liquid financial market to another, driving up asset prices as a tsunami of investor demand rushes in, taking profit as the price surge is about to ebb, leaving a field of economic destruction of the real economy in its wake” (p. 473).

• The post-crisis attempts at bank regulation overlook the shadow banks, even though the 2007–8 crisis originated in the shadow banks rather than the banks. (Shadow banks include hedge funds, private equity firms, investment banks, broker-dealers, pension funds, insurance companies, mortgage companies, venture capitalists, mutual funds, sovereign wealth funds, peer-to-peer lending groups, the financial departments of corporations, and so on; a typology is on p. 224.) The integration of commercial and shadow banks is a further variable. Shadow banks control on the order of $100 trillion in liquid or near liquid investible assets (2016, p. 446).

• Add up these trends and policies and they contribute to several forms of fragility, which is the culmination of Rasmus’s argument. Rasmus distinguishes fundamental, enabling, and precipitating trends that contribute to fragility (p. 457).

• The explosion of excess liquidity goes back to the 1970s and has taken many forms since then. QE policies amplify this liquidity and have led to financial sector fragility, which has been passed on to government balance sheet fragility (via bank bailouts, low interest rates, and QE), which have been passed on to household debt and fragility (via austerity policies). “Austerity tax policy amounts to a transfer of debt/income and fragility from banks and nonbanks to households and consumers, through the medium of government” (p. 472). This in turn leads to growing overall system fragility.

While Rasmus aims to provide a theory of system fragility, in the process
his analysis gives an incisive account of the stagnation trap. Many elements are not new. Note work on austerity and finance (Blyth, 2013, Goetzmann, 2016) and note, for instance: “The world has turned into Japan,” according to the head of a Hong Kong-based hedge fund.“When rates are this low, returns are low. There is too much money and too few opportunities” (Sender, 2016). However, by providing an organized and systemic focus on finance and liquidity, Rasmus makes clear that the policies that aim to remedy stagnation (low interest rates, QE, competitive devaluation, and bank bailouts) and provide stability are destabilizing, act as a break on growth, and worsen the problem. According to Karl Kraus, psychoanalysis is a symptom of the diseasethat it claims to be the remedy for, and the same holds for the central bank policies of crisis management.

This does not mean that the usual arguments for stimulating growth (spend on infrastructure, green innovation, etc.) are wrong, but they look in the wrong direction. For one thing, the money is not there. Courtesy of central banks, the money has gone by billions and trillions to banks, shadow banks, and thus to financial elites and the 1 percent. Surprise at corporations not investing is also beside the point when government policies at the same time are undercutting household income and consumer demand, reproducing an environment of low expectations. Criticism of QE has been mounting, even in bank circles (“it’s the real economy, stupid”). Yet the role of finance remains generally underestimated. Rasmus’s analysis of central bank policies overlaps with that of El-Erian (2016), but his critique of economics is more fundamental and his theory of fragility and its policy implications are more radical. A turnaround would require fundamentally different policies and, in turn, different economic analytics.

Let me note some reservations about Rasmus’s approach. One concerns the unit of analysis—the global economy. His analysis overlooks or underestimates the extent to which East Asian countries stand apart from general financial fragility. Asian countries have been less dependent on western finance than Latin America and Africa and having learned from the Asian crisis of 1997, have built buffer funds against financial turbulence, stand apart from general financial fragility, and tend to ring-fence their economies from Wall Street operations. Of course, this remains work in progress.

Second, Rasmus adds China’s stimulus spending to the liquidity injections of western central banks. However, the bulk of China’s stimulus funding has been invested in the real economy of infrastructure, productive assets, and urbanization, which has led to overinvestment, but has next led to major initiatives of externalizing investment-led growth in new Silk Road projects in Asia and far beyond (One Belt, One Road, Maritime Silk Road, Asian Infrastructure Investment Bank, Silk Road Fund, etc.; Nederveen Pieterse, 2017). Even so, China also faces a huge debt overhang (Pettis, 2013, 2014).

It may be appropriate to add notes about the trend break of the Trump administration. First, a general ongoing shift from monetary to fiscal policies and the shift toward protectionism in advanced economies have been in motion regardless of the election of Trump. In the case of the United States, this includes rejection of the Trans-Pacific Partnership (TPP) as well as the Transatlantic Trade and Investment Partnership (TTIP). The Trump administration represents “a bonfire of certainties,” yet in macroeconomic policy in many respects the likely scenario is back to the old normal of supply-side economics and trickle down, the Reagan-era package. Deregulation now goes into overdrive. What institutional buffers there are to rein in banks, shadow banks, and corporations will shrink further. Those who advocate dismantling government agencies are appointed to head the agencies (such as labor, education, energy, environment, housing, and justice) to better implement deregulation from the inside. Corporate tax cuts come with attempts to bring back funds from overseas. American corporations are hoarding cash already and corporate tax cuts adding more will boost stock buybacks and chief executive officer stock options, but investment? The American middle class is shrinking, malls are closing, and department stores are downsizing. The Trump cabinet of billionaires, a return to the Gilded Age with generals for muscle, is an entrepreneurial state, not in an ordinary sense but the entrepreneurialism of plutocracy, the state apparatus placed in the service of capitalism with a big C. A no-pretense version of the anti-government ethos adopted since the Reagan administration (“get government off our backs”), anti-government government, gloves off. Pundits have sternly criticized emerging economies for disrupting the liberal international order, but now an American government changes the rules by sliding to transactional deal making. If the old problem was double standards, the new problem is no standards.

This is part of a slow deterioration of institutions that has been in motion since the Reagan era. A cover headline of the Economist is “The debasing of American politics” (2016), but it is the debasing of institutions that matters more. If market incentives lead and everything is for profit—health care, utilities, prisons, media, education, and warfare—institutions gradually decline, such is the logic of liberal market economies bereft of countervailing powers. Corporate media are a major factor in the decline of the public sphere. Part of the profile of emerging economies and developing countries is rickety institutions. Investigations and trials for corruption in several emerging economies indicate that norms and standards have been rising during recent years, while in the United States, the reverse is happening and the country may be slipping to emerging economy status. Several emerging economies no longer tolerate Big Boss behavior (e.g., South Korea, South Africa) while in the United States it becomes the new normal. Meanwhile, Rasmus has made a signal contribution to contemporary economics and provided a vitally important X-ray of the political economy of stagnation.

References

Blyth, M. Austerity: The History of a Dangerous Idea. New York, NY: Oxford University Press, 2013.

Cowen, T. The Great Stagnation. New York, NY: Dutton, 2011.

The Economist. “The Debasing of American Politics.” October 15–21, 2016.

El-Erian, M.A. The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. New York, NY: Random House, 2016.

Galbraith, J.K. The End of Normal. New York, NY: Simon and Schuster, 2014.

Goetzmann, W.N. Money Changes Everything. Princeton, NJ: Princeton University Press, 2016.

Gordon, Robert J. 2016 The rise and fall of American growth. Princeton University Press

Harding, R. “Lagarde warns of ‘new mediocre’ era.” Financial Times, October 2, 2014.

Morath, E. “U.S. in Weakest Recovery Since ‘49.” Wall Street Journal, July 30–31, 2016.

Nederveen Pieterse, J.
Multipolar Globalization: Emerging Economies and Development. London, UK: Routledge, 2017.

Pettis, M. Avoiding the Fall: China’s Economic Restructuring. Washington, DC: Carnegie Endowment for International Peace, 2013.

———. The Great Rebalancing. Princeton, NJ: Princeton University Press, 2014.

Sender, H. “Short-term Relief for Hedge Funds Belies Tough Search for Yield.”
Financial Times, July 12, 2016.

Sinn, H.-W. “Secular Stagnation or Self-inflicted Malaise?.” Project Syndicate, September 27, 2016.

Summers, L. “Why Stagnation Might Prove to Be the New Normal.”
Financial Times, December 15, 2013.

Wolf, M. “An End to Facile Optimism About the Future.”
Financial Times, July 13, 2016.

Jan Nederveen Pieterse
University of California, Santa Barbara, Global Studies

posted November 9, 2017
The Trump-Ryan $4.6 Trillion Tax Cut–Who Pays?

“Last month Trump and released his initial proposals for cutting taxes on the rich. The proposals were developed behind closed doors by his key economic policy makers, Steve Mnuchin, Treasury Secretary, and Gary Cohn, director of the Trump Economic Council—both former senior managers of the Goldman Sachs investment bank. (see my prior article this blog, ‘The Trump-Goldman Sachs Tax Cut for the Rich’).

The initial Trump-Goldman Sachs proposal defined only the broad outlines of the Trump tax plan, but still clearly benefiting the wealthy and their businesses. But the proposal said little how the multi-trillion dollar handout would be paid for. This past week the tax plan was further revised and clarified by the Republican run US House of Representatives.

The Trump-Goldman Sachs-Paul Ryan Tax Plan

The Trump-Goldman Sachs proposals have been melded with tax cuts proposed by US House speaker, Paul Ryan, who has led the effort for years to use the tax system to transfer wealth to the rich and their corporations. This past week’s Trump-Ryan proposals now clarify further ‘who pays’—i.e. mostly the middle class and especially working class households earning less than $50,000 annual income.

How exactly are they paying, in this latest iteration of the tax cuts and income transfer for the rich that’s been going on since Reagan in the 1980s, accelerating under both George W. Bush and Barack Obama?

The Trump-Republican latest iteration of the tax handouts will cost about $1.5 trillion, according to the Trump administration. That’s what they say it will cost the federal government budget deficit and thus will add to the federal debt. But the total tax cuts are actually around $4.5 trillion. The $1.5 trillion number is only the estimated final impact of the cuts on federal budget deficits. By Congressional rules, if the Trump-Ryan version can keep the budget impact to $1.5 trillion, it needs only 50% votes (plus one) in Congress to pass; but if the hit to the deficit is more than $1.5 trillion, it takes 60%.

The $2.6 Trillion Corporate-Business Tax Cuts

It’s estimated the corporate tax cut measure in the Trump-Ryan bill alone—cutting the nominal tax rate from current 35% to 20% and the corporate Alternate Minimum Tax–will together reduce tax revenue and raise deficits by $1.5 trillion, according to the Congress Joint Committee on Taxation. But that’s only the beginning of the total tax cuts to businesses. That’s just for corporate businesses, and just one of the several big corporate tax cut windfalls in the plan.

There are tax reductions for non-corporate businesses as well. By reducing the nominal tax rate for non-corporate businesses from 39.6% to 25% (affecting what’s called ‘pass through business income’) the result, according to the Joint Committee on Taxation, is an additional $448 billion tax reduction for businesses that are proprietorships, partnerships, S corporations, and other non-traditional corporations. And this cut goes to the wealthiest, high end of non-corporate companies. Small businesses (mom and pop businesses) whose owners earn less than $260,000 a year would see nothing of this proposed ‘pass through’ reduction. Half of all ‘pass through’ business income is earned by the wealthiest 1% non-corporate businesses.

Back to the corporate tax cutting, then there’s the daddy of all big corporate tax cuts for US multinational corporations. Trump, Ryan and other business interests claim that US multinationals—i.e. Apple, Google, big Pharma companies, global banks, oil companies and their ilk—pay the highest corporate taxes in the world and therefore cannot compete with their offshore counterparts in Europe, Asia and elsewhere. But that’s a lie. Studies have shown that US MNCs pay an effective tax rate (i.e. actual and not just ‘on paper’ nominal rate) of only 12.5%. Add to that 12.5% a mere 2-4% additional tax they pay in offshore countries, and another 2% or so they pay to US States with corporate income tax laws, and the true, total global tax rate is around 17%–not 35%.

US MNC’s currently hoard at least $2.4 trillion in their offshore subsidiaries (what they publicly admit to) that they have been refusing pay taxes on for years. Apple Corp., one of the worst tax avoiders, currently has $268 billion in cash; 95% of that $268 billion is stashed away in its offshore subsidiaries in order to avoid paying US corporate taxes. That’s just the legally admitted number. No one knows how much Apple, other MNCs, and wealthy individual investors sock away in offshore tax havens and shelters in order to avoid even reporting, let alone paying, taxes on.

The Trump-Ryan plan for this $2.4 trillion tax avoided money hoard is to cut the tax rate for cash held offshore from 35% to 12%. But that 12% is really 5%, since the 12% applies only to cash offshore; other forms of corporate ‘liquid’ assets are taxed at only 5%. That means it will be easy for corporations like Apple to ‘game’ the system by temporarily converting cash to liquid assets and then back again after the lower 5% rate is paid. They’ll pay 5%, not the 10%. Another measure calls for a 10% tax on future profits earned, but only on ‘excess offshore profits’ held by subsidiaries. If it’s not ‘excess profits’, then the tax rate is 0%. Just the latter measure, referred to as the ‘territorial tax’, is estimated to reduce MNC’s taxes by $207 billion.

A variation of this very same tax shell game was played previously, in 2005. Under George W. Bush, US multinational corporations were hoarding about $700 billion offshore by 2005. They were given a special ‘one time’ deal of a 5.25% tax rate if they brought the money back to the US and reinvested it in jobs. They brought about half of the $700 billion back—but didn’t reinvest in production. Instead they used it to buy back stock and pay more dividends that didn’t produce any jobs, and finance mergers and acquisitions of their competitors which actually reduced jobs. US MNCs got away with a 35% to 5.25% tax cut in 2005, so they began repeating the practice of shifting US profits to their offshore subsidiaries immediately after once again in order to avoid paying taxes. Now Congress is cutting them a similar deal—i.e. for a second time while calling it once again, as in 2005, a ‘one time’ deal. This so-called ‘repatriation tax’ measure results in is an incentive to shift even more production and operations to offshore subsidiaries, which reduces jobs in the US even further.

All this amounts to a total tax cut windfall for US multinational corporations of at least $500 billion, and likely even hundreds of billions of dollars more over the coming decade.

And there’s still more, however, for corporations in the Trump-Ryan plan. The tax plan’s ‘depreciation’ provision, which is another name for tax cuts for investment, are also liberalized to the tune of $41 billion new tax cuts. Companies can deduct from their tax bill the cost of all the new equipment they buy in the same year. And they can do that for the next five years. As that paragon advocate of economic justice, Larry Summers, former champion of bank deregulation, recently admitted recently in the business daily, Financial Times: “Effective tax rates on new investment is reduced to zero or less, before even considering the corporate rate reduction.” And there’s another roughly $50 billion in miscellaneous business tax cuts involving limits on business expensing and other provisions.

How Trump Personally Benefits

The commercial real estate industry—i.e. where Trump made his billions and continues to do so—gets a particularly sweet deal. It is exempt from any cap the Trump plan places on its deduction of business expenses. Commercial real estate companies are also allowed to continue deferring taxes when they exchange properties. And the industry’s numerous tax loopholes remain unchanged in the Trump-Ryan bill. Yet Trump himself says he will not benefit personally from the tax proposals—even though the tax returns he released for one year back before 2005 show his company realized billions in tax relief from the special loopholes enjoyed by the commercial real estate industry. And Trump himself paid $35 million in the corporate AMT, which is now projected to go away as well.

In summary, there’s at least $2.6 trillion in total corporate-business tax cuts in the Trump-Ryan plan. That’s well above the $1.5 trillion limit mandated by Congressional rules, however. And the $2.6 trillion does not include personal income tax reduction for wealthy households and investors. The corporate-business tax cuts alone amount to almost twice the $1.5 trillion allowed by Congressional rules. But the personal income tax cuts for the wealthy will cost another minimum $2 trillion, just for changes in top personal income tax rates and for limiting, then ending, the Alternative Minimum Tax and the Inheritance Tax. That’s $4.6 trillion and three times the $1.5 trillion!

The Personal Income Tax Cuts for the Wealthy

While personal income taxes will rise for the middle and working classes to cover the tax cuts for business, the hikes will also have to cover simultaneous tax cuts for wealthy individuals, 1% households, and investors. There are three big ways wealthy individuals and investors get tax cuts in their personal income tax in the Trump-Ryan bill: (1) reducing of personal tax brackets and lowering of rates; (2) reducing and then eliminating altogether the Alternative Minimum Tax (AMT); and (3) exempting and then ending the Inheritance (Estate) tax.

The top personal tax rate is currently 39.6%. The cutoff occurs for those earning $466,000 a year or more. They pay the 39.6%. But many more now will not under the bill. The Trump-Ryan bill raises the threshold at which they pay the 39.6% to $1 million. Those now earning between $466,000 and $1 million will now pay a lower rate of 33%. Those previously paying 33% are now reduced to 25%. Those at 25%–i.e. the middle class—stay at 25% and thus get no cut. So the personal tax rate on the middle class rate is not reduced, but the higher income levels are significantly reduced. The total tax cut from lower tax brackets for the wealthy has been estimated at $1.1 trillion, according to the Congress’s Joint Committee on Taxation.

The Inheritance, or Estate, tax is paid by only 0.2% of households. Nonetheless, the exemption will double from the first $5.5 million value of the estate to $11 million per person. And it will be completely repealed by 2024. The gift tax, through which the wealthy pass on much of their estates before dying, will also enjoy a $10 million exemption. That all amounts to a $172 billion tax cut for the 1% wealthiest households.

The other ‘biggie’ tax cut for the rich is the reduction and subsequent elimination of the Alternative Minimum Tax, AMT. This was designed to get the rich to pay something in taxes, after they exploited all their available tax loopholes and/or stashed their money offshore in tax shelters and havens, both legally and illegally. (Note: the just released so-called ‘Paradise Papers’, show how much and where they hide their wealth offshore to avoid taxes—from Queen Elizabeth of Britain to entertainment celebrities like Madonna, Bono, and a long list). 60% of the AMT is paid by individuals earning more than $500,000 a year, and another 20% by those earning adjusted income of more than $200,000. The AMT measures in the Trump-Ryan bill will amount to a $696 billion tax cut for the wealthy, according to estimates by the Joint Committee of Congress last week. And that’s not even counting the changes to the AMT paid by businesses as well.

Just the ‘big 3’ personal income tax cuts amount to nearly $2 trillion in total reductions. Add to that the estimated additional $2.5 trillion in corporate-business tax cuts and the total is $4.5 trillion—not the $1.5 or even $1.75 trillion currently referred to in the business and mainstream media.

How the Middle and Working Classes Pay for it All

• Personal Exemptions and Standard Deductions

The personal exemption for a family of four current reduces taxable income by $16,600 a year. This is ended under Trump-Ryan and replaced with an increase in the Standard Deduction, from current $13,000 a year to $24,400. So the Standard Deduction rises by $11,400 but is less than $16,600. So the net result is an increase in $5,200 in taxable income for a family of four.

The increase is even greater for a family of four that itemizes its deductions. For total itemization of $15,000, they will find their taxable income increasing by $7,200 a year. These gaps will also rise over the 10 year period and result in even higher taxes over time.

Repeal and changes to the Personal exemption and Standard deductions amount to a $1.6 trillion tax hike.

• Elimination of Itemized Deductions

Nearly half of all tax filers with annual income between $50,000 and $75,000—i.e. the core of the middle and working classes—currently itemize deductions to reduce their total taxable income and taxes paid. So it’s not true that only the rich itemize. And here is where the Trump-Ryan tax proposals take their biggest whack at the middle class.

-All State and Local income tax deductions are ended under the Trump plan. That’s a roughly $186 billion tax hike—a measure that will mostly hit ‘blue’ Democratic states where state income taxes exist. Contrary to Trump-Ryan propaganda, only 27% of state-local tax deduction is claimed by the wealthiest 1% households. The majority of the deduction is by the middle class.

-Limits on the property tax deduction will result in a further tens of $billions of tax hikes. Limits on this deduction will also reduce property values and thus have a negative wealth effect on middle class homeowners—especially in the ‘blue’ coastal states where home prices are highest.

-Deductible interest on first mortgages are reduced by half. This will reduce new home construction, and result in an indirect effect of escalating apartment rental costs, reducing middle and working class real incomes.

-Ending the extraordinary medical expenses deduction will hike taxes by $182 billion. These expenses are incurred by families with extraordinary medical expenses, as health insurance coverage pays less and less of such coverage. Previously they could deduct up to 10% of their income. This is now ended.
Expenses formerly deducted for personal casualty losses, un-reimbursed employment expenses for teachers, alimony, moving to a new job expenses, equity home loans interest, are all totally eliminated under the Trump-Ryan plan.

Limits and elimination of deductions are estimated at a tax hike of another $1.3 trillion, according to the Joint Committee on Taxation.

That’s $2.9 trillion to offset the $4.6 trillion in tax cuts for corporations, businesses, and the wealthiest households!

In addition are further miscellaneous tax hikes on the Middle Class in the following ways:

• Alternative Energy Credits

Current credits for installing solar and other alternative energy end, raising taxes by $12.3 billion.

• Adoption Credits

Credits for families adopting children end, raising taxes of $3.8 billion

• Flexible Health Savings Accounts and Elderly Dependents Expenses

Currently, workers may reduce taxes from gross wages by setting aside some income in a flexible health savings account. Business also enjoy a tax deduction for payments they make into health insurance plans and pensions. The total amounts to $540 billion a year. Businesses can continue their tax deduction for health payments, but workers will not. Nor may they deduct expenses for elderly dependents’ care. Their costs also tens of billions of dollars.

• Education Credits

Students and colleges take a big hit under the Trump-Ryan plan. Several education credit programs are ended, leaving one education credit. The result is a cut and tax hike of $17 billion. Student loan interest deductions are also ended, costing $13 billion. Companies that assisted higher education programs for employees with $5,250 tax free tuition aid for employee and company are ended; now they are taxable. May companies will now reduce their tuition assistance programs. Education tuition costs deductions for low income households are ended. So are tax free interest higher education savings bonds and savings accounts. It’s a total tax hike of $65 to $95 billion over the decade.

• New Price Index and Reduced EITC

The Trump-Ryan bill brags that it reduces taxes for the near and working poor who now pay an income tax rate of 15% and 10%, by consolidating the two brackets to a combined 12% rate. The former 10% group will of course get a 2% tax hike. But the increase in the income limit at which taxes are paid, from current $12,000 to $24,000, will offset this hike, according to Trump-Ryan. But the plan’s shift to a new, lower consumer price index will reduce the amount increasingly over time the working poor may claim tax reimbursement under the Earned Income Tax Credit, EITC. And it’s highly likely in any final bill that the $24,000 will be significantly reduced.

The foregoing is just a short list of the many ways the middle and working classes will pay for the Trump-Ryan tax bill. We’re talking about approximately $3.5 trillion in tax hikes in the Trump-Ryan bill negatively affecting mostly middle and working class households.

Closing 3 Big Capital Income Tax Loopholes

If Trump-Ryan really wanted to raise taxes, instead of targeting the middle class, they could have easily raised $2 trillion by ending just two other programs: Eliminating the preferential tax rate for long term capital gains taxation, which would bring in $1.34 trillion by 2024; and ending the practice of foregoing all taxation on stocks transferred at death, for which recipients of the stock pay no taxes whatsoever. That would generate another $644 billion. That’s $2 trillion.

Another at least $2.5 trillion could be raised by ending corporate tax deductions for payments into company pension and health insurance plans. Workers don’t get to deduct their contributions to these plans. Why should employers?

In other words, just three measures alone targeting corporate and capital incomes would raise $4.5 trillion in tax income over the coming decade. The three could pay for all the corporate-business-wealthiest 1% tax cuts in the Trump-Ryan bill, without raising any taxes on the middle and working classes! But that’s targeting capital incomes of the rich and their corporations, and politicians elected and paid for by the same won’t ‘bite the hand that feeds them’, as they say.

Concluding Comments

My prediction is that the Senate version, and final joint House-Senate version, of the bill that will now follow in coming weeks will have to pare down the tax cuts for wealthy individuals and raise some more the tax hikes on the middle class. Cutting the corporate tax rate is the priority for the Trump administration. After that ensuring US Multinational corporations get to shield even more of their profits from taxation. Congress will take it out of the personal income tax provisions which will be scaled back from the current Trump-Ryan proposals. Tax breaks for wealthy individuals will be softened, and new ways to quietly raise taxes on the middle class households may be found.

But the main solution will be to offset the more than $1.5 trillion net tax breaks with more spending cuts on social programs. In 2011 Congress and Obama cut spending by $1 trillion on education, health, transport, etc. Another $500 billion was cut in 2013. They will therefore try to repeat the ‘fiscal austerity’ solution to enable tax cutting for corporations. But that’s not new. The process of spending cuts to finance corporate-wealthy tax cuts has been going on since Ronald Reagan. It’s one of the main causes of the growing income inequality in the US that is the hallmark of Neoliberal policy since the 1980s.

The Trump-Ryan proposals are just the latest iteration of Neoliberal fiscal policy that has been making the rich richer, while destroying the economic and social base of the USA. Neoliberal policies associated with tax and spending programs, free money for bankers and investors provided by the central bank (the Federal Reserve), industrial policy deregulating everything and destroying unions, and trade policy enabling offshoring of production and jobs and free re-entry of US goods produced overseas back to the US (aka free trade) have been together ripping a gaping and ever-growing hole in the social fabric of the country. That has in turn been giving rise to ever more desperate radical right wing politics and solutions—i.e. the political consequences of the Neoliberal economic policies.”

Dr. Jack Rasmus is author of ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and ‘Systemic Fragility in the Global Economy’ and ‘Looting Greece’, also by Clarity Press, 2016. He blogs at jackrasmus.com and his website is http://www.kyklosproductions.com and twitter handle, @drjackrasmus.

posted November 4, 2017
China Shifts Policy, Predicts ‘Minsky Moment’ of Global Financial Instability

The past year the US and global ‘real’ economies have enjoyed a moderate recovery. Much of that has been due to China stimulating its economy to ensure real growth in anticipation of the Communist Party’s convention, which has just ended. China’s president Xi and central bank (Peoples Bank of China) chair, Zhou, have announced, post-convention, that China’s real growth will slow and have warned a global ‘Minsky Moment’ (i.e. financial crisis) may be brewing. China will now try, once again, to tame its shadow bankers and speculators who have been feeding China’s debt and bubbles, and prepare for the global financial instability that is brewing.

The global financial bubbles–in stocks, bonds, currencies (crypto and real), derivatives, real estate, etc.– have been fueled since 2008 by capitalist central banks–led by the US Federal Reserve and followed even more aggressively by the European Central Bank and Bank of Japan. Central bank ‘free’ money has boosted stock and other financial asset prices into bubble territory and produced historic capital gains profits for corporations, professional investors, and the wealthiest 1% households in the US and worldwide. The world’s approximately 1500 billionaires’ wealth now totals more than $6 trillion–and that is only the officially admitted figure. More is not accounted for in the dozens of tax havens worldwide in which they park their money away from public and tax collectors’ view. US and other governments meanwhile are feverishly trying to pass even more tax cuts for billionaires and multi-millionaires, so they can keep even more $ trillions for themselves. Financial speculation has become the primary means by which the super-rich enrich themselves even more–with the help of central bankers and their paid-for Congressional government tax cutters.

Central banks have enabled their wealth acceleration by providing virtually free money for them to invest in financial markets through borrowing (debt) and leverage. Government tax cutters also let them keep more and more of the free money, profits, and their financial capital gains. Financial bubbles are the consequence. More and more financial writers have begun lately to write articles in the mainstream business press forewarning of the growing bubbles that are the engines of the the super-rich wealth acceleration.

The central banks and their policy of free money have created their own contradictions however. They have enriched the rich as never before, but in so doing have enabled and fueled the bubbles that threaten it all. After 8 years of pumping free money into private banks, corporations, and investors, the US central bank has this past year begun a desperate effort to raise interest rates and try to slow the flow of liquidity from the ‘free money firehose’ since 2008 that have produced a tripling of corporate profits, a quadrupling of US stock prices, bitcoin and crypto-currency bubbles, and $6 trillion of corporate bond debt issuance, much of which has been passed on to shareholders in dividend and stock buyback payouts. But the massive money and capital income growth has also produced financial asset bubbles that are now growing alarmingly as well. So the Fed over the past year has tried to raise interest rates a little to slow down the bubbles. It will be too little, however, as I have argued elsewhere that the Fed cannot raise rates much higher without precipitating a financial credit crunch that will generate the next recession. So the Fed talks tough on rates but does very little. The central banks of Europe and Japan do even less. Global banks and investors are addicted to the free money from the central banks and that policy will change little apart from token adjustments and talk.

The Fed’s (and all central banks’) dilemma is that raising rates and selling off its balance sheet (that will also raise rates) will cause the dollar to rise in global markets, cause in turn currency collapse in emerging markets that will sharply reduce US multinational corporations’ profits offshore. The Fed will not jeopardize US multinational corporations’ offshore profits therefore by raising rates too much. Higher rates will also shut down the US construction sector, already weak (new residential housing is declining), and reduce US consumption spending that is also barely growing, as it is based on debt and savings reductions instead of real wage growth. So the Fed is engaged in a charade of raising rates. And whomever Trump reappoints to the Fed chair after Janet Yellen won’t matter. The same free money policies will continue. For the system is addicted to free money and low rates for years to come–and that will continue feeding financial bubbles.

The Fed, like all central banks today, has become an institution whose main task is to continue subsidizing capital and capital incomes. As the Fed raises rates tokenly, other State institutions (Congress, Presidency) are also embarking on massive tax cuts for corporations and investors to offset the moderate hikes in interest rates coming from the Fed. More than $10 trillion in corporate-investor tax cuts occurred under Bush-Obama. Trillions $ more is coming under Trump.

In the 21st century, advanced capitalist economies are increasingly being subsidized by their states–monetarily by their central banks with free money and fiscally by their governments with more and more tax cuts for corporations and investors. Via both central banks and legislatures, the State is increasingly engaged in reducing capital costs and thus subsidizing capital incomes. This is the primary emphasis of ‘neoliberal’ policy in the 21st century capitalist economy.

The weaker capitalist sectors–Europe and Japan–are engaged in even more aggressive central bank free money provisioning. Europe’s central bank has just announced a ‘sleight of hand’, fake change in monetary policy: reducing its monthly free money injection (which has been benefiting mostly going to Germany and France bankers and corporations), while extending the period over which it will continue its program. It will provide less per month but for longer. Just moving the money around, as they say. Not really reducing anything.

The Bank of Japan has been even more generous to its bankers, investors and businesses. The Bank of Japan has refused to engage in a free money/higher rates charade (US) or language manipulation to fake a reduction in the free money flow (Europe). Japan’s central bank has announced it will continue buying and subsidizing corporate bonds, private stocks, and other financial assets, at an historic pace, thus contributing to propping up financial markets with no end in sight. Not suprisingly, Japan stock and financial markets are also on a tear, rising to levels not seen in 20 years. Similarly, financial asset markets have begun to escalate as well in Europe.
As I have indicated in my just released book, Central Bankers at the End of Their Rope, capitalist central banks are the original primary culprits of the free money policies adopted by all advanced capitalist economies–a policy that has been fueling debt and leverage, and stoking financial asset markets now entering bubble territory once again–i.e. creating the ‘Minsky Moment’ of financial instability about which China’s PBOC central bank chair, Zhou, has just forewarned.

Two big decisions will occur in the US in the first week of November: Trump will announce his new nominee for the chair of the US Federal Reserve Bank and the right wing-dominated US House of Representatives will define the Trump corporate-investor tax cuts further.

But whoever leads the Fed, there will be no real change in policy set in motion decades ago by Greenspan, continued by his protege, Ben Bernanke, and extended by Janet Yellen. Free money will continue to flow from the Fed (and even more freely from the central banks of Europe and Japan). Whether Powell, Taylor, Cohn or whoever are appointed, the policy of free money will continue. Rates will not be allowed to rise much. The private bankers and investors want it that way. And their ‘bought and paid for’ politicians will ensure it continues. Meanwhile, the Trump tax cuts will additionally subsidize corporations and investors at an even greater rate with Trump’s multi-trillion tax cuts. The Trump tax cuts (which follow more than $10 trillion under Obama and Bush) will enable US Corporations to continue paying record dividends and stock buybacks to enrich their shareholders. The $6 trillion in dividends and stock buybacks since 2010 will be exceeded by even trillions more. Income inequality trends in the US will therefore continue to accelerate unabated.

It is true the global economy has ‘enjoyed’ a brief and mild growth spurt in 2017, as noted previously. That growth has been driven by China’s stimulus and by US business inventory investing in anticipations of Trump tax and other deregulation (also cost reduction) policy driven changes. But the growth of the summer of 2017 will soon slow significantly. Now China will purposely slow, as policy shifts to rein in its own financial bubbles and in part prepare for a global ‘Minsky Moment’ crisis that is coming.

Meanwhile, the Trump bump in US economic growth will also fade in 2018, driven up until now largely by inventory investing by business that won’t be realized in sales and revenue in 2018. Working-middle class household consumption has been based on debt and savings reduction instead of real wage income recovery this past year. That is not a basis for longer term growth. Household consumption cannot be sustained. US autos and housing are already fading. Simultaneously, escalating costs of healthcare insurance premiums will cut deeply into consumer spending in 2018 as well. And government spending, now stagnant, will also slow, as Congress cuts social programs in order to offset deficits created by the massive tax cuts for corporations and investors.

In Europe, political instability forces will keep a lid on economic recovery there (a ‘hard’ Brexit looking increasingly likely, Catalonia independence uncertainty, new breakaway regions in Italy soon also voting for independence, the rise of right wing governments in eastern europe, etc.). In Japan, business interests will continue to ignore prime minister Abe pleas to raise wages, as they have for years, while Japan gives the green light to become the global financial center for crypto-currency speculative investing.
Consequently, odds are rising there will be a recession in the US, and globally, by late 2018 or early 2019. That will likely be accompanied soon, before or after, by a new ‘Minsky Moment’ of financial instability that will exacerbate the real economic downturn.

Jack Rasmus is author of ‘Central Bankers at the End of Their Ropes: Monetary Policy and Coming Depression’, Clarity Press, August 2017; and ‘Systemic Fragility in the Global Economy’, Clarity Press, January 2016. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

posted October 14, 2017
In Depth Review of the Book ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, by Dr. Jack Rasmus, Clarity Press, August 2017

Review of ‘Central Bankers at the End of Their Ropes’,
by Dr. Jack Rasmus, Clarity Press, August 2017

By Graham H. Seibert,

An AMAZON TOP 500 REVIEWER,
October 10, 2017

This book does a better job of explaining how central banks work in any of the others I have read. Two mainstream books, Mohamed El-Erian’s The Only Game in Town and Banking on the Future: The Fall and Rise of Central Banking appear to be limited by the obligate blindness that bankers must have to the fact that there is no correct way to do it. The central bank’s goals are too elusive, the tools are too blunt and ineffective, the process is inherently political, and there are demographic and economic variables at play which are beyond the central bankers’ ability to control. Losing Control: The Emerging Threats to Western Prosperity is another book that covers more or less the same ground, though I think Rasmus does it better and with less bias.

Other books such as The Creature from Jekyll Island: A Second Look at the Federal Reserve and The Secrets of the Federal Reserve are conspiratorial. The Jekyll Island does a great job of describing how the Federal Reserve was established, but it ascribes to conspiracy that which can be better explained by mere self-interest. The bankers look out for themselves. The second book edges close to describing a Jewish conspiracy. As Kevin McDonald writes in The Culture of Critique: An Evolutionary Analysis of Jewish Involvement in Twentieth-Century Intellectual and Political Movements, the Jews have evolved to look out for one another, but that does not rise to the level of conspiracy. Murray Rothbard’s 1962 What Has Government Done to Our Money? was a prescient vision of things to come.

The Tyranny of the Federal Reserve, not widely read, is valuable in that it puts the operation of the central bank into a much broader perspective. It addresses an entire range of tyrannies: those of debt, usury, fractional reserve banking, gold, central banks, war, free trade, mass immigration, the media and public education. This Time Is Different: Eight Centuries of Financial Folly is a survey of fiat money regimes going back eight centuries. They all fail, and all for the same reason: politicians cannot control themselves when it comes to printing money. James Rickards makes the same point well in The Death of Money: The Coming Collapse of the International Monetary System.

Rasmus’ book is the most valuable of the group, effectively enumerating and describing the tools, policy objectives and targets of the central banks, and evaluating their effectiveness in light of their own targets and their ability to manage their respective economies.

Rasmus recommends a constitutional amendment to address the problem. The effect of the amendment would be to redress the abuse that he sees in the present system, whereby central banks worldwide are generating a great amount of liquidity most of which flows into financial instruments instead of the real economy, benefiting the rich and starving pensioners and savers.

He recommends democratizing the governance of the Federal Reserve, taking it out of the self-serving hands of the bankers.

This would be a good start. The book does not address larger issues, such as the coming demographic crisis as world populations age.

This is as good a book as one will find describing the problems as they exist and how they came to be. One cannot fault the book for failing to recommend a complete solution. Nobody in the world has found one. For this reason prognosticators are increasingly forecasting a global collapse, a reset that will require something new to rise from the ashes. Only between the lines does Rasmus suggest that that’s where things are headed.

A five-star effort. The best single book I have read on the Federal Reserve and central banks. I am including my (somewhat unedited) reading notes as comments. See my reviews of the books cited in this review for similarly detailed analyses.

EXTENDED COMMENTARY OF THE BOOK, CHAPTER BY CHAPTER,
By Graham Seibert

Chapter 10:
Yellen’s Bank:
From Taper Tantrums to Trump Trade / 257

Yellen has pretty much followed Bernanke’s policies. Although quantitative easing may have ended at some point, the Fed continues to use other tools to inject liquidity into the economy.

Rasmus says very directly that this is a conscious gift to the wealthy financial interests at the cost of everybody else, especially savers and pensioners. The money flows to corporations which pay generous dividends and conduct stock buybacks that favor the financial classes. Interest rates are so low that pension funds cannot make a decent return by buying bonds and by keeping money in banks. They too must reach for yield by buying overpriced stocks. It is unsustainable. The inequalities in wealth have grown insupportable.

Rasmus concludes with Yellen’s five challenges:
“1) how to raise interest rates, should the economy expand in 2017-18, without provoking undue opposition by investors and corporations now addicted to low rates; 2) how to begin selling off its $4.5 trillion balance sheet without spiking rates, slowing the US economy, and sending EMEs into a tailspin; 3) how to conduct bank supervision as Congress dismantles the 2010 Dodd-Frank Banking Regulation Act; 4) how to ensure a ‘monetary policy first’ regime continues despite a re-emergence of fiscal policy in the form of infrastructure spending; and 5) how to develop new tools for lender of last resort purposes in anticipation of the next financial crisis.”

There are not, obviously, clear answers to any of these. The Fed has painted itself into a corner with no apparent exit.

Chapter 11:
Why Central Banks Fail / 287

“But the new function of ensuring financial stability is something of a misnomer. The fundamental means by which central banks today attempt to stabilize the banking system is by permanently subsidizing it.”

Rasmus has earlier said that the quantity theory of money, the idea that increasing the money supply will lead to inflation, has been repeatedly disproven. Others such as Kenneth Rogoff and Carmen Reinhart would say that it is only being held in abeyance and will come back with a vengeance when excessive injection of liquidity finally topples the institutions.

Rasmus writes that” Therefore, if discussions on central banking in the 21st century are to address new functions, this one should be more accurately termed the subsidization of the banking system by virtually free money enabled by central banks’ chronic and massive liquidity provisioning.” Rasmus says that this subsidization function started in the 1970s.

The most important development, per Rasmus, is the capture first by Citibank and then by Goldman Sachs of all of the key appointed positions in the Bush, Obama, and Trump administrations. How else, Rasmus asked, can one explain the fact that the Federal Reserve has continued massive liquidity injections for seven years after this last crisis was wound up in 2010? Only for the benefit of the banks.

Rasmus provides two lists of reasons central banks fail: excuses, and real reasons.

The excuses include
• too much discretion; no monetary rule.
• Fiscal policy and the gates monetary policy. I, the reviewer, add the there is no discussion of the immense government deficits anywhere in this work. That would be a function of fiscal policy.
• Banks become bottlenecks to lending. The monetarist theory is that if you increase the money supply you will get lending. Wrong. The banks may simply sit on the money.
• Wrong targets: 2% growth in what?
• dual mandate: which is it? Prices, inflation, or employment?
• Global savings glut – those damned foreigners
• the need for new tools
• government influence with central-bank independence

Rasmus list of real reasons central banks fail is as follows. Enlisting them, Rasmus is offering the conclusion that the central banks have failed. As he has so elaborately described, they have failed in their assigned missions. But they, and the countries they represent, are still in place. As institutions they have survived. This is therefore our list of reasons why they haven’t been effective in their assigned role.

• Mismanaging money supply and serving as a reactionary lender of last resort
• fragmented and feeling banking supervision
• the inability to achieve 2% price stability. The problem is persistent deflation.
• The failure to address financial asset price inflation
• declining influence of interest rates on real investment
• central-bank policies and the redirection of investment to financial assets
• monetary tools: declining effects and rising contradictions
• victims of their own ideology: Taylor rules, Phillips curves, and NIRP’s. It doesn’t work like the book says. Rasmus: “central bankers may be victims of their own false ideological notions, just as politicians and government bureaucrats may be. The Taylor rule maintains that central banks should not pursue policies that attempt to adapt or respond to economic business cycles.”

Rasmus concludes that central banking has been failing to perform even its own presumed functions, targets and tools. They have not adapted or changed keep up with global developments. Monetary policy is a path to yet more financial and economic stability.

Conclusion:
Revolutionizing Central Banking in the Public Interest:
Embedding Change Via Constitutional Amendment / 323

This final chapter is in the form of a constitutional amendment to democratize the function of the federal reserve. It would give the general public the power to select the leadership. It would require that the Federal Reserve, and its lender of last resort function, ensure that liquidity flowed to the real economy rather than financial assets. It provides for consistent banking supervision by parties not connected to the banks themselves.

The amendment does not address related problems. It makes no mention of fiscal policy, chronic government debts. The federal reserve has the power both to redistribute money within the economy, which Rasmus rightly says that it does, favoring the financial interests. It also has the power to create money that the government needs to offset budget deficits, currently running between $500 million and $1 billion.

The national debt, standing at $20 trillion, requires $400 billion per year just to service. The government debt is about equal to GDP in the United States; unsupportable, but better than Europe, England, China or Japan. None of these would be able to withstand a significant increase in interest rates.

The book does not address the question of demographics. The demographics in the United States are terrible, with the rising generations barely keeping up in numbers with those who are retiring. This is not to even to mention its composition. There is a question of whether the current rising generation, 50% made up of disadvantaged minorities, will have the same productivity as the retirees it replaces.

The demographics in China, Japan, England and Europe are worse. They all have inverted population pyramids. Supporting the promised pension and healthcare benefits will require more tax income from fewer taxpayers. Printing money will not do the trick; at some time the printed money has to be recognized as being increasingly less valuable. Inflation has to kick in and the real economy, just as Rasmus documents that it has in the financial economy.
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Chapter 6:
The Bank of Japan: Harbinger of Things
That Came / 142

Japan overstimulated its economy in the 1980s, culminating with a total stock market valuation of 40% of the world’s stockmarkets, and real estate valuations exceeding that of the United States. From there it was downhill.

The Bank of Japan tried all of the central bank tools, with a notable lack of success. All that worked was lender of last resort, the same as in the United States.

Japan was the first to try quantitative easing. They did it in stages, ultimately unleashing the most powerful quantitative easing of any country to date. One objective was price stability. They wanted to end deflation and achieve zero price growth. The second bout of quantitative easing did it, although a massive cost.

Japan was also among the first to introduce negative interest rates in an attempt to force banks to loan money. The money that they loaned tended to go overseas and into financial investments. It did not help at home.

As things stand, Japan’s debt is 250% of GDP. The situation looks precarious.

It is interesting that Rasmus does not anywhere mention demographics. Japan’s falling birth rate and huge population of elderly has to have an effect on labor demand, fiscal policy to pay pensions, income tax income and other financial parameters.

Chapter 7:
The European Central Bank under German
Hegemony / 165

The European Central Bank was not originally structured as a central bank, and does not yet have all the powers it would need. It is part of the European monetary union (EMU) which assigned price stability as it’s only target. Bank supervision was expressly left to the national central banks. It negotiates money supply in concurrence with the national central banks. It is expressly enjoined from serving as a lender of last resort to sovereign governments, though it could lend to banks and central banks. Alternative organizations to bail out governments did not come into being until 2010 and 2012, at which time many of the European banks were technically insolvent.

The EMU charter required member states to avoid running budget deficits. This meant that fiscal policy could not be used as a tool of central banking. Policy would have to be implemented through monetary action. Rasmus writes that it was created by bankers in the interest of bankers. Financial interests were well taken care of and the crisis of 2009, but the real economy, employment and wages declined.

Germany dominates the ECB. The smaller NCBs are dependent on Germany for exports and capital flows, and therefore tend to support Germany. See the gripping report on this phenomenon in . Germany likewise dominates the European commission (EC) of finance ministers. Germany’s interests are served by the ECB’s original week structure.

The inability to use fiscal stimulus requires austerity, tickly in the peripheral countries but increasingly even in the core, such as France. Fiscal rules have the result of preventing the successful functioning of the central bank.

From 1999 to 2008 the ECB’s primary central banking function was limited to managing the money supply. It launched the euro and converted national currencies to the new one. Germany and the other northern core economies currencies were overvalued. They therefore received an excessive share of euros.

The M1 money supply grew by 104% from 1999 through 2006 as the ECB pumped excessive liquidity into the regional economy in order to jumpstart trade within the zone. This was faster than GDP growth. Exports went from the northern core to the southern and periphery countries. Banks took ECB liquidity and let it out rapidly, from the core to the periphery. The money went into real property and imports of manufactured goods from the German core.

There was a buildup of debt on the periphery, however most of it private. When the crash came, no new capital flowed in, but the debt still had to be paid. New loans were made to pay off the old. The troika imposed austerity to ensure he got repaid.

Interest rate management contributed to the 2008 crisis and the double dip recession in 2010 – 13. As elsewhere, the rate increases were too much, too late. The ECB was late to adapt experimental tools such as quantitative easing. This was inconsistent with its original charter and vision.

The ECB was late to inject liquidity, injected less as a percentage than the United States or Japan, and didn’t have the mechanisms to ensure that the money would go where was needed – into investment and jobs.

According to the Bank of International settlements, the northern banks had an exposure of $1.6 trillion in periphery economy government debt by 2010. In May 2010 they launched the securities markets program (SMP) which involved indirect buying of sovereign bonds and other securities. It totaled €210 billion over the next two years, but was not enough. Thus was established the European financial stability facility (EF SF) which succeeded the ESM in 2012. Funding totaled €440 billion. There was a hitch – they required austerity.

Mario Draghi promised to do “whatever it takes.” He started out right money transactions (OMT) in September 2012 to buy stocks and bonds and thus create liquidity. Estimated to have added €600 billion. However, there was not a corresponding increase in M1 money supply. It rose only from €4.53 trillion to 5.10 trillion. Rasmus writes that the signs are that the liquidity would not be loaned out and getting into the economy at large. I assume he concludes this because the €600 billion did not show any multiplier effect that could have been expected from fractional reserve banking.

ECB injections of liquidity tapered off toward the end of 2013, its balance sheet showing €2.27 trillion in assets, after which there was little new action.

After a Spanish bank went Boston others threatened to, Germany overcame its reluctance to perform bank supervision because it was even more reluctant to bail them out. The ECB established a single supervisory mechanism, SSM, to take effect in November 2014. It worked at the level of single banks, not macro policy. It only applied to the biggest banks. National Bank inspectors had to be involved. It did not involve institutions that did not have retail customers.

Nonperforming loans exceeded €1 trillion when the SSM was established and did not decline measurably for 2 1/2 years. It was only in March 2017 that the ECB issued guidelines on how to address the problem. The Italian bank problems, especially Monte dei Pasche, Are an indication of this. Though they are insolvent, the banks lumber on.

As a lender of last resort, the ECB did manage to keep private banks from going bankrupt. Governments likewise. But did they resolve anything? Were the banks able to resume lending? No.

The ECB’s only target was price stability, inflation of 2%, and despite the injections of l they did not achieve that. their tools did not do the job. In 2014 it looked like the euro economy was headed for another recession. At this point the ECB introduced its own version of quantitative easing, followed by the even more radical negative interest rates (NIRP).

The ECB was buying bonds at the rate of €80 billion per month. This should have vastly reduced the bonds on euro banks balance sheets. But it didn’t. This indicates the bonds must’ve been purchased from non-bank entities and foreign banks. Credit to nonfinancial corporations continued to decline.

Chapter 8:
The Bank of England’s Last Hurrah:
From QE to Brexit / 195

The financial system in Britain is more similar to that of the United States than Europe or Japan. The Bank of England is a genuine central bank, with its own currency. It was relatively late in being given the total independence that is fashionable for central banks to receive in the 1980s and 1990s. Bank supervision functions and monetary policy were theoretically supervised by the chancellor of the Exchequer, although the Bank of England was usually able to do what it wanted.

Like the other banks, the Bank of England went through waves of quantitative easing that injected large amounts of liquidity into the economy. As elsewhere, it did not achieve the desired levels of inflation in the real economy. It did, however, results in asset price inflation, real estate and stocks, just as everywhere.

The Brexit vote depressed the foreign exchange value of the pound. This in turn raised the price of imports, probably the single most significant factor in whatever consumer price inflation was realized.

The Bank of England faces the same problem as the other central banks. It has a swollen balance sheet, including lots of debt that would have otherwise not existed or gone into the private sector. Unwinding this debt will be a real problem, or would be a problem were to be attempted.

Chapter 9:
The People’s Bank of China Chases Its Shadows / 215

The central bank of China has a much more compressed history than those of the Western institutions. Rasmus starts with the period of 1983 through 1998. The People’s Bank of China (PBOC) started out as a part of the government. It handled fiscal matters – collections and disbursements of state owned enterprises. There are three quasi-independent government owned banks servicing different sectors of the economy: industry and commerce, agriculture, and construction.

The banks changed in character as China started to encourage private enterprise. The quarter of a million or so state owned enterprises consolidated. Some accepted outside shareholders. It became possible for entrepreneurs to start businesses. Independent banks were set up.

There were boom and bust cycles as in in the early capitalist system. China was notable only in the compressed timeframe in which it all occurred. There was little banking supervision at first. The government stepped in to sort out some of the mass, setting up government entities to purchase bad loans in order to keep the banks afloat.

The People’s Bank of China took form as a central bank in the early 2000’s, separating itself from the Ministry of finance. It still did not have autonomy with regard to bank supervision. Its primary target was continued growth; interest rates and inflation were secondary concerns.

In the early 2000’s the money supply more than doubled. However, the money more or less had to be invested productively. The channels did not exist to send it overseas in large amounts. There simply were no financial derivatives or other speculative products to absorb it.

The PBOC, unlike other central banks, was able to get most of the nonperforming loans that it had picked up during the Asian financial crisis of the late 90s off of its balance sheet in the early 2000’s. This was possible because the country experienced significant real growth.

“There are only three ways out of a debt crisis:
• expunge private debt by banks, voluntarily or by government action
• grow out of it by means of rising prices generating income with which to repay it; or
• transfer the debt to government established “bad banks” or by some other way to the government balance sheets.

Every central bank named in the book had hoped that option two would work out. China is the only one where it did.

China’s residential housing bubble crested in 2007 – 08, but did not break. The financial system was too simple to have involved layers of derivatives, as it did in the United States. There were no credit default swaps, collateralized debt obligations and instruments of that sort. As a result values resumed their climb after a couple of year pause.

Central bank policy worked because China was mostly a closed society. Liquidity injected in the system did not seep out through foreign investment, shadow banks and other mechanisms.

After the world economic crisis in 2007 – eight, China injected enough liquidity into the system to almost double the money supply. This is more than the United States injected into an economy twice as large. China’s objective was to shield their economy from the world economic crisis. 38% of China’s liquidity was directed at infrastructure – railroads, highways, water projects, ports and the like, and another 30% into housing and commercial property.

The fact that China board money directly into sectors, whereas the United States poured money into the system and left it to the participants in the economy to route it towards investment (or hoard it), China’s investment was much more effective.

China allowed the M2 money supply to grow 20% a year from 2008 through 2011, and 10 to 15% annually through 2017. This is more than was needed to accommodate real expansion. Where did the money go?

Asset prices is one thing. China discouraged housing appreciation by raising down payment requirements, forbidding ownership of more than two houses, and raising mortgage interest rates.

There was a tsunami of excess liquidity provided by all of this. Credit and debt grew to about $30 trillion. A lot of the money flowed overseas, but a lot of it also went into asset markets. Stock market, bond markets, and new securities like wealth management products. China’s shadow banking system blossomed.

All of this has resulted in China’s development of the same problems that afflict the West. There asset bubbles in real estate, stock, and financial assets. Real GDP growth has slowed to about 4% annually.

According to the Bank of International settlements, China’s total debt as of the end of 2016 exceeded 250% of GDP, twice the ratio in 2008. Two thirds of it is corporate and business debts, with most of that concentrated in the state owned entities and local government financing vehicles. Nonperforming loans are again a problem, of a scale much larger than in 1999. With growth slower, it is an open question whether they can grow out of it this time.

Of the $30 trillion debt, bank loans account for just over half as of the end of 2016. To this should be added about $7.7 trillion in Chinese shadow banking. Determining the level of nonperforming loans is a guesstimate, but $5 trillion seems reasonable. This is 16 times the amount that they “grew out of” after 1999. That does not seem like a likely solution. China does have $4 trillion of foreign reserves in cash… depending on how well the value of foreign assets holds up in a global crisis.

As an aside from the reviewer – gold bugs estimate that China has been actively accumulating gold, now possessing 20,000 tons worth close to $1 trillion at today’s valuation. If the value of gold increases significantly, as many speculate is likely in an impending global crisis, China’s reserves could be significantly greater than $4 trillion.

China at one point tried to force the excess liquidity and the buying stocks. There was a stock market surge in 2015 caused by allowing margin buying, foreign participation in markets, and other such devices. They tried to dampen that, causing a stock market contraction and downward pressure on the renminbi. They tried to reverse that by throwing money at it.

China faces the same dilemma as the West. “In 2008, every dollar of credit and debt produced a dollar of real growth; in 2017 it takes four dollars to produce one dollar of growth. The rest diverts into financial markets producing price bubbles and requiring still more debt to rollover and refinance the rising levels of old debt.”
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Chapter 5:
Bernanke’s Bank:
Greenspan’s ‘Put’ On Steroids / 106

The Fed was very data-driven, but myopic in that they were driven only by the data that they collected. The Bureau of Labor Statistics and other federal agencies gathered data on the real economy. It largely ignored what was going on in the financial economy. Rasmus contends that between the depression and 1965 the two were largely disjoint. However, from the Carter administration onward they greatly influenced one another. Not to pay attention to what was going on in the financial markets – bubbles and housing, bonds, the stock market and foreign currencies – was to be willfully blind.

Greenspan allowed himself to be blind. The “Great Moderation” was a fiction that was only sustainable by ignoring the financial sector of the economy.

Bernanke was Greenspan’s protégé from the time he joined the Fed in 2002. He came from Princeton, where he had headed the economics department. He briefly left the Fed to join the Bush administration, but returned and was elevated to the chairmanship in 2006. Like Greenspan, he was a monetarist, a student of Milton Friedman, and a believer in deregulation. A monetarist believes that you manage an economy by managing the money supply; a Keynesian believes that you do it through government fiscal policy. He was also friendly with the banks.

“When the banking and financial crash finally came in 2008, he would adopt Greenspan same solutions to imploding financial bubbles and financial crises i.e. throw another wall of liquidity at it. But massive liquidity injections over decades were the fundamental originating cause of the financial instability, leading to exploding debt, inordinate leveraging, it excess demand for financial securities and financial asset bubbles. Now they would be considered the solution to the problem they had created.” This reviewer notes that it is the same all over again in 2017. They learned nothing.

Long-term interest rates theoretically should to some degree track short-term interest rates. Greenspan’s “conundrum” was that the two became increasingly disconnected. Although Greenspan brought short-term rates down to 1% after the 2001 “tech wreck,” long-term rates fell only very slowly. Rasmus’ explanation is that this worldwide flood of liquidity represents an enormous source of demand to purchase US bonds, government and corporate. It represents a constant downward pressure on bond interest rates.

There was a productivity conundrum. Goods inflation slowed at the same time as productivity decreases. Less productivity should make products more costly. But it didn’t work that way. Factors Rasmus identifies are globalization, destruction of labor unions, lower minimum rage, capital replacing labor, offshoring, privatizing pensions, and the shift from manufacturing to a service economy.

Bernanke blamed a “savings glut” caused by persistent US trade deficits allowing dollars to accumulate overseas. Those dollars sought to be invested in the US, lowering long-term interest rates. But “savings” was a misnomer, the foreigners were not responsible, and it had begun long before 1996. Central banks worldwide had pumped liquidity in the system at every excuse.

Bernanke held a noninterventionist view, the idea that it was not the Fed’s job to pop bubbles, up until the time he retired from the Fed. The case that Rasmus does not make is what happens when the Fed does attempt to contain asset prices. One must assume that it causes dislocations elsewhere in the economy as excess liquidity will not stand still in banks, losing value. This reviewer asks the question as to whether the Fed could contain all asset prices – stocks, bonds, real estate, precious metals and works of art – at the same time. If they did, where would the money go? Conversely, is there any federal reserve policy that would soak up the excess liquidity without causing dislocations? These are questions I hope will be answered later in the book.

Rasmus contends that the Fed abandoned its money supply and credit regulation function to carry out its lender of last resort function. The Fed’s traditional tools were inadequate, leaving it to invent quantitative easing and the zero interest rate policy (QE and ZIRP).

The housing bust of 2007 also involve credit markets like asset-backed commercial paper (ABCP) and repo agreements. As the value of housing started to fall, the value of securitized loans and other financial assets collapsed quickly. Injections of 62 billion by the New York Fed and 214 billion by the European Central Bank were quickly swallowed up. The crisis originated in the shadow banks which could not borrow at the Fed’s discount window. Ultimately it took tens of trillions of dollars.

Hedge funds and private equity funds began feeling. The Fed said it would buy not only T-bills but mortgage-backed securities from the big five shadow banks in New York: Goldman Sachs, Morgan Stanley, Merrill, Lehman, and Bear Stearns. Bear was crashing. Bernanke in the Fed arranged $25 billion Fed loan to J.P. Morgan to buy Bear Stearns. Chase wound up paying only 236 million. NB: Morgan and Chase are the same entity.

Bernanke played political games to get the deal through with only 4/7 Fed governors voting. The Fed’s rule said they needed five.

The Fed did allow Lehman Brothers to collapse in September 2008. They did nothing to save it. This called the solvency of the other banks into question, and the New York Fed had to put another 70 billion in two quell the panic. They threw in another $85 billion to cover AIG, which was massively hemorrhaging due to credit default swaps. The Fed played favorites – money that went to AIG flowed through to Goldman Sachs.

Congress voted 700 billion for the Troubled Asset Relief Program (TARP) to be administered by the Treasury Department. Rasmus lists another six programs which together amount to another almost $2 trillion.

This money was used (I the reviewer conclude) to buy troubled assets from the troubled banks. Take the assets off of the bank books and put them onto Federal Reserve’s books or some other. This was supposedly done at fair value, but of course in a financial crisis – fair value is impossible to know. Without a doubt the bankers knew it better than the government or the Fed did. The bankers were at a minimum bailed out, and in some cases given an enormous gifts. Citigroup and Bank of America became technically insolvent. They too were given loans and guarantees.

Quantitative easing was launched in March 2009 With the purchase of $600 billion worth of mortgage securities and another hundred billion dollars worth of Fannie Mae – Freddie Mac’s own debt. The Fed was buying the toxic assets that had collapsed in price for private investors. QE1 total $1.75 trillion.

QE2 was launched in mid-2010. Altogether the Fed liquidity programs resulted in a federal reserve balance sheet of $4.5 trillion, still in place as of March 2017.

These actions resulted in a huge increase in money supply. The cash monetary base – currency in your currency – rose from 853 billion to $3.7 trillion at the end of 2013. Him too, the broader measure, went from $7.3 trillion to $11.2 trillion. These figures do not take in all credit growth – the total is larger, but hard to estimate.

The judgment is that the Federal Reserve succeeded at only one objective, as a lender of last resort, and did so at huge cost. The process was highly political, with government officials quite openly helping friends in high places. It absolutely failed in its supervisory capacity. It was unable to manage interest rates – the disparity between short and long term was hard to remedy.

Price stability was a failure as well. The Fed’s target is called the Personal Consumption Expenditure, or PCE. It is a measure of goods and services prices. Asset prices are not part of the equation. They could not push prices up to the targeted 2% by 2016, but stock and other asset prices skyrocketed. The Fed’s Inflation targets failed.

The chapter concludes with an assessment of the tools that Bernanke introduced: quantitative easing, ZIRP and the other tools to support bank liquidity, and the relaxation of mark to market and other supervisory metrics. The conclusion is that the negative effects will be felt for decades to come. They represent a massive injection of liquidity, exceeding even the specific bailout programs of 2008 – 09. Rasmus does not mention moral hazard as such, but they apparently establish a precedent that may be impossible to replicate next time.
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Chapter 3:
The US Federal Reserve Bank:
Origins & Toxic Legacies / 48

Rasmus gives a short version of the fairly well-known history of the founding of the Federal Reserve. The best known account, , is a little bit conspiratorial. Rasmus disagrees in part. He says that the negotiations were done in the public eye, in Congress, over a period of several years culminating in 1914. It is no doubt the product of the New York banks, and it was crafted to respect their interests. Rasmus writes that it did solve real problems. The boom and bust cycle had put a damper on expansion during significant portions of the prior three decades.

The Federal Reserve is owned by the banking community itself, which in turn is dominated by the big New York banks. The bankers got most of what they wanted. To sell the plan politically, it was constructed as a decentralized group of regional Federal Reserve Banks. In fact, the New York Fed dominated from the beginning. The decentralization was only a fig leaf to get the legislation through Congress. It had bipartisan support, although the Democrats could not afford to show too much enthusiasm because they were known as the anti-banking party.

Rasmus provides a history of the first two decades of the Federal Reserve’s existence. They had gotten essentially everything that they asked for from Congress, claiming that they needed the power to be able to control booms and busts and supervise banks. It did not work out in any of the central banks three primary functions.

In its supervisory role, the Federal Reserve stood idly by as the banks allowed the money supply to grow three times faster than production, creating a bubble. Much of the money went into margin loans that fueled the stock market bubble. A great many banks were still outside the Federal Reserve system, and those that were in it received very little discipline. The Federal Reserve had to balance two objectives, keeping interest rates low enough the gold didn’t flow from England to the United States and throw England off the gold standard, and yet control speculation in the United States. It failed.

As a lender of last resort the Fed also failed. The discount rate was kept abnormally high, discouraging banks in trouble from borrowing. Banks failed in the brief, severe recession of 1920 – 21. There were three strong waves of bank failures in 1930 – 31, 1932, and the third and early 1933. The rate of failure was more than it had been in the decades before the Federal Reserve. To fulfill a commitment to stay the gold standard, it actually raised interest rates going into the depression. This protected wealthy investors at the expense of farmers, small businesses and workers.

The Federal Reserve was supposed to ensure a stable money and credit supply. The single currency replaced the thousands of state bank banknotes. I, the reviewer, note that since we had a single currency, the US dollar, all of the banknotes must have been denominated in dollars at the then prevailing rate of $20 per ounce of gold. Though there may have been many banknotes, they must all have purported to represent the same amount of value. Although the most conservative measures of money, currency in circulation and bank deposits, were held in check, other lending such as margin lending on stock accounts was not. The bottom line, Rasmus says is “And the Fed had totally lost control of credit creation by the end of the decade.”

In its fourth role as government funding in fiscal agent, Rasmus contends that the Federal Reserve did adequately. It was able to raise the money to fund the First World War. He credits this primarily to the Department of the Treasury itself, which kept interest rates low to maximize government war borrowing.

In its fifth objective, price stability, the Fed did not do very well. Prices rose 11% to 19% during the war, after which there was a major deflation. Financial assets again surged in the bubble of the late 20s, after which all prices – goods, services, food, commodity, and financial assets – collapse together. Currency exchange rates also fluctuated wildly.

In its sixth objective, maintaining the gold standard, it absolutely failed. Although unemployment was not a stated target, it was also a disaster. By 1933, 30% of the entire workforce were unemployed, compared to 2.9% in 1929. Real output fell by 29%. Rasmus notes that in 1929, just as in 2017, the Fed’s policy was not to intervene and attempt to pick a financial asset bubble, but to try to pick up the mess after his bursts. By 1927 more than 1/3 of all bank loans went into buying stock, not into improving productivity.

The Fed did not use its tools, the discount rate and open market operations, to cool the speculative bubble in 1928 and 29. It ignored the effects of the shadow banks and other players.

Rasmus concludes that although it made a number of tactical errors, the most fundamental error was that the bank operated in the interests of the banks, not the country.

Chapter 4:
Greenspan’s Bank:
The ‘Typhon Monster’ Released / 71

The Federal Reserve was considerably chastened by the great depression. The flurry of legislation designed to control the banks left them on the sidelines. Rasmus gives Roosevelt most of the credit for the recovery – other economists would write the history differently – and says that the Federal Reserve did not regain power until March 1951 with a new record between the Fed and the treasury. Rasmus notes that the to decades without the Fed were the high point of economic and employment growth in the United States. While this is true, one must recognize that 1933 represented the absolute nadir of economic activity, and that productivity toward the end of this period was stimulated by two wars. Rasmus concludes that central-bank independence may not be the best for economic stability and growth.

The Treasury Department allowed the feds to increase reserve requirements in 1937 to offset golden flows from Europe. That slowed the economy, resulting in a short but deep double dip in the Depression.

Rasmus writes that after 1945 there was continued reliance on fiscal policy (presumably, rather than monetary policy). Here is how the Internet defines the difference:
• Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.
• Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

The bankers carried the day in March 1951. Truman needed the cooperation of the private banks to buy government bonds to fund the Korean War. Moreover, it was argued that the Fed needed to raise interest rates to bring inflation under control. Marriner Eccles, a strong advocate of government control, resigned as Fed chairman and was replaced by William McChesney Martin, a banker.

For the next two decades (through the early 70s) the FOMC (Federal open market committee) handled most of the regulation through buying and selling of government bonds and setting the level of reserves for the districts of the Fed.

“In the 1960s fiscal policy primacy continued but began to ran into trouble.” In other words, the government did not balance its books. It could not have guns and butter during the Vietnam War.

A number of financial innovations by the private banks circumvented Fed controls. Among them were certificates of deposit. Penn Central failed as did Franklin National Bank. This represented a failure of the Fed to supervise. Credit cards were introduced in this era – and consumer credit grew rapidly. Banks competed with savings and loans in the home mortgage business. The growth of new financial instruments left the Fed far behind.

Dollars flowed overseas first with foreign aid, US troops stationed overseas, and capital investment by US corporations. There were thus dollars in Europe to be loaned – EuroDollars – outside of the control of the federal reserve. This, combined with taking the dollar off the gold standard and the digitization of financial transactions and the related creation of new financial instruments meant that there was more money available, less subject to control by the Fed. Money velocity would’ve also increased, applying a multiplier effect of the monetary supply.

Continued deficit spending – as a result of fiscal policy – increase the amount of money in circulation. It cost inflation, which in turn raised the price of US exports and decreased US competitiveness. It led to an accumulation of dollars overseas and a lack of faith by our trade partners, who increasingly redeemed dollars for gold at the official rate of $35 per ounce. Under chair Arthur Burns, Nixon halted convertibility in 1971 as part of his New Economic Plan (NEP).

The end of the gold standard meant that the dollar was the reserve currency, which increased the demand for dollars as other countries would buy and sell the currency to stabilize their own currencies. Other central banks also injected liquidity, rarely taking it back.

In 1977 Congress gave the Fed the responsibility for targeting unemployment. Throughout the late 70s the Fed continued to allow liquidity to grow. It was ineffective at meeting any of its targets, which continue to change in any case: interest rates, money supply, discount rate, unemployment – they were all elusive. The Fed, under chair William Miller, tried all its tools, to no real effect. Carter replaced him with Paul Volcker in 1979.

Volcker’s top priority was to curb inflation. He put a halt to the money supply growth and paid no attention to the resultant interest rates and unemployment. Inflation continued for a while, but eventually abated as the economy crashed. Volcker bailed out financial interests, including the Hunt brothers who had failed in their attempt to corner the silver market. Rasmus notes that this indicates who the Fed is designed to protect – the banks.

Rasmus reports that Volcker was no more consistent than Miller had been, expanding and then contracting the money supply rather abruptly in the first years of the Reagan administration and allowing inflation to whipsaw.

Rasmus reports that Volcker was not successful even in controlling inflation. Prices of goods and services were indeed moderated, but financial prices grew considerably. There was a stock market bubble and in Boston 1987, a junk-bond bubble, and a second housing bubble.

US corporate “offshoring” in the 1980s required the relaxation of transborder monetary transactions. This was in the interests of business, escaping high costs of production in the United States, and supported by the Reagan administration. Deregulation, both domestic and international, enhanced liquidity by making money move more easily.

Reagan saw Volcker as not sufficiently onboard with the government’s objectives of improving investment and decreasing unemployment. He was replaced by Alan Greenspan, who was to serve for 20 years from 1987 until 2007. Rasmus says that Greenspan unloosed the “Typhon monster” of Greek mythology by creating excess liquidity. “Why is liquidity a monster? Because it’s excess beyond available opportunities for real asset investment overflows into financial asset investment and financial market speculation.” It results in bubble, which pop.

Rasmus next couple of paragraphs, although written about the 1980s, perfectly capture what is happening in 2017:

“Enabled by ever-expanding liquidity, financial asset investing becomes more profitable than real asset investing—i.e. credit expands into financial investment markets and even slows the flow of credit that might have gone into investing in real assets like structures, equipment, and other real assets that create more jobs and incomes than financial asset investment. With slowing real asset investment, productivity eventually slows as well, thus producing even fewer jobs and further reducing real earned incomes for most households. The flip side of excess liquidity is excess debt accumulation, as the expansion of that debt increasingly funds financial asset investment and financial speculation.

“The rising ratio of debt to real income has additional negative impacts on the real economy apart from diverting capital that might have financed real assets, jobs, and incomes. As real asset investment growth slows, and earned incomes grow more slowly, so does productivity slow. The growth of debt that excess liquidity creates also reduces multiplier effects from government fiscal policy that attempts to stimulate growth by means of spending increases and/or tax reductions. Debt also negatively affects monetary policy stimulus. Excess liquidity drives down interest rates. Businesses and investors then increase borrowing but divert the funds borrowed into financial asset investing as well. Financial markets expand abnormally and result in asset bubbles, with the same consequences noted above.”

Rasmus concludes that Greenspan was no genius – he simply bailed the banks out every time his policies failed, seven or more times in the course of his 20 years. He did nothing about financial asset bubbles. He noted that in 1996 the stock market valuation was 120% of GDP, up from 60% in 1990. Nota bene: it is 136% as I write).

Greenspan had advocated increasing financial deregulation, such as the end of the Glass-Steagall act which had prevented banks from combining retail lending with investment banking activity. The Fed also largely abandoned its supervisory function.

The stock market crashed – NASDAQ down 86%. But the biggest bubble of all, subprime lending for housing, continued. In a quid pro quo, Greenspan kept interest rates around 1% to finance George Bush’s war in Iraq, and he was reappointed. This gave new legs to and already extended, stale housing market by allowing marginal homebuyers into the market.
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Chapter 2:
A Brief History of Central Banking / 30

Merchant banks emerged in the late Middle Ages, first in Italy and then spreading north. See Fritz Rorig for a history. The oldest of central bank acknowledged as such is the Bank of England, which assumed that role about the beginning of the 19th century.

In the absence of a central bank, local banks issued their own currency. This led to frequent bank runs and financial crises. The United States had national banks in the early part of the 19th century. A legacy was not a happy one, and the United States was slow to establish a central bank. The Bank of England got a monopoly on issuing currency in 1844.

As continental central banks evolved, fractional reserve lending came into practice. Rasmus covers it briefly. The idea is that the bank loans out more money than it has deposits on the theory that not everybody will want their money back immediately. Loaned money goes into the construction of long-term assets which will enable the borrowers to pay the banks back. The long versus short problem inevitably led to liquidity crises. The banks assets might exceed its liabilities, but it would not have money on hand. Central banks handled this by limiting the amount of currency in circulation and acting as the lender of last resort.

By 1870 – 90 nearly all European states has adopted central banks. The Federal Reserve was created only in 1914, and Latin American and other central banks were founded in the early 20th century. Countries with central banks rose from 18 in 1900 up to almost 200 by the year 2000.

The three primary functions of central banks are:
• acting as a lender of last resort to bail out banks in a crisis
• regulating the supply of money in the domestic economy
• supervising the private banking system
Modern central banks perform other functions:
• raising money for governments
• issuing new paper currency
• precious metals and currency conversion
• clearinghouse services for interbank transactions
• managing government payments
• economic research

The ultimate goal of government and central banks is stable long-term growth, increasing the wealth of the society and the well-being of the citizens. To achieve that ultimate goal, central banks set targets for measurable economic statistics. Among the statistics that they target include:
• price level
• supply of money (cash, demand deposits, and other types of credit)
• currency exchange rates
• interest rates
• full employment (or conversely, an acceptable level of unemployment)

All of these targets are inter-related. Given that the tools used to achieve the objectives are also interrelated, central banks lack, and have always lacked the ability to attack any particular target in isolation.

The tools of central banking are:
• The reserve requirement: the percentage of money that must be held in the bank to back up loans made on the fractional reserve principle. The higher the reserve, the less likely the bank will suffer from a bank run, but the less profit they can make from interest on loans.
• The discount rate charged by the central bank to private banks.
• The market interest rate that banks charge one another for loans.
• Open market operations: buying and selling bonds, usually T-bills, which has the effect of injecting cash into the system or absorbing it out of the system as it is tied up in interest-bearing instruments.
• Quantitative Easing: buying bonds from private investors as well as banks and other financial institutions to provide them with liquidity. In Japan this includes buying corporate stock.
• Special Auctions: actors in the banking sector submit bids indicating the prices and amounts at which they are willing to borrow.
• Reverse Repo Agreements

All of these tools recognize that banking is a question of supply and demand: the supply of money available to be lent and the demand for borrowing. Reduce the supply of money by increasing the reserve requirement and the interest on loans goes up. Inject liquidity into the market by buying bonds, placing cash in the bank’s coffers, and they find it easier to lend. The same with quantitative easing. Adjusting the discount rate directly affects demand: the more expensive it is to borrow, the lower the demand. Therefore, in the final analysis, every central bank tool manipulates the same parameters: supply and demand. The objective is to achieve a level of lending such that the money can be put to use productively, increasing human productivity and gross domestic product, and not squandered, hoarded, or stolen. The borrower should be able to put the money to use in such a way that the earnings allow the loan to be repaid with interest in the borrower to make a profit.

In a global world central bankers have less and less control over the parameters they seek to manage. Money is really a global commodity. Productivity growth is a function of technology, something certainly beyond the control of central banks. Employment levels are a function of human capital: education, experience, and ultimately personal traits such as intelligence and personality. The thesis of this book is that the traditional tools named above are in adequate to achieve the named targets, and that the name targets themselves may be badly chosen. The era of the central bank may be coming to an end.

posted October 3, 2017
The Trump-Goldman Sachs Tax Cut for the Rich

This past week Trump introduced his long awaited Tax Cut, estimated between $2.0 to $2.4 trillion. Like so many other distortions of the truth, Trump claimed his plan would benefit the middle class, not the rich—the latest in a long litany of lies by this president.

Contradicting Trump, the independent Tax Policy Center has estimated in just the first year half of the $2 trillion plus Trump cuts will go to the wealthiest 1% households that annually earn more than $730,000. That’s an immediate income windfall to the wealthiest 1% households of 8.5%, according to the Tax Policy Center. But that’s only in the first of ten years the cuts will be in effect. It gets worse over time.

According to the Tax Policy Center, “Taxpayers in the top one percent (incomes above $730,000), would receive about 50 percent of the total tax benefit [in 2018]”. However, “By 2027, the top one percent would get 80 percent of the plan’s tax cuts while the share for middle-income households would drop to about five percent.” By the last year of the cuts, 2027, on average the wealthiest 1% household would realize $207,000, and the even wealthier 0.1% would realize an income gain of $1,022,000.

When confronted with these facts on national TV this past Sunday, Trump’s Treasury Secretary, Steve Mnuchin, quickly backtracked and admitted he could not guarantee every middle class family would see a tax cut. Right. That’s because 15-17 million (12%) of US taxpaying households in the US will face a tax hike in the first year of the cuts. In the tenth and last year, “one in four middle class families would end up with higher taxes”.

The US Economic ‘Troika’

The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump’s economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump’s economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. Together with the other key office determining US economic policy, the US central bank, held by yet another ex-Goldman Sachs senior exec, Bill Dudley, president of the New York Federal Reserve bank, the Goldman-Sachs trio of Mnuchin-Cohn-Dudley constitute what might be called the ‘US Troika’ for domestic economic policy.

The Trump tax proposal is therefore really a big bankers tax plan—authored by bankers, in the interest of bankers and financial investors (like Trump himself), and overwhelmingly favoring the wealthiest 1%.

Given that economic policy under Trump is being driven by bankers, it’s not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. And that’s just the nominal corporate rate cut proposed by Trump. With loopholes, it’s no doubt more.

The Trump-Troika’s Triple Tax-Cut Trifecta for the 1%

The Trump Troika has indicated it hopes to package up and deliver the trillions of $ to their 1% friends by Christmas 2017. Their gift will consist of three major tax cuts for the rich and their businesses. A Trump-Troika Tax Cut ‘Trifecta’ of $ trillions.

1.The Corporate Tax Cuts

The first of the three main elements is a big cut in the corporate income tax nominal rate, from current 35% to 20%. In addition, there’s the elimination of what is called the ‘territorial tax’ system, which is just a fancy phrase for ending the fiction of the foreign profits tax. Currently, US multinational corporations hoard a minimum of $2.6 trillion of profits offshore and refuse to pay US taxes on those profits. In other words, Congress and presidents for decades have refused to enforce the foreign profits tax. Now that fiction will be ended by officially eliminating taxes on their profits. They’ll only pay taxes on US profits, which will create an even greater incentive for them to shift operations and profits to their offshore subsidiaries. But there’s more for the big corporations.

The Trump plan also simultaneously proposes what it calls a ‘repatriation tax cut’. If the big tech, pharma, banks, and energy companies bring back some of their reported $2.6 trillion (an official number which is actually more than that), Congress will require they pay only a 10% tax rate—not the current 35% rate or even Trump’s proposed 20%–on that repatriated profits. No doubt the repatriation will be tied to some kind of agreement to invest the money in the US economy. That’s how they’ll sell it to the American public. But that shell game was played before, in 2004-05, under George W. Bush. The same ‘repatriation’ deal was then legislated, to return the $700 billion then stuffed away in corporate offshore subsidiaries. About half the $700 billion was brought back, but US corporations did not invest it in jobs in the US as they were supposed to. They used the repatriated profits to buy up their competitors (mergers and acquisitions), to pay out dividends to stockholders, and to buy back their stock to drive equity prices and the stock market to new heights in 2005-07. The current Trump ‘territorial tax repeal/repatriation’ boondoggle will turn out just the same as it did in 2005.

2. Non-Incorporate Business Tax Cuts

The second big business class tax windfall in the Trump-Goldman Sachs tax giveaway for the rich is the proposal to reduce the top nominal tax rate for non-corporate businesses, like proprietorships and partnerships, whose business income (aka profits) is treated like personal income. This is called the ‘pass through business income’ provision.

That’s a Trump tax cut for unincorporated businesses—like doctors, law firms, real estate investment partnerships, etc. 40% of non-corporate income is currently taxed at 39.6% (the top personal income tax rate). Trump proposes to reduce that nominal rate to 25%. So non-incorporate businesses too will get an immediately 14.6% cut, nearly matching the 15% rate cut for corporate businesses.
In the case of both corporate and non-corporate companies we’re talking about ‘nominal’ tax rate cuts of 14.6% and 15%. The ‘effective’ tax rate is what they actually pay in taxes—i.e. after loopholes, after their high paid tax lawyers take a whack at their tax bill, after they cleverly divert their income to their offshore subsidiaries and refuse to pay the foreign profits tax, and after they stuff away whatever they can in offshore tax havens in the Cayman Islands, Switzerland, and a dozen other island nations worldwide.

For example, Apple Corporation alone is hoarding $260 billion in cash at present—95% of which it keeps offshore to avoid paying Uncle Sam taxes. Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today—not the 35% nominal rate.

Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft’s effective global tax rate last year was only 12%. IBM’s even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they’ll pay even less, likely in the single digits, if that.

Corporations and non-corporate businesses are the institutional conduit for passing income to their capitalist owners and managers. The Trump corporate and business taxes means companies immediately get to keep at least 15% more of their income for themselves—and more in ‘effective’ rate terms. That means they get to distribute to their executives and big stockholders and partners even more than they have in recent years. And in recent years that has been no small sum. For example, just corporate dividend payouts and stock buybacks have totaled more than $1 trillion on average for six years since 2010! A total of more than $6 trillion.

But all that’s only the business tax cut side of the Trump plan. There’s a third major tax cut component of the Trump plan—i.e. major cuts in the Personal Income Tax that accrue overwhelmingly to the richest 1% households.

3. Personal Income Tax Cuts for the 1%

There are multiple measures in the Trump-Troika proposal that benefits the 1% in the form of personal income tax reductions. Corporations and businesses get to keep more income from the business tax cuts, to pass on to their shareholders, investors, and senior managers. The latter then get to keep more of what’s passed through and distributed to them as a result of the personal income tax cuts.

The first personal tax cut boondoggle for the 1% wealthiest households is the Trump proposal to reduce the ‘tax income brackets’ from seven to three. The new brackets would be 35%, 25%, and 12%.

Whenever brackets are reduced, the wealthiest always benefit. The current top bracket, affecting households with a minimum of $418,000 annual income, would be reduced from the current 39.6% to 35%. In the next bracket, those with incomes of 191,000 to 418,000 would see their tax rate (nominal again) cut from 28% to 25%. However, the 25% third bracket would apply to annual incomes as low as $38,000. That’s the middle and working class. So households with $38,000 annual incomes would pay the same rate as those with more than $400,000. Tax cuts for the middle class, did Trump say? Only tax rate reductions beginning with those with $191,000 incomes and the real cuts for those over $418,000!

But the cuts in the nominal tax rate for the top 1% to 5% households are only part of the personal income tax windfall for the rich under the Trump plan. The really big tax cuts for the 1% come in the form of the repeal of the Inheritance Tax and the Alternative Minimum Tax, as well as Trump’s allowing the ‘carried interest’ tax loophole for financial speculators like hedge fund managers and private equity CEOs to continue.

The current Inheritance Tax applies only to those with estates of $11 million or more, about 0.2 of all the taxpaying households. So its repeal is clearly a windfall for the super rich. The Alternative Minimum Tax is designed to ensure the super rich pay something, after they manipulate the tax loopholes, shelter their income offshore in tax havens, or simply engage in tax fraud by various other means. Now that’s gone as well under the Trump plan. ‘Carried interest’, a loophole, allows big finance speculators, like hedge fund managers, to avoid paying the corporate tax rate altogether, and pay a maximum of 20% on their hundreds of millions and sometimes billions of dollars of income every year.

Who Pays?

As previously noted, folks with $91,000 a year annual income get no tax rate cuts. They still will pay the 25%. And since that is what’s called ‘earned’ (wage and salary) income, they don’t get the loopholes to manipulate, like those with ‘capital incomes’ (dividends, capital gains, rents, interest, etc.). What they get is called deductions. But under the Trump plan, the deductions for state and local taxes, for state sales taxes, and apparently for excess medical costs will all disappear. The cost of that to middle and working class households is estimated at $1 trillion over the decade.

Trump claims the standard deduction will be doubled, and that will benefit the middle class. But estimates reveal that a middle class family with two kids will see their standard deduction reduced from $28,900 to $24,000. But I guess that’s just ‘Trump math’.
The general US taxpayer will also pay for the trillions of dollars that will be redistributed to the 1% and their companies. It’s estimated the federal government deficit will increase by $2.4 trillion over the decade as a result of the Trump plan. Republicans in Congress have railed over the deficits and federal debt, now at $20 trillion, for years. But they are conspicuously quiet now about adding $2.4 trillion more—so long as it the result of tax giveaways to themselves, their 1% friends, and their rich corporate election campaign contributors.

And both wings of the Corporate Party of America—aka Republicans and Democrats—never mention the economic fact that since 2001, 60% of US federal government deficits, and therefore the US debt of $20 trillion, are attributable to tax cuts by George W. Bush and Barack Obama: more than $3.5 trillion under Bush and more than $7 trillion under Obama. (The remaining $10 trillion of the US debt due to war and defense spending, price gouging by the medical industry and big pharma driving up government costs for Medicare, Medicaid, and other government insurance, bailouts of the big banks in 2008-09, and interest payments on the debt).

The Neoliberal Tax Offensive

Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the ‘fiscal cliff’ settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps.

Neoliberal tax cutting in the US has also been characterized by the ‘tax cut shell game’. The shell game is played several ways.
In the course of major tax cut legislation, the elites and their lobbyists alternate their focus on cutting rates and on correcting tax loopholes. They raise rates but expand loopholes. When the public becomes aware of the outrageous loopholes, they then eliminate some loopholes but simultaneously reduce the tax rates on the rich. When the public complains of too low tax rates for the rich, they raise the rates but quietly expand the loopholes. They play this shell game so the outcome is always a net gain for corporations and the rich.

Since Reagan and the advent of neoliberal tax policy, the corporate income tax share of total US government revenues has fallen from more than 20% to single digits well below 10%. Conversely, the payroll tax has doubled from 22% to more than 40%. A similar shift within the personal income tax, steadily around 40% of government revenues, has also occurred. The wealthy pay less a share of the total and the middle class pays more. Along the way, token concessions to the very low end of working poor are introduced, to give the appearance of fairness. But the middle class, the $38 to $91,000 nearly 100 million taxpaying households foot the bill for both the 1% and the bottom. This pattern was set in motion under Reagan. His proposed $752 billion in tax cuts in 1981-82 were adjusted in 1986, but the net outcome was more for the rich and their corporations. That pattern has continued under Clinton, Bush, Obama and now proposed under Trump.

To cover the shell game, an overlay of ideology covers up what’s going on. There’s the false argument that ‘tax cuts create jobs’, for which there’s no empirical evidence. There’s the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There’s the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes.

All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan—which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. US multinational corporations will begin again to divert profits, and investment, offshore; profits brought back untaxed will result in mergers and acquisitions, dividend payouts, and financial markets investment. No real jobs will be created in the US. The wealthy will continue to pump their savings into financial asset markets, causing further bubbles in stocks, exchange traded funds, bonds, derivatives and the like. The US economy will continue to slow and become more unstable financially. And there will be another financial crash and great recession—or worse. Only this time, the vast majority of US households—i.e. the middle and working classes—will be even worse off and more unable to weather the next economic storm.

Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting ‘shell games’, and is allowed to continue to foment its ideological cover up.

Dr. Jack Rasmus, October 2, 2017

Dr. Rasmus is author of the just published book, ‘Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the previously published ‘Looting Greece: A New Financial Imperialism Emerges’, October 2016, and ‘Systemic Fragility in the Global Economy’, January 2016, also by Clarity press. More information is available at Claritypress.com/Rasmus. For more analyses on the Trump and neoliberal taxation, listen to Dr. Rasmus’s, September 29, 2017 radio show, Alternative Visions, on the Progressive Radio Network at http://alternativevisions.podbean.com. He blogs at jackrasmus.com and his website is http://kyklosproductions.com.

posted September 26, 2017
Will Central Banks Survive to Mid-21st Century?

By Jack Rasmus

The global economy has its eyes on the gathering of central bankers at Jackson Hole, Wyoming. In this article, Dr. Jack Rasmus comprehensively elaborates on the central banks’ nine-year experiment, its inevitable transformation, and ultimately, its survival during the 21st century.

After nearly nine years of a radical experiment injecting tens of trillions of dollars and dollar equivalent currency into their economies, the major central banks of the advanced economies – the Federal Reserve (Fed), Bank of England (BoE), European Central Bank (ECB), Bank of Japan (BoJ), and the People’s Bank of China (PBOC) – appear headed toward reversing the policy of massive liquidity injection they launched in 2008. The next phase of the process will likely become more apparent once central bankers gather for their annual meeting at Jackson Hole, Wyoming, on August 24-25, 2017.

Led by the US central bank, the Federal Reserve, central bankers have begun, or are about to begin, reducing their bloated balance sheets and raising benchmark interest rates. A fundamental shift in the global availability of credit is thus on the horizon. Whether the central banks can succeed in raising rates and reducing balance sheets without precipitating a major credit crunch – or even another historic credit crash as in 2008 that sends the global economy into another recession tailspin – is the prime question for the global economy in 2018 and beyond.1

Fundamental forces in recent decades associated with globalisation, rapidly changing financial structures worldwide, and accelerating technological change significantly reduced central banks’ ability to generate real investment and productivity gains – and therefore economic growth – after nine years of near zero and negative benchmark rates. The same changes and conditions may threaten a quicker than anticipated negative impact on investment and growth should rates rise much in the near term. In the increasingly globalised, financialised, and rapid technological change world of the 21st century, central bank interest rate policies are becoming less effective – and with that central banks policies less relevant.

The $25 Trillion Radical Experiment

For the past nine years the major central banks have embarked on an unprecedented experiment, injecting tens of trillions of dollars of liquidity into their banking systems and economies – by means of programmes of quantitative easing (QE), zero interest rates (ZIRP) and even negative rates (NIRP), among other more traditional means. The consequence has been the ballooning of their own balance sheets.

Officially, the balance sheets of the five major central banks today total conservatively $20 trillion. The Fed’s contribution is $4.5 trillion. The ECB’s just short of $4.9 trillion, but still rising as it continues its quantitative easing, QE, programme purchasing both government and private bonds. The BoJ’s is more than $5 trillion, while it too continues even more aggressively buying not only government and corporate bonds but private equities and other non-bond securities as well. The BoE’s total is heading toward $1 trillion, as it re-introduced another QE programme in the wake of the Brexit vote in June 2016. And the PBOC’s is estimated somewhere between $5 and $7 trillion – the result of liquidity injections supporting its state policy banks and entrusted loans to industries and local government construction projects.

Add in important “tier 2” central banks – like the Swiss National Bank, the Bank of Sweden, and central banks of India, Brazil, Russia and others – that in recent years have also significantly increased their balance sheets, global balance sheet totals easily exceed the $20 trillion of the five majors.

This historically unprecedented $25 trillion global liquidity injection by central banks worldwide has occurred within the context of a simultaneous general retreat from fiscal policy as well – at least in the form of government direct investment and spending.

The $20 trillion itself is actually an under-estimation of cumulative liquidity injections that have occurred since 2008. Although the Fed officially ended its QE3 programme at the end of 2013 when its total reached $4.5 trillion, it continued re-buying securities thereafter as some of its earlier bond purchases matured and “rolled off”. The repurchases kept its balance sheet level at $4.5 trillion. Bloomberg Research has estimated the Fed has purchased 2008 more than $7 trillion since 2008 when its repurchases are considered. Similar reinvestments by the other four major central banks would likely add even more “cumulative trillions” of liquidity injections since 2008 to their official $20 trillion balance sheet totals. The actual liquidity injected is therefore likely closer to $25 trillion.

Some argue the reinvestments shouldn’t be counted, since the maturing of bonds represent liquidity removed from the general economy. But that view disregards any money multiplier effects on private debt and debt leveraging. Even after maturing, the bonds leave a residue of debt-generation in the economy regardless whether the bonds are repaid. The liquidity might be removed from the economy, but its multiple of residue of debt and leverage remain.

This historically unprecedented $25 trillion global liquidity injection by central banks worldwide has occurred within the context of a simultaneous general retreat from fiscal policy as well – at least in the form of government direct investment and spending. With the exception of China perhaps, it has meant almost total reliance in the advanced economies on central bank monetary policy. Since 2008 central bank monetary policy of massive liquidity injection, generating super-low (and even negative) interest rates, has been the “only game in town”, as others have aptly described.2 Talk of renewed government investment and spending in the form of infrastructure investment has to date been only talk. Elites and policy makers in 2008 chose central bank monetary policy as the primary, and even sole, engine of economic recovery. And it has proven an engine running on low octane fuel, and now running out of gas.

Has the Nine-Year Experiment Failed?

In retrospect, monetary policy has not been very effective – whether considered in terms of generating real economic growth, achieving targets of price stability and employment, or even in terms of ensuring central banks’ primary functions of lender of last resort, money supply management, and banking system supervision.

If measured in terms of central banks’ primary functions, avowed targets, and monetary tools’ effectiveness, the past nine years of “monetary policy first and foremost” (with fiscal spending frozen or contracting) may reasonably be argued to have failed. The $20 trillion central bank monetary experiment was supposed to bail out the banks, generate employment, raise goods and services prices to at least 2% annually, restore financial stability, and return economic growth in GDP terms to pre-2008 crisis averages. But it has done none of the above – despite the $20-$25 trillion massive liquidity injections.

That in turn raises the question: should anyone believe central banks’ pending policy shift – i.e. to sell off and reduce their balance sheets and raise interest rates – will prove any more successful?

Both mainstream and business media generally concur that central banks policies since 2008 saved the global economy from another 1930s-like global depression. But an assessment of central banks’ performance in terms of their primary functions, in achieving their publicly declared targets and objectives, and in the effectiveness of their monetary policy tools suggest the track record of central banks has been far less than successful.

Should anyone believe central banks’ pending policy shift – i.e. to sell off and reduce their balance sheets and raise interest rates – will prove any more successful?

Lender of Last Resort Function. Clearly some of the biggest commercial banks were rescued after 2008. The bailout was enabled by means of a combination of programmes: i.e. central banks providing virtually zero interest loans and loan guarantees to banks, directly buying bad assets like subprimes from banks and private investors at above market rates, forcing bank consolidations, suspending normal accounting rules, establishing government run so-called “bad banks” to offload bad debt, and by temporary bank nationalisations. But the global banking system today is still over-loaded with a mountain of non-performing bank loans (NPLs) and other forms of private debt and remains therefore still quite fragile. Lender of last resort appears to have been successful in rescuing some large banks, but much of the rest of the banking system has been left mired in a swamp of bad debt.

Official data show NPLs in Europe and Japan officially at levels of $1-$2 trillion each. But much of it is concentrated dangerously in certain periphery economies and industries, which makes their NPLs potentially even more unstable. China’s NPLs are estimated around $6 trillion. NPLs in India are certainly hundreds of billions of dollars and perhaps even more, and are almost certainly officially underestimated. Then there’s Russia, Brazil, South Africa and other oil and commodity producing countries, the NPLs of which – like India’s – have been accelerating particularly rapidly since 2014 as a percent of GDP, according to the World Bank. Moreover, all that’s just official data, which grossly underestimates true totals of bad debt still on banks’ balance sheets, since many NPLs are conveniently reclassified by governments as “unrecognised stressed loans” or “restructured loans” in order to make the magnitude of the problem appear less serious.

In other words, the $25 trillion central bank liquidity experiment has left the global economy with $10 to $15 trillion in global NPLs. And that’s hardly an effective “lender of last resort” performance, notwithstanding the bailout of the highly visible big banks like Citigroup, Bank of America, Lloyds, RBS, and others. What remains is a massive bad bank loan debt global overhang of at least $10 trillion. And when high risk private debt in the form of corporate junk bonds, equity market margin debt, household and local government debt are considered as well, “non-performing” debt totals likely exceed $15 trillion worldwide at minimum. A truly effective lender of last resort function would have cleaned up at least some of this bad debt, but it hasn’t. Beneath the appearance of a successful post-2008 lender of last resort function lies massive evidence of central banks failure in their performance of this function.

The global economy thus remains highly fragile, despite the $25 trillion liquidity injections by central banks since 2008.3 The global banking system is permeated with “dry rot” in many locations. If financial stability is an avowed objective of central bank policy, the magnitude of global NPLs and other forms of non-performing private debt is ample testimony that central banks have failed the past nine years to restore stability of the financial system. Central banks have failed to implement pre-emptive lender of last resort programmes and have been content to respond in reactionary fashion as lender of last resort after crises have erupted.

Money Supply Management Function. The great liquidity experiment is not just a phenomenon of the post-2008 period. It has been underway for decades, beginning with the collapse of the Bretton Woods international monetary system in the 1970s which gave central banks, especially the Fed, the task of stabilising global currency exchange rates, ensuring price stability, and facilitating global trade. Neoliberal economic policies, first in the UK and USA then later elsewhere, further encouraged and justified central bank excess liquidity policies since the 1980s. The removal of restrictions on global money capital flows in the late 1980s helped precipitate financial instability events globally in the 1990s that further encouraged central bank excesses. So did technological change in the 1990s that linked and integrated financial markets and accelerated cross-country money velocities that made banking and financial systems increasingly prone to contagion effects. As financial asset markets’ bailouts grew in frequency and magnitude after 1990 in response to multiple sovereign debt crises, Asian currency instability, bursting tech bubbles, and subprime housing and derivatives credit booms, central banks provided ever more liquidity to the system. At the same time changing global financial structures gave rise to forms of non-money “inside” credit and technology increasingly spawned forms of digital money – over both of which central banks have had little influence as well. The 2008-09 global crash thus only accelerated these developments and trends already underway for decades.

Financialisation, technological change and globalisation thus have all served to reduce central banks’ ability to carry out their money supply function as well. Moreover, central banks themselves have exacerbated the trends and loss of control by embracing policies like QE, ZIRP, and NIRP which, in effect, have thrown more and more liquidity at crises – i.e. crises that were fundamentally created by excess liquidity, runaway debt, and leveraging in the first place. The solution to the last crisis – i.e. liquidity – would become the enabling cause of the next.

Banking Supervision Function. Central banks have been no more successful in performing their third major function of banking supervision. If banks were properly supervised the current volume of NPLs would not have been allowed to grow to excessive levels. Central banks would intervene and check financial asset price bubbles before they build and burst, threatening the entire credit system and collapsing the real economy. Limited initial efforts to expand bank supervision role of central banks following the 2008 crash – such as Dodd-Frank legislation in the US and the Financial Stability Authority in the UK – have been checked and are being dismantled step by step. In Japan, bureaucratic forces have effectively stymied more bank supervision for decades and little more was done after 2008. In Europe, supervision remains largely still with national central banks. Efforts to coordinate bank supervision across central banks with the Basel II and III agreements are moribund. And nowhere have effective regulatory measures been implemented to address the huge shadow banking system, rapidly expanding online banking, or the growing role of global multinational corporations’ financial departments, which have been transforming them into de facto private banks as well.

Even ardent central banker, Stanley Fischer, vice-chair of the Federal Reserve and head of its financial stability committee, has recently declared that efforts in the US to roll back even the limited measures of Dodd-Frank to expand Fed bank supervision as “very, very dangerous”.4

Never totally responsible for bank supervision – and only one institution among several tasked with supervising the private banks – central banks have never been very successful performing bank supervision. And now that function is again weakening across many locations of the global economy.

The Failure to Achieve 2% Price Stability. Failing functions of lender of last resort, money supply and credit control, and banking supervision are not the only indications of central banks’ failure in recent decades, and especially since 2008. No less indicative of failure has been central banks’ inability to achieve their own publicly declared targets.

Failure to achieve their 2% price stability target has been particularly evident. Since 2008 the economies of Europe and Japan in particular have repeatedly flirted with deflation in goods and services prices. When not actually deflating, prices have either stagnated or barely rose above zero. Even the US economy, which analysts herald as performing more robustly than the others, the Fed’s preferred Personal Consumption Expenditures, or PCE, price index has consistently failed the 2% threshold. And over the longer term has steadily drifted toward 1% annual rate or less. And in recent months it has been near zero. China’s prices have performed better, but that has been mostly due to periodic booms in its housing sector and its several fiscal stimulus programmes that have accompanied its central bank’s liquidity injections policy since 2011. Despite the $25 trillion, central banks have clearly failed to achieve anything near their declared 2% price targets.

Unemployment and GDP Growth. While the ECB, BoE, and BoJ limit their targeting to a 2% price stability rule (the PBOC to 3.5%), the US Fed officially maintains that employment and economic growth are also official targets of central bank monetary policy.

But it has been mostly lip-service. Since 2015 the Fed has touted the fact of the US economy’s unemployment rate has fallen to only 4.5%. But 4.5% is not the true US unemployment rate. It is the government’s official U-3 rate, which estimates only full time permanent employment. At least an equivalent percentage of the US labour force remains unemployed in the US economy when part time, temp, and contract work – i.e. underemployment – is considered. That’s the U-6 unemployment rate which the Fed conveniently ignores. The true numbers of jobless are even higher than the U-6, when workers who never entered or drop out of the labour force are considered, or when the millions more who chose permanent disability status in lieu of unemployment are added; or when the poorly estimated growing underground economy and undocumented immigrant labour force are considered. The true US unemployment rate remains over 10%, as it does as well in Europe.

If central banks’ $25 trillion liquidity injection are measured against restoring economic growth rates, the picture fares no better. Despite the Fed’s QE, ZIRP, and related programmes, the US economy has grown since 2008 at an annual rate, in GDP terms, averaging only 60% of its pre-crisis economic average. On three separate occasions since 2010 the US economy collapsed to near zero growth for one quarter. Europe’s GDP performance has been even worse, experiencing a serious double dip recession in 2011-13, and chronic growth rates well below 1% for most of the period that followed. And Japan’s growth has been even worse than Europe’s, experiencing no less than four recessions since 2008. Only China has performed better, but most likely due once again to its significant fiscal stimulus programme of 2008-09 and additional mini-fiscal stimulus thereafter and not due to monetary policy. In 2012 every dollar of liquidity provided by the PBOC generated an equivalent dollar of real GDP growth; today, that ratio is four dollars necessary to generate one dollar of real growth.

Monetary Policy Tools’ Effectiveness. With the 2008-09 global crash, it became almost immediately evident that central banks’ traditional monetary tools, like open market operations bond buying and reserve requirement adjustments, were seriously deficient for both bailing out banks and assisting economic recovery. New, more radical policy tools were introduced – specifically QE, ZIRP and then NIRP. How effective have the new tools been, one might ask?

While they reflated part of the banking system no doubt, the negative costs of the QE-ZIRP-NIRP have risen steadily since 2008. Much of the QE driven liquidity – especially direct buying of investors’ subprimes by the Fed and ECB-BOJ purchases of corporate bonds and equities – have been misdirected into financial asset markets rather than real investment, redistributed to shareholders, diverted offshore, or remain hoarded on corporate balance sheets. Both real productivity and real goods and services prices have stagnated, while financial asset prices have bubbled – especially in equities, high yield corporate bonds, and derivatives like exchange traded funds (ETFs). The nine years of near zero interest rates have devastated fixed income households’ savings. Retirees’ incomes in particular have stagnated and declined, while capital gains incomes of investors and speculators have accelerated. That does not portend well for sustained household consumption.

Central banks’ chronic low rates have been fuelling a new “debt bomb” worldwide, not just in the advanced economies but increasingly in emerging markets as well.

The long term QE-ZIRP has also been distorting various markets. Pension funds and insurance annuities have not recovered due to the chronic low rates of return, and are poorly positioned now for the next recession and crisis. Low rates have encouraged excessive corporate bond debt issuance, which has not flowed into real investment and productivity or wage incomes. In the US alone, corporate debt has exceeded $6 trillion in the past six years. Central banks’ chronic low rates have been fuelling a new “debt bomb” worldwide, not just in the advanced economies but increasingly in emerging markets as well. Not least, the low rate regime for nearly a decade has seriously neutralised interest rates as a potential central bank tool on hand when the next recession occurs within the next few years.

As the world’s primary central bank, the Fed has been desperate to raise rates in order to restore a policy tool cushion before the next crisis. Central banks in Europe and Japan are waiting to follow suit, to raise their rates and sell off their balance sheets, but will not do so until the Fed does more convincingly in the coming months. Due to new forces dominant in the 21st century, however, the Fed and other central banks may not be able to raise rates much higher (or significantly reduce balance sheets that will have the similar effect on rate hikes).

It is this writer’s view that the Fed will not be able to raise its benchmark federal funds rate above 2%, or push the longer term 10 year Treasury bond yield (rate) above 3%, without precipitating another major credit crisis. And if the Fed cannot, the other central banks will not as well. Monetary policy may be already neutralised for the next recession and crisis.

Central Banking’s Inevitable Transformation

Whether based on assessment of central banks’ primary functions, central bank targets, or effectiveness of new monetary tools, it is reasonable to argue that central banks have not been performing very well in recent decades, and especially not well in the post-2008 period. As the Fed and other central banks now consider reversing and reducing the consequence of post-2008 policies by trying to sell of balance sheets and raise rates, that major policy shift will most likely prove no more successful than policies pursued 2008-2017 and perhaps even less so.

Central banks have clearly not evolved apace with the rapid changes in globalisation, financial structures, and technology. The private banking and global financial system is changing far more rapidly than central banks have been able to adjust. Being essentially national institutions, they cannot adapt fast enough to the globalisation and economic and financial integration trends that are accelerating. Manipulation of national interest rates by central banks are thus becoming increasingly ineffective. Expanding, highly liquid and integrated global financial markets, proliferating new financial securities, new forms of digital money and inside credit beyond their influence, virtually unregulated (and perhaps unregulatable) global shadow banking institutions that now control more assets than commercial banks, fast-trading, dark pool investing, and coming artificial intelligence driven passive investing – all represent significant challenges to central banks’ functions, targets, and tools effectiveness. Their response has been simply to thrown more money and ever more liquidity at crises as they multiply and magnify. And in the process they lay the groundwork for still more speculative debt and leverage, more financial asset bubbles, and more subsequent financial instability to follow.

The problem is not only technological or economic. Accompanying the changes has been the rise of a new global finance capital elite – i.e. the human agency driving changes both economically and ensuring those changes are enabled politically.

Moreover, the problem is not only technological or economic. Accompanying the changes has been the rise of a new global finance capital elite – i.e. the human agency driving changes both economically and ensuring those changes are enabled politically. A couple hundred thousand super-wealthy individuals and investors who are transforming not only the global banking-financial system but who are steadily deepening their influence within the state and governments of the advanced economies as well their economies. They have been bending traditional government institutions – legislatures, executive agencies, and even courts – to their collective will. Central banks are being influenced and affected no less so.

US economic policy today is largely determined by members of this financial elite. Despite this elite’s central role in causing and precipitating the last financial crash, none have gone to jail and their representatives now sit firmly in control of US levers of economic policy. The US Treasury, the New York Fed, and the National Economic Council are run by former Goldman Sachers Steve Mnuchin, Bill Dudley, and Gary Cohn. It is almost certain Cohn will replace current Fed chair Janet Yellen when her term expires next February, thus further solidifying that control. President Trump is himself a billionaire real estate speculator and member of this new finance elite, as are most of the private advisors with whom he communicates regularly and who have a swinging door access to the White House.

The various economic developments, global system restructuring, technological changes and political system entrenchment of the new elite thus render it highly likely that central banks will perform even more poorly in the decades to come – whether that performance is measured in terms of functions, targets, tools, or ensuring financial stability. That failure will drive necessary basic changes in central banking in the coming decades. Central banks will have to undergo major structural change, develop new targets and tools, and become more directly accountable to the public interest than ever before if they are to survive by mid-century. There will always be central banking in some form. But central banks as we now know them will certainly no longer exist.

About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression”, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy”, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html. He teaches economics at St. Marys College in Moraga, California, and hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

References

1. This is one of several main themes addressed by the author in the just published book: Jack Rasmus, “Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression”, Clarity Press, July 2017
2. See Mohammed El-Erian, “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse”, Random House, 2016.
3. For an assessment of the “system-wide” fragility as of 2015, see Jack Rasmus, “Systemic Fragility in the Global Economy”, Clarity Press, January 2016.
4. Financial Times, August 19, 2017, p.R3.

posted September 19, 2017
Update on the Greek Debt Crisis–Why Syriza Continues to Lose

This past August marked the second anniversary of the Greek debt crisis and the third major piling on of debt on Greece in August 2015 by the Eurozone ‘Troika’ of European Commission, European Central Bank, and the IMF. That 2015 third debt deal added $86 billion to the previous $230 billion imposed on Greece—all to be paid by various austerity measures squeezing Greek workers, taxpayers, retirees, and small businesses demanded by the Troika and their northern Euro bankers sitting behind it.
Studies by German academic institutions showed that more than 95% of the debt repayments by Greece to the Troika have ended up in Euro bankers’ hands.
But the third debt deal of August 2015, which extends another year to August 2018, was not the end. Every time a major multi-billion dollar interest payment from Greece was due to the Troika and their bankers, still more austerity was piled on the $83 billion August 2015 deal. The Troika forced Greece had to introduce even more austerity in the summer of 2016, and again still more this past summer 2017, to pay for the deal.
Last month Syriza and its ‘rump’ leadership—most of its militant elements were purged by Syriza’s leader, Alex Tsipras, following the August 2015 debt deal—hailed as some kind of significant achievement that the private banks and markets were now willing to directly lend money to Greece once again. Instead of borrowing still more from the Troika—the bankers representatives—Greece now was able once again to borrow and owe still more to the private bankers instead. Pile on more private debt instead of Troika debt. What an achievement!
Greece’s 2012 second debt deal borrowed $154 billion from the Troika, which Greece then had to pay, according to the debt terms, to the private bankers, hedge funds and speculators’ which had accumulated over preceding years and the first debt crisis of 2010. So the Troika simply fronted for the bankers and speculators in the 2nd and 3rd debt deals. Greece paid the Troika and it paid the bankers. But now, as of 2017, Syriza and Greece can indebt themselves once again directly to the bankers by borrowing in public markets.
What it shows is that supra-state institutions like the Troika function as debt collectors for the bankers and shadow bankers when the latter cannot collect their payments on their own. This is the essence of the new, 21st century form of financial imperialism. The Supra-State prefers weaker national governments to indebt themselves directly to the banks and squeeze their own populace with Austerity whenever they can to make the payments. But the Supra-State will step in if necessary to play debt collector if and when popular governments get control of their governments and balk at onerous debt repayments.
Syriza came to power in January 2015 as one of those popularly elected governments intent on adjusting the terms of debt repayment. But after a tragic, comedy of errors negotiation effort, capitulated totally to the Troika’s negotiators after only seven months.
The capitulation by Syriza’s leader, Alex Tsipras, in July 2015 was doubly tragic in that he had just put to a vote to the Greek people a week beforehand whether to reject the Troika’s deal and its deeper austerity demands. And the Greek popular vote called for a rejection of the Troika’s terms. But Tsipras and Syriza rejected their own supporters, not the Troika, and capitulated totally to Troika terms.
The August 2015 3rd debt deal quickly thereafter signed by Syriza-Tsipras was so onerous—and the Tsipras-Syriza treachery so odious—that it left opposition and popular resistance temporarily immobilized. That of course was the Troika’s strategic objective. Together with Tsipras they then pushed through their $83 billion deal, while Tsipras simultaneously purged the Syriza party to rid it of elements refusing to accept the deal. Polls showed at that time, in August-September 2015, that 70% of the Greek people opposed the deal and considered it even worse than the former two debt agreements of 2010 and 2012. Other polls showed 79% rejected Tsipras himself.
To remain in power, Tsipras immediately called new Parliamentary elections, blocking with the pro-Troika parties and against former Syriza dissidents, in order to push through the Troika’s $83 billion deal. This week, September 20, 2017 marks the two year anniversary of that purge and election that solidified Troika and Euro banker control over the Syriza party—a party that once dared to challenge it and the Eurozone’s neoliberal policy regime.
The meteoric rise, capitulation, collapse, and aftermath ‘right-shift’ of Syriza raises fundamental questions and lessons still today. strategies by governments and states that make a social-democratic turn in response to popular uprisings, and then attempt to confront more powerful neoliberal capitalist regimes that retain control their currencies, their banking systems, and their budgets as in the case of Greece.
The following is an excerpt from the concluding chapter of this writer’s October 2016 book, ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, which questioned strategies that attempted to resurrect 20th century forms of social-democracy in the 21st century world of supra-State neoliberal regimes. It summarizes Syriza’s ‘fundamental error’—a naïve belief that elements of European social democracy would rally around it and together they—i.e. resurgent social democracy and Syriza Greece—would successfully outmaneuver the German-banker-Troika dominated Euro neoliberal regime that solidified its power with the 1999 Euro currency reforms.
Syriza and Tsipras continue to employ the same error, it appears, hoping to be rescued by other Euro regime leaders instead of relying on the Greek people. Tsipras-Syriza recently invited the new banker-president of France, Emmanuel Macron, who this past month visited Athens. Their meeting suggests Tsipras and the rump Syriza still don’t understand why they were so thoroughly defeated by the Troika in 2015, and have been consistently pushed even further into austerity and retreat over the past two years. But perhaps it no longer matters. Polls show Tsipras and the rump Syriza trailing their political opponents by more than two to one in elections set to occur in 2018.
EXCERPT from ‘Looting Greece’, Chapter 10, ‘Why the Troika Prevailed’.
Syriza’s Fundamental Error

To have succeeded in negotiations with the Troika, Syriza would have had to achieve one or more of the following— expand the space for fiscal spending on its domestic economy, end the dominance and control of the ECB by the German coalition, restore Greece’s central bank independence from the ECB, or end the control of its own Greek private banking system from northern Europe core banks. None of these objectives could have been achieved by Syriza alone. Syriza’s grand error, however, was to think that it could rally the remnants of European social democracy to its side and support and together have achieved these goals—especially the expanding of space for domestic fiscal investment. It was Syriza’s fundamental strategic miscalculation to think it could rally this support and thereby create an effective counter to the German coalition’s dominant influence within the Troika.

Syriza went into the fight with the Troika with a Greek central bank that was the appendage, even agent, of the ECB in Greece, and with a private banking system in Greece that was primarily an extension of Euro banks outside Greece. Syriza struggled to create some space for fiscal stimulus within the Troika imposed debt deal, but it was thoroughly rebuffed by the Troika in that effort. It sought to launch a new policy throughout the Eurozone targeting fiscal investment, from which it might benefit as well. But just as the ECB was thwarted by German-core northern Euro alliance countries, the German coalition also successfully prevented efforts to promote fiscal stimulus by the EC as well. The Troika-German coalition had been, and continues to be, successful in preventing even much stronger members states in France and Italy from exceeding Eurozone fiscal stimulus rules. The dominant Troika German faction was not about to let Greece prevail and restore fiscal stimulus, therefore, when France and Italy were not. Greece was not only blocked from launching a Euro-wide fiscal investment spending policy; it was forced to introduce ‘reverse fiscal spending’ in the form of austerity.

Syriza’s insistence on remaining in the Euro system meant Grexit was never an option. That in turn meant Greece would not have an independent central bank providing liquidity when needed to its banking system. With ECB control over the currency and therefore liquidity, the ECB could reduce or turn on or off the money flow to Greece’s central bank and thus its entire private banking system at will—which it did repeatedly at key moments during the 2015 debt crisis to influence negotiations.

As one member of the Syriza party’s central committee reflected on the weeks leading up to the July 5 capitulation, “The European Central Bank had already begun to carry out its threats, closing down the country’s banking system”.

The ECB had actually begun turning the economic screws on Syriza well before the final weeks preceding the referendum: It refused to release interest on Greek bonds it owed under the old debt agreement to Greece from the outset of negotiations. It refused to accept Greek government bonds as collateral necessary for Greek central bank support of Greece’s private banks. It doled out Emergency Lending Assistance, ELA, funds in amounts just enough to keep Greek banks from imploding from March to June and constantly threatened to withhold those same ELA funds when Troika negotiators periodically demanded more austerity concessions from Greece. And it pressured Greece not to impose meaningful controls on bank withdrawals and capital flight during negotiations, even as those withdrawals and money flowing out of the country was creating a slow motion train wreck of the banking system itself. The ECB, in other words, was engineering a staged collapse of Greece’s banking system, and yet Syriza refused to implement any possible policy or strategy for preventing or impeding it.

For a more detailed analysis of the respective strategies and tactics of Syriza and the Troika in 2015 and after, and the role played by individual leaders and organizations, see the concluding chapter of Jack Rasmus, ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, October 2016, pp. 231-57. Dr. Rasmus is also author of the recently published, ‘Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depression’, Clarity Press, August 2017.

posted September 16, 2017
Review of ‘Central Bankers at the End of Their Ropes?’, Clarity Press, August 2017, by David Baker

Jack Rasmus has written a series of important books about the global economy; the critical question is, important or not, why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky who tells us that we face two existential threats, nuclear holocaust and the environmental collapse called climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing back real democracy from the shadow of the empty political theater which we currently endure; but to bring back real democracy, we need to understand what destroyed it and what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus; his book, Central Bankers on the Ropes, examines the fundamental role of central banks in our new, savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen et al but it accurately describes neoliberalism’s impact on the world; the lower 90% are collateral damage in the service of the 1%. But the central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial industry which in turn have been used to prop up the stock and bond markets world wide; offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are in effect a conduit straight to the one percent; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Jack Rasmus is excellent at peeling away the layers of economic deceit to demonstrate that the rivers of cash pouring out of the central banks does not bring prosperity to the lower 90%; the idea that prosperity is even trickling down is empty ideology. The way in which he peels away the layers of deceit is by examining each of the central banks, in turn, The Fed, The Bank of Japan, the EU Central Bank, and the Central Bank of China, and determines which if any is actually achieving their publicly announced goals. These goals include inflation at 2%; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns, and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are and ultimately after peeling away all the layers of deception, their real goal to help the one per cent, by propping up stocks and bonds, providing capital to offshore jobs as well as gamble in financial assets.

The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals. It has fallen into the chronic subsidization trap of financial institutions.

It is this paradigm shift, the chronic subsidization of financial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.” Historically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the one per cent were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in world wide debt through the extension of credit then the inevitable collapse becomes greater; but if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising oceans of debt [over $20 trillion] and the central banks have no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the US out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend”. For a progressive, you tax based upon ability and spend based upon need; and, during the 1950’s and 1960’s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy.

Monetary policy is economic policy driven by the central banks who in turn serve the one percent. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low or interest free loans as well as direct buys of stocks and bonds and raising and lowering interest rates. What Jack Rasmus provides is the insight that the one percent are not willing to wait for prosperity to “trickle up” from the lower 90%; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90% can wait, apparently forever.

Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the US during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme; they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Jack Rasmus concludes with a proposed US constitutional amendment that would place The Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of The Fed the raising of household disposable incomes. There is a body of scholarly work that demonstrates that the US Constitution was designed to protect investor rights [see e.g. An Economic Interpretation of the US Constitution] so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

David Baker

posted September 16, 2017
Review of ‘Central Bankers at the End of Their Ropes?’, Clarity Press, August 2017, by David Baker

Jack Rasmus has written a series of important books about the global economy; the critical question is, important or not, why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky who tells us that we face two existential threats, nuclear holocaust and the environmental collapse called climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing back real democracy from the shadow of the empty political theater which we currently endure; but to bring back real democracy, we need to understand what destroyed it and what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus; his book, Central Bankers on the Ropes, examines the fundamental role of central banks in our new, savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen et al but it

accurately describes neoliberalism’s impact on the world; the lower 90% are collateral damage in the service of the 1%. But the central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial industry which in turn have been used to prop up the stock and bond markets world wide; offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are in effect a conduit straight to the one percent; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Jack Rasmus is excellent at peeling away the layers of economic deceit to demonstrate that the rivers of cash pouring out of the central banks does not bring prosperity to the lower 90%; the idea that prosperity is even trickling down is empty ideology. The way in which he peels away the layers of deceit is by examining each of the central banks, in turn, The Fed, The Bank of Japan, the EU Central Bank, and the Central Bank of China, and determines which if any is actually achieving their publicly announced goals. These goals include inflation at 2%; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns, and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are and ultimately after peeling away all the layers of deception, their real goal to help the one per cent, by propping up stocks and bonds, providing capital to offshore jobs as well as gamble in financial assets.

The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals. It has fallen into the chronic subsidization trap of financial institutions.

It is this paradigm shift, the chronic subsidization of financial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.” Historically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the one per cent were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in world wide debt through the extension of credit then the inevitable collapse becomes greater; but if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising oceans of debt [over $20 trillion] and the central banks have no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the US out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend”. For a progressive, you tax based upon ability and spend based upon need; and, during the 1950’s and 1960’s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy.

Monetary policy is economic policy driven by the central banks who in turn serve the one percent. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low or interest free loans as well as direct buys of stocks and bonds and raising and lowering interest rates. What Jack Rasmus provides is the insight that the one percent are not willing to wait for prosperity to “trickle up” from the lower 90%; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90% can wait, apparently forever.

Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the US during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme; they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Jack Rasmus concludes with a proposed US constitutional amendment that would place The Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of The Fed the raising of household disposable incomes. There is a body of scholarly work that demonstrates that the US Constitution was designed to protect investor rights [see e.g. An Economic Interpretation of the US Constitution] so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

David Baker

posted August 29, 2017
Central Banks as Engines of Income Inequality & Financial Crises

My just published book, ‘Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression’, Clarity Press, July 2017, is now available for immediate purchase on Amazon.com, as well as from this blog. (see book icon)

The following article, ‘Central Banks As Engines of Income Inequality and Financial Crisis’, summarizing some of the book’s themes, appeared in Z Magazine, September 1, 2017:

“This September 2017 marks the ninth year since the last major financial crisis erupted in 2008. In that crisis, investment banks Bear Stearns and Lehman Brothers collapsed. So did Fannie Mae and Freddie Mac, the quasi-government mortgage agencies that were then bailed out at the last minute by a $300 billion U.S. Treasury money injection. Washington Mutual and Indymac banks, the brokerage Merrill Lynch, and scores of other banks and shadow banks went under, were forced-merged by the government, or were consolidated or restructured. The finance arms of General Motors and General Electric were also bailed out, as were the auto companies themselves, to the tune of more than $100 billion. Then there was the insurance giant, AIG, that speculated in derivatives and ultimately required more than $200 billion in bailout funds. The “too big too fail” mega banks—Citigroup and Bank of America—were technically bankrupt in 2008 but were bailed out at a cost of more than $300 billion. And all that was only in the U.S. Banks in Europe and elsewhere also imploded or recorded huge losses. The U.S. central bank, the Federal Reserve, helped bail them out as well by providing more than a trillion U.S. dollars in loans and swaps to Europe’s banking system.

Although the crisis at the time was deeply influenced by the crash of residential housing in the U.S., few U.S. homeowners were bailed out. A mere $25 billion was provided to rescue homeowners, and most of that went to bank mortgage servicing companies who were supposed to refinance their mortgages but didn’t. More than $10 trillion, conservatively was provided to financial institutions, banks and shadow banks, and big corporations, and foreign banks by U.S. policy makers in the government and at the U.S. central bank, the Federal Reserve.
The Federal Reserve Bank as Bailout Manager

A common misunderstanding is that the banking system bailouts were managed by Congress passing what was called the Trouble Asset Relief Program, TARP. Introduced in October 2008, TARP provided the U.S. Treasury a $750 billion blank check with which to bail out the banks. But less than half of the $750 billion was actually spent. By early 2009 the remainder was returned to the U.S. Treasury. So Congress didn’t actually bail out the big banks. The bailout was engineered by the U.S. central bank, the Federal Reserve, in coordination with the main European central banks—the Bank of England, European Central Bank, and the Bank of Japan.

The central banks bailed out the big banks. That has always been the primary function of central banks. That’s why they were created in the first place. It’s called the lender of last resort function. Whenever there’s a general banking crisis, which occurs periodically in all capitalist economies, the central bank simply prints the money (electronically today) and injects it free of charge into the failing private banks, to fill up and restore the private banks’ massive losses that occur in the case of banking crashes. Having a central bank, with operations little understood by the general public, is a convenient way for capitalism to rescue its banks without having to have capitalist politicians—i.e. in Congress and the Executive—do so more directly and more publicly.

From Bailouts to Perpetual Bank Subsidization

But central banks since 2008 have evolved toward a new primary function, no longer just bailing out the banks when they get in trouble, but providing a permanent regime of subsidization of the banks even when they’re not in trouble. The latter function has become a permanent feature of capitalist global banking.

With the Fed in the lead, in 2008-09 the central banks of the advanced capitalist economies simply created money—i.e. dollars, pounds, euros and yen—and allowed banks and investors to borrow it virtually free. But free money, in the form of near zero interest, was still not the full picture. The Fed and other central banks as well as other institutional and even private investors, said: “We will also buy up your bad assets that virtually collapsed in price as a result of the 2008-09 crash.” This direct buying of bad mortgage and government bonds—and in Europe and Japan also buying of corporate bonds and even company stocks—was called “quantitative easing,” or QE for short. And what did the central banks pay for the assets they bought from banks and investors, many of which were worth as low as 15 cents on the dollar? No one knows, because the Fed to this day has kept secret how much they overpaid for the bad assets. But the QE and the near zero interest rates have continued for nine years in the U.S. and the UK; and, in 2015 QE was accelerated even faster in Europe; and since 2014 faster still in Japan. And even in China after 2015, when its stock market bubble burst, its central bank began providing trillions to prop up financial markets.

In the course of the past nine years, the private capitalist banking system globally has become addicted to the free money provided by central banks.

Private banks cannot earn profits on their own any longer, it appears. They are increasingly dependent on the virtually free money from their central bankers. This is a fundamental change in the global capitalist economic system in the past decade—a change which is having historic implications for growing income inequality worldwide in the advanced economies as well as for another inevitable global financial crisis that will almost certainly erupt within the next decade.

The $25 Trillion Banking System Bailout

In the U.S., the Fed’s QE officially purchased $4.5 trillion in bad assets between 2009 and 2014. But it was actually more, perhaps as much as $7 trillion, because, as some of the Fed-purchased bonds matured and were paid off, the Fed reinvested the money once again to maintain the $4.5 trillion. The 2008-09 crash was global, so the Fed was not the only central bank player doing this. The European Central Bank, as of 2017, has bailed out European banks to the tune of $4.9 trillion so far. The Bank of England, another $.7 trillion. And the Bank of Japan, as of mid-2017, more than $5 trillion. The People’s Bank of China, PBOC, did not institute formal QE programs, but after 2011 it too started injecting trillions of dollar in equivalent yuan, to prevent its private sector from defaulting on bank loans, to bail out its local governments that over invested in real estate, and to stop the collapse of its stock markets in 2015-16. PBOC bailouts to date amount to around $6 trillion. And the totals today continue to rise for all, as the UK, Europe, Japan, and China continue their central bank engineered bailout binge, with Europe and Japan actually accelerating their QE programs.

Contrary to many critiques of rising debt levels since 2009, it is not the level of debt itself that is the problem and the harbinger of the next financial crash. It is the inability to pay for the debt, the principal and interest on it, when the next recession occurs. As long as economies are growing, businesses and households and even government can finance the debt, i.e. continue to pay the principal and interest some way. But when recessions occur, which they always do under capitalism, that ability to keep paying the debt collapses. Business revenues and profits fall, employment rises and wages decline, and government tax collections slow. So the income with which to pay the principal and interest collapses. Unable to make payments on principal and or interest, defaults on past-incurred debt occur. Prices for financial assets—stocks, bonds, etc.—then collapse even faster and further. Businesses and banks go bankrupt, and the crisis deepens, accelerating on itself in a vicious downward spiral as the financial system collapses and drags the non-financial economy down with it—and as the latter in turn exacerbates the financial crisis even further.

In other words, the private corporate debt at the heart of the last crisis in 2007-08 has not been removed from the global economy. It has only been shifted—from the business sector to the central banks. And this central bank debt has nothing to do with national governments’ total debt. That’s a completely additional amount of government debt. So too is consumer household debt additional, which, in the U.S, is more than $1 trillion each for student loans, auto loans, credit cards, and multi-trillions more for mortgage loans. Moreover, in recent months defaults on student, auto and credit card debt have begun to rise again, already the highest in the last four years in the U.S.

It’s also not quite correct to say that the $25 trillion central banks’ injection of money into the banking system since 2008 has successfully bailed out the private banks globally. Despite the total, there are still more than $10-$15 trillion in what are called non-performing bank loans worldwide. Most is concentrated in Europe and Asia—both of which are likely the locus of the next global financial crisis. And that next crisis is coming.

In the interim, the central banks’ free money and bank subsidization machine is generating a fundamental dual problem within the global economy. It is feeding the trend toward income inequality and it is helping fuel financial asset bubbles worldwide that will eventually converge and then burst, precipitating the next global financial crash.

The Fed as Engine of Income Inequality

In the U.S., the central bank’s $4.5 trillion (really $7 trillion) balance sheet—and the 9 years of free money at 0.1% to 0.25% rates provided to banks by the Fed— have been at the heart of a massive income shift to U.S. investors, businesses, and the wealthiest 1% households.

Where did all this money go? The lie fed to the public by politicians, businesses, and the media was that this massive free money injection was necessary to get the economy going again. The trillions would jump-start real investment that would create jobs, incomes consumption, and consequently, economic growth or GDP. But that’s not where it went, and the U.S. economy experienced the weakest nine-year post-recession recovery on record. Little of the money injection financed real investment—i.e. in equipment, buildings, structures, machinery, inventories, etc. that creates jobs and wage incomes. Instead, investors got QE bailouts and banks borrowed the free money from the Fed and then loaned it out at higher interest rates to U.S. multinational companies who invested it abroad in emerging markets; or they loaned it to shadow bankers and foreign bankers who speculated in financial asset markets like stocks, junk bonds, derivatives, foreign exchange, etc.; or the banks borrowed and invested it themselves in financial securities markets; or they just hoarded the cash on their own bank balance sheets; or the banks borrowed the money at 0.1 and then redeposited it at the central bank, which paid them 0.25%, for a 0.15% profit for doing nothing.

This massive money injection, in other words, was then put to work in financial markets. Behind the 9- year bubbles in stock and bond markets (and derivatives and currency exchange markets as well) is the massive $7 to $10 trillion Federal Reserve bank money injections. And how high have the stock-bond bubbles grown? The Dow Jones U.S. stock market has risen from a low in 2009 of 6,500 to almost 22,000 today. The U.S. Nasdaq tech-heavy market has surpassed the 2001 peak 5,000 before the tech bust, now more than 6,000. The S&P 500 has also more than tripled. Business profits have also tripled, Bond market prices have similarly accelerated. Free money in the trillions $ from the central bank and trillions more in profits from financial speculation. But that’s not all. The 9- year near-zero rates from the Fed have also enabled corporations to issue corporate bonds by more than $5 trillion in just the last 5 years.

So how do these financial asset market bubbles translate into historic levels of income inequality, one might ask? The wealthiest 1%—i.e. the investor class—cash in their stocks and bonds when the bubbles escalate. The corporations that have raised $5 trillion in new bonds and seen their profits triple in value then take that massive $6 to $9 trillion cash hoard to buy back their stocks and to issue record level of dividends to their shareholders. Nearly $6 trillion of the profits-bond raised cash was redistributed in the U.S. alone since 2010 to shareholders in the form of stock buybacks and dividends payouts. The 1% get $6 trillion or more distributed to them and the corporations and banks sit on the rest in the form of retained cash. Or send it offshore into their foreign subsidiaries in order to avoid paying taxes in the US.

Congress and Presidents play a role in the process, as well. Shareholders get to keep more of the $6 trillion plus distributed to them by passing tax cut legislation that sharply cuts capital gains and dividend income. Corporations also gain by keeping more profits after-tax, as a result of corporate tax cuts—which they then distribute to their shareholders via the buybacks and dividends.

The Congress and President sit near the end of the distribution chain, enabling through tax cuts the 1% and shareholders to keep more of their distributed income. But it is the central bank, the Fed, which sits at the beginning of the process. It provides the initial free money that, when borrowed and reinvested in stock markets, becomes the major driver of the stock price bubble. The Fed’s free money also drives down interest rates to near zero, allowing corporations to raise the $5 trillion more from issuing new corporate bonds. Without the Fed and the near zero rates, there would be nowhere near $5 trillion raised from new corporate bonds, to distribute to shareholders as a consequence of buybacks and dividends. Furthermore, without the Fed and QE programs, investors would not have the excess money to invest in stocks and bonds (and derivatives and currencies) that drive up stock and bond prices to bubble levels before investors cash in on those bubble level prices.

The Fed, as well as other central banks, are therefore the originating source of the runaway income inequality that has plagued the U.S. since late 1970s.

Income inequality is a function of two things. On the one hand, accelerating capital incomes of the wealthiest 1% households are largely a result of buybacks and dividend payouts. Such capital gains incomes constitute nearly 100 percent of the wealthiest 1%’s total income. On the other, income inequality is also a consequence of stagnating or declining wage incomes of non-investor households. Inequality may therefore rise if capital gains drive capital incomes higher; or may rise if wage incomes stagnate or decline; or may rise doubly fast if capital incomes rise while wage incomes stagnate or decline. Since 2000 both forces have been in effect: capital incomes of the 1% have escalated while wage incomes for 80 % of households have stagnated or declined.
Mainstream economists tend to focus on the stagnation of wage incomes, which are due to multiple causes like de-unionization, the rise of temp-part-time-contract employment, free trade treaties’ wage depressing effects, failure to adjust minimum wages, high wage manufacturing and tech industries offshoring of investment and jobs, cost shifting of healthcare from employers to workers, reduction in retirement benefits, shifting tax burdens to working and middle classes, etc. But economists don’t adequately explain why capital incomes have been accelerating so fast. Perhaps it is because mainstream economists simply don’t understand financial markets and investment very well; or perhaps some do, and just don’t want to go there and criticize runaway capital incomes.

Central Banks as Source of Financial Instability

As a result of Fed and other central banks’ money injections, underway now for decades, and especially since 2008, there is a mountain of cash—virtually trillions of dollars—sitting on the sidelines globally in the hands of professional investors and their shadow bank institutions. That money is looking for quick, speculative capital gains profit opportunities. That means seeking reinvestment short term in financial asset markets worldwide. The mountain of cash moves in and out of these global financial markets, creating and bursting bubbles as its shifts and moves. Periodically a major bubble bursts—like China’s stock market in 2015. Or a housing speculation bubble here or there. Or junk bonds or consumer debt in the U.S. Or the bubble in U.S. stocks which is nearing its limit.

A new global finance capital elite has arisen in recent decades, having directly benefited from and controlling this mountain of cash. There are about 200,000 of them worldwide, mostly concentrated in the U.S. and UK, some in Europe, but with numbers rising rapidly in Asia as well. They now control more investible assets than all the traditional commercial banks combined. Their preferred institutional investment vehicles are the global shadow banking system and their preferred investment targets are the global system of highly liquid financial asset markets. This system of new finance capitalists, their institutions, and their preferred markets is the real definition of what is meant by the financialization of the global economy. That financialization is generating ever more instability in the global capitalist system as it increasingly diverts trillions of dollars, euros, etc., from investing in job creating real things to investing in financial assets worldwide. That’s why global productivity and growth are progressively slowing, putting even more downward pressure on wage incomes. And central bank policies are a major contributor to this new trend in global capitalism in the 21st century.

Will the Central Banks Retreat?

In 2017, a minority of policymakers in the Fed and other central banks have begun to recognize the fundamental danger to their capitalist system itself from their providing free money and QE bond and stock buying money injections. So, led by the Fed, the central banks of the major economies are together now considering raising interest rates from the zero floor and trying to reverse their QE buying. Western central bankers met in late August 2017 at their annual Jackson Hole, Wyoming gathering, with the main topic of discussion being raising rates and reducing their QE bloated, $15 trillion official balance sheets. (China’s PBOC was absent or the total balance sheets would have amounted to more than $21 trillion.)

As I have argued, however, the Fed and other central banks will fail in both raising rates and selling off their balance sheets in 2017-18 and beyond—just as they failed in generating normal levels of real economic recovery since 2009. For the global capitalist banking system has become addicted and dependent on their central banks’ free money injections and their firehose of central bank bond-stock buying QE programs. Should the central banks attempt to retreat and raise rates or sell off their balance sheets to any meaningful extent, they will precipitate a serious credit contraction and provoke yet another financial and economic crisis. In other words, the global capitalist system has become dependent on the permanent subsidization of the banking system by their central banks after 2008. That is its new fundamental contradiction.

Jack Rasmus is the author of the just published book, Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depressions, Clarity Press, August 2017. For information, see http://claritypress.com/RasmusIII.html. To purchase, go to Amazon.com or click on the book icon on this webpage to purchase through Paypal. Bulk orders available at Clarity Press.

posted August 16, 2017
How Capitalist Central Banks Have Been Creating the Next Financial Crisis

As central bankers, finance ministers, and government policy makers head off to their annual gathering at Jackson Hole, Wyoming, this August, 24-26, 2017, the key topic is whether the leading central banks in North America and Europe will continue to raise interest rates this year; another topic high on the agenda is when the three major central banks – the Federal Reserve, European Central Bank and Bank of England – might begin to sell off their combined $9.8 trillion dollar balance sheets that they accumulated since the 2008-09 banking crisis.

But the more fundamental question – little discussed by central bankers and academics alike – is what are the likely effects of further immediate rate hikes and/or commencement of central banks’ balance sheet reductions? The assumption is further rate hikes and sell-offs will have little negative impact on the real economy or financial markets. But will they? The effects of hikes and sell off will prove the opposite of what they predict.

Central banks in the US and Europe were grossly in error predicting in 2008 that massive liquidity injections and zero interest rates would re-stimulate their economies and return them to pre-crisis real GDP growth rates. They are now about to repeat a similar error, as they presume that raising those rates, and retracting excess liquidity by selling off balance sheets, will not have a significant negative impact on the real economy or financial markets.

Central banks’ balance sheets have been growing for almost nine years, driven by programs of zero-bound (ZIRP) interest rates and the introduction of firehose liquidity injections enabled by quantitative easing, QE, bond and other securities purchases.

After eight years, the official consensus among central bankers and government policy makers is that the 2008 shift to unlimited central bank liquidity and zero (or below) interest rates is now over. The front page business press and media lead story is that central banks are now about to embark collectively in a new direction – raising their benchmark rates and selling off their massive, bloated balance sheets. But don’t bet on it. They may find sooner, rather than later, that rates cannot be raised much higher and that balance sheets—now totaling $9.8 trillion for the US, UK and Europe alone—may not be reduced much, if at all, without provoking a further slowdown of their still chronically weak real economic recoveries, or without precipitating a serious contraction in equity, bond and other financial asset markets.

Globally, balance sheet totals are actually far greater than the $9.8 trillion accumulated to date by the big 3 central banks—the Fed, Bank of England, and European Central Bank. When other major central banks, like Switzerland’s, Sweden’s, Canada’s and others are added, it’s well more than $10 trillion. And then there’s the nearly $5 trillion balance sheet of the Bank of Japan and the more than $5 trillion of the People’s Bank of China. Worldwide, central banks’ balance sheets therefore exceed well over $20 trillion…with the total still growing.
It’s equally important to understand that the $20 trillion in central bank balance sheet debt essentially represents bad debt from banks, corporations, and private investors that was in effect transferred from their private balance sheets to the balance sheets of the central banks as a result of nine years of bailout via QE (quantitative easing), zero interest rate free money, and other policies of the central banks. The central banks bailed out the capitalist system in 2008-09 by shifting the bad debts to themselves. In the course of the last 9 years, the private system loaded itself up on still more debt than it had in 2007. Can the central banks, already bloated with $20 trillion bail out bankers and friends once again? That’s the question. Attempting to unload the $20 trillion to make room for the next bailout—as the central banks now propose to do—may result, however, in precipitating the next crisis. That’s the contradiction.

Attempting to sell off such massive balance sheet holdings will prove far more daunting than those central banks now anticipate. And their coordinated raising of interest rates risks precipitating another recession – given their fundamentally weak economies with chronic low bank lending, slowing investment, stagnating productivity, contracting public investment, and lack of real wage income gains. For the global economy has undergone a major structural change in recent decades that has been rendering central bank interest rate policies increasingly ineffective with regard to stimulating real investment and growth, while simultaneously contributing to further financial fragility as well.1

The US Economy is Fragile and Weakening—Not Robust and Stable

All eyes are on the US central bank, the Fed, and what signals it gives at the Jackson Hole August 24-26 gathering, and the Fed’s subsequent policy committee in September. Will it continue to raise rates? Will it announce formally a schedule for balance sheet reduction in September? If the latter, will the announcement of sell-off be so minimal and token that it will generate a mere 0.25% hike in rates by year end 2018, as some pundits predict? Or will the psychological effects on investors – who have enjoyed eight years of record equity, bond, property, and derivatives asset price and thus extraordinary capital gains – consider the announcement as the signal to “cash in” and take their money and run, given the bubble levels already attained in equities, some bond markets, and real estate? And should the Fed continue to raise interest rates at a pace of 3 to 4 a year, what will be the impact on the US real economy?
Economic potholes are beginning to appear in a number of places. Bank lending to US business has declined sharply, now growing at only 2%; consumer loans for auto, mortgages and credit cards have halved over the past year; real investment and productivity have nearly collapsed; the so-called “Trump Bump” has dissipated; government investment has contracted below 2007 levels and infrastructure spending is still but a discussion envisioned for 2019 at the earliest, if at all; and job growth has been consistently low quality, resulting in wage stagnation or worse for the vast majority of the labor force.

In this unstable environment the Fed has nonetheless has announced plans to continue to raise interest rates and to begin selling off its balance sheet. The question is just how much and when? Consensus thinking at the Fed is that rates can continue rising 3 to 4 times a year at .25 basis points a crack through 2019 without serious negative effects. And that the Fed’s balance sheet can start selling off immediately in 2017, initially at a modest rate of $10 billion a month, accelerating further at a later date.

But these were the same central bankers who believed their QE and zero bound rate programs would return the US real economy to robust growth by 2010 but didn’t; who maintained the Fed’s massive liquidity injections would attain a 2% goods and services inflation rate, which it still hasn’t; who argued that once unemployment fell to 4.5% (in the US), wage growth and consumption would return to past trends and stimulate the economy, which has yet to occur; and who argued in 2008, also incorrectly, that Fed QE programs providing bankers virtually free money would stimulate bank lending and in turn real investment and growth. The Fed’s latest predictions could prove no more correct about the consequences of further rate hikes and balance sheet reductions than they were about QE, ZIRP, and all the rest for the past eight years.

It’s Not Your Grandpa’s Global Economy

To assume that selling off that magnitude of securities – even if slowly and over extended time – will not have an appreciable impact on nominal interest rates is the kind of assumption that resulted in previous predictive errors circa 2008 since the possible effects on investors’ psychological expectations of more rate hikes and balance sheet selling are completely unknown.

After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning. What started in 2008 as a massive, somewhat coordinated central bank lender of last resort experiment – i.e. global bank bailout – has over the past eight years evolved into a more or less permanent subsidisation of the private banking and financial systems by central banks. The system has become addicted to free money. And like all addictions, the habit won’t be broken easily. That means central bankers’ plans to raise interest rates in the immediate months ahead will likely “hit a wall” well before the announced rate levels they are projecting. Plans to sell off balance sheets will almost certainly be limited to the US Fed for some time. The ECB and BOE – as well as Bank of Japan and others – will wait and see what the Fed does. The Fed will proceed at a snails pace that will represent little more than mere tokenism, and in the event of further slowing of real GDP growth, or US financial markets correcting in a major way, it will halt selling altogether. In short, there will be little Fed balance sheet reduction before the next recession, and a continued escalation of balance sheets by central banks globally. Central banks will enter the next recession with further bloated balance sheets.

After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning.

The Fed is thus on the verge of another major disastrous monetary policy shift and experiment. It will be unable to raise interest rates as it has announced, by 3 to 4 times a year for the next two years. Nor will it be able to sell off much of its current balance sheet, since anything but token adjustments will accelerate rates even higher. In this writer’s opinion, the federal funds rate cannot be raised above 2%, or the 10 year Treasury yield much above 3%, without precipitating either a serious financial market correction or an abrupt slowing of real economic growth, or both.

What the eight years since the 2008-09 financial crash and great recession reveals is that the major central banks, led by the Fed, have painted themselves in a corner. The massive liquidity provided to their banking systems – engineered by zero rates and QEs – failed even to adequately bail out their banks. Today more than $10 trillion in non-performing bank loans still overhang the major economies, despite the more than $20 trillion added to their central bank balance sheets in just the past eight years.

The fundamental changes in the global economy and radical restructuring of financial, capital and labor markets have severely blunted central banks’ main monetary tool of interest rate management. Just as reduction of rates have little positive effect on stimulating real investment and economic growth, rising rates will have a greater negative impact than anticipated on investment and growth. The Fed and other central banks may soon discover this should they raise rates much faster and further or engage in more than token balance sheet reduction.

Central bankers at the Fed, the BOE and ECB will of course argue the contrary.

They will promise the economy can sustain further significant rate hikes and can commence selling its balance sheet without severe negative consequences. But these are the same people who in 2008 promised rapid and robust recovery from QE and ZIRP programs that didn’t happen. What happened was an unprecedented acceleration in financial asset markets as equity and bond prices surged for eight years, high end real estate prices rose to prior levels, derivatives boomed, gold and crypto-currencies escalated in value, and income inequality soared to record levels – all fueled by the massive $10 trillion central bank liquidity injections that drove interest rates to zero or below. And now they tell us they plan to raise those rates without serious negative effects. Anyone want to buy the Brooklyn bridge? I think they’re also trying to sell that as well.

About the Author
Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression”, Clarity Press, July 2017, available for purchase at discount from this website; and the previously published “Systemic Fragility in the Global Economy”, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html. He hosts the radio show, Alternative Visions, on the Progressive Radio Network.

References
1. For the author’s 2016 analysis of global financial restructuring, Systemic Fragility in the Global Economy, Clarity Press, January 2016. How central banks’ interest rate policies are failing is addressed in more detail in the just published book, Central Bankers at the End of Their Ropes: Monetary Policy and the Next Depression, by Jack Rasmus, Clarity Press, July 2017.

posted July 27, 2017
The Limits of Central Banks’ Emerging Policy Shift’

The following article was published in the European Financial Review, July 20, 2017, summarizing and presenting major themes from my just published, latest book, ‘Central Bankers at the End of Their Ropes’, Clarity Press, July 2017.

THE LIMITS OF CENTRAL BANKS’ EMERGING POLICY SHIFT’, by Dr. Jack Rasmus, European Financial Review, July 20, 2017.

“The major central banks have a plan, but its consequences are questionable. In this article, Dr. Jack Rasmus analyses past and present factors of the global economy, from balance sheets to policy shifts, which have significant influence on the possible future of the financial industry and the global society as a whole.

As central bankers, finance ministers, and government policy makers head off to their annual gathering at Jackson Hole, Wyoming, this August, 24-26, 2017, the key topic is whether the leading central banks in North America and Europe will continue to raise interest rates this year; another topic high on the agenda is when the three major central banks – the Federal Reserve, European Central Bank and Bank of England – might begin to sell off their combined $9.8 trillion dollar balance sheets that they accumulated since the 2008-09 banking crisis.

But the more fundamental question – little discussed by central bankers and academics alike – is what are the likely effects of further immediate rate hikes and/or commencement of central banks’ balance sheet reductions? The assumption is further rate hikes and sell-offs will have little negative impact on the real economy or financial markets. But will they?

Central banks in the US and Europe were grossly in error predicting in 2008 that massive liquidity injections and zero interest rates would re-stimulate their economies and return them to pre-crisis real GDP growth rates. They are now about to repeat a similar error, as they presume that raising those rates, and retracting excess liquidity by selling off balance sheets, will not have a significant negative impact on the real economy or financial markets.

The Central Banks Monetary Policy Shift

Central banks’ balance sheets have been growing for almost nine years, driven by programmes of zero-bound (ZIRP) interest rates and the introduction of firehose liquidity injections enabled by quantitative easing, QE, bond and other securities purchases.

After eight years, the official consensus among central bankers and government policy makers is that the 2008 shift to unlimited central bank liquidity and zero (or below) interest rates is now over. The front page business press and media lead story is that central banks are now about to embark collectively in a new direction – raising their benchmark rates and selling off their massive, bloated balance sheets. But don’t bet on it. They may find sooner, rather than later, that rates cannot be raised much higher and that balance sheets may not be reduced much, if at all, without provoking a further slowdown of their still chronically weak real economic recoveries, or without precipitating a serious contraction in equity, bond and other financial asset markets.

In 2008-09 the Federal Reserve quickly dropped its benchmark federal funds rate from 5.25% to a mere 0.15% by January 2009. It followed with its initial bond buying QE1 programme in early 2009. By 2013 the Fed’s net balance sheet rose to $4.5 trillion.

The front page business press and media lead story is that central banks are now about to embark collectively in a new direction – raising their benchmark rates and selling off their massive, bloated balance sheets. But don’t bet on it.
The Bank of England promptly followed the Fed. It reduced its rates from 5% in September 2008 to 0.5% by early 2009, followed by a launch of several QE-like bond and equity buying programmes and then its formal QE “Asset Purchase Plan” in early 2009. Its net balance sheet level rose to approximately $600 billion.

Lacking full central bank authority at the time of the 2008 crash, the European Central Bank lowered rates initially more slowly while injecting more than $2 trillion in liquidity by various pre-QE programmes from 2010 to 2014, eventually introducing its highly aggressive QE programme beginning early 2015. Its rate and liquidity programmes drove Eurozone sovereign nominal bond rates to negative levels, as its aggressive $2.5 trillion QE programme raised its balance sheet to more than $4.7 trillion.

That’s a combined balance sheet total of roughly $9.8 trillion as of mid-2017 for the three major central banks alone.

Globally, however, balance sheet totals are actually far greater than the $9.8 trillion. When other major central banks, like Switzerland’s, Sweden’s, Canada’s and others are added, it’s well more than $10 trillion. And then there’s the nearly $5 trillion balance sheet of the Bank of Japan and the more than $5 trillion of the People’s Bank of China. Worldwide, central banks’ balance sheets therefore exceed well over $20 trillion…with the total still growing.

Attempting to sell off such massive balance sheet holdings – even the $9.8 trillion of the three central banks in Europe and America – may prove far more daunting than those central banks now anticipate. And their coordinated raising of interest rates risks precipitating another recession – given their fundamentally weak economies with chronic low bank lending, slowing investment, stagnating productivity, contracting public investment, and lack of real wage income gains. For the global economy has undergone a major structural change in recent decades that has been rendering central bank interest rate policies increasingly ineffective with regard to stimulating real investment and growth, while simultaneously contributing to further financial fragility as well.1

The New Normal: Unstable Interest Rate Elasticity Effects

In 2008-09 all three central banks quickly reduced their benchmark rates and began to add trillions of dollars, pounds and euros to their balance sheets. But real investment and GDP growth lagged, and periodically stagnated in the US and UK, and even contracted again in the Eurozone. In economists’ jargon, the elasticity of real investment to interest rate cuts was highly “inelastic” – i.e. the collapse of rates and accelerated central bank liquidity produced insufficient real investment, employment, and wage incomes necessary to restore pre-crisis GDP growth.

Now that central banks are reversing those policies – with the Fed in the lead and the BOE and ECB expected to follow – a “mirror image” of the error of the past eight years may emerge: it will take very little in terms of rate hikes or balance sheet reductions (which will also raise rates) to generate a further contraction in real investment and growth, and may even precipitate a major correction in financial market prices.

In other words, the negative impact of pending rate hikes on investment may prove highly elastic, just as it proved in the past that rate cuts’ positive effects on real investment were highly inelastic.

This may seem anomalous – i.e. rate reductions post-2008 had little positive effect on real investment and growth, but rate hikes now will have a quick and major negative impact on investment and growth. But it is not. The same global forces and restructuring in financial, capital, and labour markets that have taken place in recent decades causally underlie both effects. The global economy crossed a threshold in 2008-09 that is still not very well understood by central bankers and economists alike. The anomaly is only apparent.2 The causes are the same.

What then are the likely scenarios with regard to the three central banks – Fed, ECB and BOE – in the next six to twelve months as they attempt to shift their policies of the preceding eight years by raising rates and selling off balance sheets?

Three Scenarios: BOE, ECB & the Fed

The Bank of England’s (BOE) initial QE experiment was temporarily halted when the Fed suspended expanding its QE programmes in 2013, but QE was re-introduced in 2016 in the wake of Brexit. As of mid-2017, moreover, the BOE shows no indication that it will not continue its QE programme and thereby expand its balance sheet. Embroiled an in increasing difficult implementation of Brexit, and what appears to be several more years of growing economic uncertainty, the UK economy has begun to show signs of weakening in recent months. The BOE will therefore continue to add liquidity, both by QE and traditional means, in order to prop up UK financial markets in the interim. Balance sheet sell off is thus not imminent anytime soon.

On the other hand, more likely is the BOE will follow the Fed should the latter continue to raise rates, raising its benchmark marginal lending or discount rate to prevent a further decline of the UK currency to ensure much needed money capital inflows and to slow rising import inflation that comes with currency decline. So expect more rate hikes from the BOE, as well as more balance sheet accumulation.

Nor will the ECB’s balance sheet be appreciably reduced any time soon. European Central Bank chair, Mario Draghi, plans to attend the Jackson Hole gathering of central bankers and friends. It will be his first appearance since three years ago, where in 2014 he signalled the ECB was planning to introduce its version of quantitative easing, QE, which it did in early 2015. But this time it is highly unlikely Draghi will signal the ECB to follow the Fed in any reduction of its own $4.7 trillion balance sheet. More likely is some ECB intent to slow its QE bond accumulation programme in 2018 – i.e. after it sees what the US Fed will do in what remains in 2017 and after it replaces current chair, Janet Yellen, with former Goldman Sachs banker, Gary Cohn, next February 2018. Meanwhile, the ECB will allow rates to drift upward from their former negative and zero levels. Like the BOE’s, the ECB’s balance sheet will therefore continue to grow, as rates are allowed to rise in coordination with the Fed.

All eyes are therefore on the US central bank, the Fed, and what signals it gives, and its follow up, to the Jackson Hole August gathering, and the Fed’s policy committee in September. Will it continue to raise rates? Will it announce formally a schedule for balance sheet reduction in September? If the latter, will the announcement of sell-off be so minimal and token that it will generate a mere 0.25% hike in rates by year end 2018, as some pundits predict? Or will the psychological effects on investors – who have enjoyed eight years of record equity, bond, property, and derivatives asset price and thus extraordinary capital gains – consider the announcement as the signal to “cash in” and take their money and run, given the bubble levels already attained in equities, some bond markets, and real estate? And should the Fed continue to raise interest rates at a pace of 3 to 4 a year, what will be the impact on the US real economy?

Economic potholes are beginning to appear in a number of places. Bank lending to US business has declined sharply, now growing at only 2%; consumer loans for auto, mortgages and credit cards have halved over the past year; real investment and productivity have nearly collapsed; the so-called “Trump Bump” has dissipated; government investment has contracted below 2007 levels and infrastructure spending is still but a discussion envisioned for 2019 at the earliest, if at all; and job growth has been consistently low quality, resulting in wage stagnation or worse for the vast majority of the labour force.

In this unstable environment the Fed has nonetheless has announced plans to continue to raise interest rates and to begin selling off its balance sheet. The question is just how much and when? Consensus thinking at the Fed is that rates can continue rising 3 to 4 times a year at .25 basis points a crack through 2019 without serious negative effects. And that the Fed’s balance sheet can start selling off immediately in 2017, initially at a modest rate of $10 billion a month, accelerating further at a later date.

But these were the same central bankers who believed their QE and zero bound rate programmes would return the US real economy to robust growth by 2010 but didn’t; who maintained the Fed’s massive liquidity injections would attain a 2% goods and services inflation rate, which it still hasn’t; who argued that once unemployment fell to 4.5% (in the US), wage growth and consumption would return to past trends and stimulate the economy, which has yet to occur; and who argued in 2008, also incorrectly, that Fed QE programmes providing bankers virtually free money would stimulate bank lending and in turn real investment and growth. The Fed’s latest predictions could prove no more correct about the consequences of further rate hikes and balance sheet reductions than they were about QE, ZIRP, and all the rest for the past eight years.

It’s Not Your Grandpa’s Global Economy

To assume that selling off that magnitude of securities – even if slowly and over extended time – will not have an appreciable impact on nominal interest rates is the kind of assumption that resulted in previous predictive errors circa 2008 since the possible effects on investors’ psychological expectations of more rate hikes and balance sheet selling are completely unknown.

After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning. What started in 2008 as a massive, somewhat coordinated central bank lender of last resort experiment – i.e. global bank bailout – has over the past eight years evolved into a more or less permanent subsidisation of the private banking and financial systems by central banks. The system has become addicted to free money. And like all addictions, the habit won’t be broken easily. That means central bankers’ plans to raise interest rates in the immediate months ahead will likely “hit a wall” well before the announced rate levels they are projecting. Plans to sell off balance sheets will almost certainly be limited to the US Fed for some time. The ECB and BOE – as well as Bank of Japan and others – will wait and see what the Fed does. The Fed will proceed at a snails pace that will represent little more than mere tokenism, and in the event of further slowing of real GDP growth, or US financial markets correcting in a major way, it will halt selling altogether. In short, there will be little Fed balance sheet reduction before the next recession, and a continued escalation of balance sheets by central banks globally. Central banks will enter the next recession with further bloated balance sheets.

After eight years of treating symptoms and not the disease, the global financial system has become addicted to super-low rates and to continued central bank excess liquidity provisioning.

The Fed is thus on the verge of another major disastrous monetary policy shift and experiment. It will be unable to raise interest rates as it has announced, by 3 to 4 times a year for the next two years. Nor will it be able to sell off much of its current balance sheet, since anything but token adjustments will accelerate rates even higher. In this writer’s opinion, the federal funds rate cannot be raised above 2%, or the 10 year Treasury yield much above 3%, without precipitating either a serious financial market correction or an abrupt slowing of real economic growth, or both.

What the eight years since the 2008-09 financial crash and great recession reveals is that the major central banks, led by the Fed, have painted themselves in a corner. The massive liquidity provided to their banking systems – engineered by zero rates and QEs – failed even to adequately bail out their banks. Today more than $10 trillion in non-performing bank loans still overhang the major economies, despite the more than $20 trillion added to their central bank balance sheets in just the past eight years.

The fundamental changes in the global economy and radical restructuring of financial, capital and labour markets have severely blunted central banks’ main monetary tool of interest rate management.

The fundamental changes in the global economy and radical restructuring of financial, capital and labour markets have severely blunted central banks’ main monetary tool of interest rate management. Just as reduction of rates have little positive effect on stimulating real investment and economic growth, rising rates will have a greater negative impact than anticipated on investment and growth. The Fed and other central banks may soon discover this should they raise rates much faster and further or engage in more than token balance sheet reduction.
Central bankers at the Fed, the BOE and ECB will of course argue the contrary.

They will promise the economy can sustain further significant rate hikes and can commence selling its balance sheet without severe negative consequences. But these are the same people who in 2008 promised rapid and robust recovery from QE and ZIRP programmes that didn’t happen. What happened was an unprecedented acceleration in financial asset markets as equity and bond prices surged for eight years, high end real estate prices rose to prior levels, derivatives boomed, gold and crypto-currencies escalated in value, and income inequality soared to record levels – all fueled by the massive $10 trillion central bank liquidity injections that drove interest rates to zero or below. And now they tell us they plan to raise those rates without serious negative effects. Anyone want to buy the Brooklyn bridge? I think they’re also trying to sell that as well.

About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression”, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy”, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html. He teaches economics at St. Marys College in Moraga, California, and hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

References
1. For the author’s 2016 analysis of global financial restructuring, Systemic Fragility in the Global Economy, Clarity Press, January 2016.
2. The theme of how central banks’ interest rate policies are failing is addressed in more detail in the just published book, Central Bankers at the End of Their Ropes: Monetary Policy and the Next Depression, by Jack Rasmus, Clarity Press, July 2017.

posted July 6, 2017
Central Bankers at the End of Their Ropes?–Monetary Policy & the Next Depression’

My most recent book will be published this month, entitled “Central Bankers at the End of Their Ropes?: Monetary Policy & the Next Depression".

Here’s the TABLE OF CONTENTS, MAIN THEMES, and SYNOPSIS of the book with an expanded description of table of contents. Check out this blog and my website for ordering information this coming weekend. For more information in the meantime, check out the publisher, Clarity Press, website at:

http://www.claritypress.com/RasmusIII.html

TABLE OF CONTENTS:

Chapter 1: Problems & Contradictions of Central Banking
Chapter 2: A Brief History of Central Banking
Chapter 3: The US Federal Reserve Bank: Origins & Toxic Legacies
Chapter 4: Greenspan’s Bank: The ‘Typhon’ Monster Released
Chapter 5: Bernanke’s Bank: Greenspan’s ‘Put’ On Steroids
Chapter 6: The Bank of Japan: Harbinger of Things That Came
Chapter 7: The European Central Bank under German Hegemony
Chapter 8: The Bank of England’s Last Hurrah: From QE to Brexit
Chapter 9: The People’s Bank of China Chases Its Shadows
Chapter 10: Yellen’s Bank: From Taper Tantrums to Trump Trade
Chapter 11: Why Central Banks Fail
Conclusion: Revolutionizing Central Banking in the Public Interest:
Embedding Change via Constitutional Amendment
MAIN THEMES:

Theme #1: Central banks of the advanced economies—despite having been assigned by their respective economic and political elites the role of primary economic policy institution—have failed since 2008 to achieve their major objectives of long run stabilization of their banking systems or the restoration of pre-2008 economic growth.

Theme #2: The decades of central liquidity injections since the 1970s, that produced the 2008-09 crisis in the first place, then became the central banks’ solution to that crisis; that same liquidity solution, 2009-2016, has become the cause of the next crisis, as tens of trillions of dollars of even more liquidity-enabled debt has since 2008 been piled on the original trillions before 2008.

Theme #3: Central banks’ function of lender of last resort, in the past designed to provide excess liquidity in instances of banking crises, has in the 21st century been transformed into a new function: the subsidization of the private banking system by means of constant central bank excess liquidity. The private banking system today has become addicted to, and increasingly dependent upon, significant continuing infusions of liquidity by central banks.

Theme #4: Central banks have failed to evolve apace with the rapid transformations of the global private capitalist banking system. Structural change in the global financial system, the continuing fragility of banking systems, and excess levels of debt and leveraging mean that interest rates post-2016 cannot be raised very much, and central banks’ balance sheets cannot be reduced to any significant extent, without provoking a widespread credit crisis throughout the private banking system.

Theme #5: Central banks must undergo fundamental restructuring and change. That restructuring must include the democratization of decision making and a redirecting of central banks toward a greater direct service in the public interest. New functions, new targets and new tools will be required.

SYNOPSIS with Expanded Chapters Descriptions:

Central banks emerged from the 2007-09 crisis as the primary economic policy institutions in the advanced economies. Tasked not only with stabilizing the banking system during the worst financial crisis since the great depression, central banks were given the additional task as well of restoring economic growth to pre-crisis historical levels. Fiscal policy as government spending and public investment was relegated to a minor role at best; at worst, and more frequently than not, recast as fiscal austerity rolling back government spending and investment.

The banking systems in the advanced economies—and indeed throughout the global economy—were temporarily stabilized after 2009 but only to a degree, and at a cost of tens of trillions of dollars, euros, pounds, yen and other currencies. Cumulative QEs alone amounted to nearly $15 trillion central bank investor and bank bailouts. Nevertheless, deep pockets of banking weakness and fragility still remain a decade after the 2008-09. Non-Performing bank loans in the advanced economies still exceed $10 trillion. Pre-2008 private and corporate debt has been only transferred to central banks’ balance sheets, not eliminated. Post 2008 private business debt has again been allowed to accelerate by tens of trillions in dollars and other major currencies. Meanwhile, household and government debt levels have continued to climb, while the ability to service that debt with wage income growth and tax revenue has stagnated or declined.

With their massive liquidity injections, the central banks have been the original enablers of the unprecedented past—and continuing—debt escalation, and are thus ultimately responsible for its consequences. Nor have central they fared any better with regard to their other mission of restoring real economic growth to pre-crisis levels. Rates of growth in GDP have lagged significantly from pre-crisis levels, and in some regions—like Europe and Japan—have stagnated or worse over the long term. Global real investment, productivity and even trade have meanwhile all slowed under the hegemony of global central bank policy regimes since 2008.

The central banks’ decades-long, chronic injections of liquidity into the global private banking system since the 1970s enabled the record levels of debt and leveraged borrowing in the ensuing decades, culminating in the financial crash of 2008-09. The same central banks provided even greater magnitudes liquidity to bailout their banking systems—initially the US and UK in 2008-09, then Europe after 2010, and more recently Japan and China. The bailout and liquidity continued for nine years.
The book then considers the question: why central banks of the advanced economies have been fueling the massive liquidity binge since the 1970s while failing to restore real economic growth since 2008? It concludes the following combination of forces and developments have been responsible:

• The collapse of the Bretton Woods International Monetary System in 1973 and central role assigned to central banks to stabilize currencies and economies
• The ascent of Neoliberal policies in the US-UK after 1978 and their adopted by others
• Deregulation of international money capital flows in the 1980s and accompanying domestic financial deregulation
• Rapid and radical restructuring of global financial institutions, markets, and products
• Rise and growing political influence of a new global finance capital elite
• Economic elites’ shift to fiscal austerity and elevation of monetary policy as primary
• Unprecedented rapid technological changes transforming the very nature of money and credit and its effects on liquidity, debt, and financial markets’ contagion
• Growing frequency and magnitudes of financial instability events globally and consequent more frequent recessions and slower growth
• Increasing demands on central banks to expand their lender of last resort function, and the bailout of banks and financial systems, while assuming primary responsibility for generating real economic growth

EXPANDED CHAPTER DESCRIPTIONS:

In Chapter One the point is raised that these new forces have led to growing contradictions between the central banks and the broader global capitalist banking system. Several of the more fundamental contradictions are listed and briefly described in the chapter, to be returned to for further consideration later at the end of the book under the subject of why central banks have been failing to achieve their broad objectives as well as their basic functions and targets.

Chapter Two describes the evolution of central banking over the past two centuries, as well as evolution of central banks’ functions, targets and monetary policy tools. The point is made that the evolution of central banking since the late 20th century has increasingly failed to keep up with the more rapid restructuring and change in the global private banking system. Falling further behind the curve of global capitalist change, central banks’ consequently have been further failing to adequately perform their primary functions of money supply management, bank supervision, and lender of last resort; have failed to attain their price level and other targets; and their monetary tools have deteriorated in terms of effectiveness in performing those functions and attaining those targets.

In the core chapters Three through Ten of the book describe the evolution of monetary policies of each of the advanced economy central banks in turn—and to what extent each central bank performed its primary functions, attained its declared targets, and how effective have been its tools—whether traditional or the more recently experimental like quantitative easing (QE), zero bound rates (ZIRP), negative rates (NIRP), forward guidance and other innovations.

In chapters Three to Five special consideration is given to the US central bank, the Federal Reserve, from its origins in 1913 to the present. Chapter Three describes how the Fed was created and run by the private banks directly from 1913 to 1935, enabling the financial asset bubbles of the 1920s that burst in the great depression that followed; how the Fed failed miserably to manage the money supply, adequately supervise the banks, and failed to function as lender of last resort during the first four years of the depression, 1929-1933.

Chapter Four describes how the Roosevelt reforms of 1933-35 were insufficient to prevent indirect private banker interests hegemony over the Fed over the long run; how those interests came to dominate the Fed once again during the period 1951 to 1986; and how the Fed under its chair, Alan Greenspan, 1986-2006, came progressively to elevate central bank monetary policy over government fiscal spending. Chapter Four describes how US central bank policy of massive liquidity injections became a norm under Greenspan’s 20 year tenure, and how Greenspan’s liquidity ‘put’ in turn accelerated debt and levering, thus contributing to a series of US and global asset bubbles from the late 1980s to 2006 that culminated in the housing and derivatives great credit bubble and crash of 2007-09.

Chapter Five addresses the Fed under chair, Ben Bernanke, and describes how his policies were a continuation of Greenspan’s until the 2008 crash, at which time Bernanke’s Bank became Greenspan ‘on steroids’ so far as central bank liquidity and interest rate policies are concerned. The chapter debunks Greenspan notions of ‘conundrums’ and Bernanke’s ‘global savings gluts’ that were proposed to explain away the failure of Fed policies, and explains why Fed policy has been to always assiduously avoid interceding to prevent financial asset price bubbles. The chapter concludes with an analysis of the Bernanke Fed, 2006-2014, as to what extent it achieved or not its primary functions and targets. Detailed considered is given to the Bernanke bank’s innovations in new monetary policy tools like QE and ZIRP, which are then critiqued for their effectiveness and unanticipated consequences.

Chapters Six through Nine consider in turn the evolution and performance of the other major central banks, including the Bank of Japan (BOJ), European Central Bank (ECB), Bank of England (BOE), and the People’s Bank of China (PBOC), respectively. Addressing the period from roughly 1990 to the present, the chapters describe the evolution of central banking functions of money supply management, bank supervision, and lender of last resort for each of the central banks, as well as evolution in terms of the targets and the monetary tools they employed. Special attention is given to QE, ZIRP and NIRP programs and tools in Japan and Europe and why price targeting has failed so miserably in both nonetheless, despite trillions of euros and yen liquidity injections by their central banks. Why fiscal austerity has been the most extreme in both, and in the UK, and why growth rates have stagnated or slipped in and out of recession. Chapter Thirteen on China considers the unique case of the PBOC and China’s equally unique banking structure, as well as its contrary policies of fiscal stimulus as government spending and investment. Nevertheless, it is argued China and its PBOC have after 2011 increasingly resorted to massive liquidity injections accompanying that fiscal stimulus, with the result of business and household debt exploding by 210% and more than $20 trillion since 2007.

Chapter Ten returns to the US central bank, the Fed, under the chair of Janet Yellen since 2014. Yellen Fed policies through 2016 are described as the extension of the Bernanke Fed in terms of functions, targets and tools. How the Yellen Fed has performed in those terms is examined. Special challenges faced by the Yellen Fed are discussed, including raising interest rates from near zero, the effects of sell off of the Fed’s balance sheet, how to supervise the banks in an environment of renewed financial regulation rollbacks, how to maintain central bank monetary policy hegemony amongst growing calls for fiscal infrastructure government spending, and how to prepare new tools for the next financial crisis and bank bailouts.

Chapter Eleven returns to broader themes associated with the failings and challenges confronting central banking in the 21st century. The chapter revisits and summarizes the reasons why central banks have been failing with regard to functions, targets and tools effectiveness. Official excuses for that failure are critiqued and rejected. Alternative reasons are offered, including the declining effects of interest rates on investment, the relative shift to financial asset investing at the expense of real investment, failure of central banks to intervene and prevent financial asset bubbles, the purposeful fragmentation of bank supervision across regulatory institutions, mismanagement of the money supply, monetary tools ineffectiveness and contradictions, and central bankers’ continuing adherence to ideological notions of the mid-20th century that no longer hold true in the 21st—like the Taylor Rule, Phillips curves, and, in the case of ZIRP and NIRP, the idea that the cost of borrowing is what first and foremost determines investment.

The Concluding Chapter raises the question: what reforms and restructuring of central banks’ decision making processes, tools, targets, functions, as well as their very mission and objectives, are necessary if central banks are to become useful institutions for society in general? Central banks, as currently structured, have failed to keep pace with the more rapid restructuring and change in the private capitalist banking system. Contradictions have arisen in the gap that unbalanced evolution has created. Failure of performance in turn has been the consequence of failure to restructure and to evolve in tandem with the private banking system.

A Constitutional Amendment is therefore proposed, along with 20 articles of Enabling Legislation, to restructure the US Fed by democratizing its decision making and redirecting it to serve in the broader public interest, and not just the interests of the private banking system. The amendment and legislation defines a new mission and general goals for the Fed—as well as new targets, tools and new functions—to create a new kind of public interest Federal Reserve for the 21st century.

posted May 20, 2017
Brazil’s Economy: Canary in the Global Economy Coalmine?

Brazil: Canary in the EME Coalmine? from Chapter 3 “Emerging Markets’ Perfect Storm’:

No country reflects the condition and fate of EMEs better perhaps than Brazil. It’s both a major commodity and manufactured goods exporting EME. It’s also recently become a player in the oil commodity production ranks of EMEs. Its biggest trading partner is China, to which it sells commodities of all types—soybeans, iron ore, beef, oil and more. Its exports to China grew fivefold from 2002 to 2014. It is part of the five nation ‘BRICS’ group with significant south-south trading with South Africa, India, Russia, as well as China. It also trades in significant volume with Europe, as well as the US. It is an agricultural powerhouse, a resource and commodity producer of major global weight, and it receives large sums of money capital inflows from AEs.

In 2010, as the EMEs boomed, Brazil’s growth in GDP terms expanded at a 7.6% annual rate. It had a trade surplus of exports over imports of $20 billion. China may have been the source of much of Brazil’s demand, but US and EU central banks’ massive liquidity injections financed the investment and expansion of production that made possible Brazil’s increased output that it sold to China and other economies. It was China demand but US credit and Brazil debt-financed expansion as well. As in the case of virtually all the major EMEs, that began to shift around 2013-14. Both China demand began to slow and US-UK money inflows declined and began to reverse. In 2014 Brazil’s GDP had already declined to a mere 0.1%, compared to the average of 4% for the preceding four years.

In 2015 Brazil entered a recession, with GDP falling -0.7% in the first quarter and -1.9% in the second. The second half of 2015 will undoubtedly prove much worse, resulting in what the Brazilian press is already calling ‘the worst recession since the Great Depression of the 1930s’.

Capital flight has been continuing through the first seven months of 2015, averaging $5-$6 billion a month in outflow from the country. In the second half of 2014 it was even higher. The slowing of the capital outflow has been the result of Brazil sharply raising its domestic interest rates—one of the few EMEs so far having taken that drastic action—in order to attract capital or prevent its fleeing. Brazilian domestic interest rates have risen to 14.25%, among the highest of the EMEs. That choice to give priority to attract foreign investment has come at a major price, however, thrusting Brazil’s economy quickly into a deep recession. The choice did not stop the capital outflow, just slowed it. But it did bring Brazil’s economy to a virtual halt. The outcome is a clear warning to EMEs that solutions that target soliciting foreign money capital are likely to prove disastrous. The forces pulling money capital out of the EMEs are just too large in the current situation. The liquidity is going to flow back to the AEs and there’s no stopping it. Raising rates, as Brazil has, will only deliver a solution that’s worse than the problem.

Nor did that choice to raise rates to try to slow capital outflow stop the decline in Brazil’s currency, the Real, which has fallen 37% in the past year. The currency decline of that dimension should, in theory, stimulate a country’s exports. But it hasn’t, for the various reasons previously noted: in current conditions a currency decline’s positive effects on export growth is more than offset by other negative effects associated with currency volatility and capital flight.

What the Real’s freefall of 37% has done, however, is to sharply raise import goods inflation and the general inflation rate. Brazil’s inflation remained more or less steady in the 6%-6.5% range for much of 2013 and even fell to 5.9% in January 2015, but it has accelerated in 2015 to 9.6% at last estimate.

With nearly 10% inflation thus far in 2015 and with unemployment almost doubling, from a January 4.4% to 8.3% at latest estimate for July, Brazil has become mired in a swamp of stagflation—i.e. rising unemployment and rising inflation. With more than 500,000 workers laid off in just the first half of 2015, it is not surprising that social and political unrest has been rising fast in Brazil.

The near future may be even more unstable. Like many EMEs, Brazil during the boom period borrowed the liquidity offered by the AEs bankers and investors (made available by AE central banks to their bankers at virtually zero interest) to finance the expansion. That’s both government and private sector borrowing and thus debt. Brazil’s government debt as a percent of GDP surged in just 18 months from 53% to 63%. More important, private sector debt is now 70% of GDP, up from 30% in 2003. Much of that debt is ‘junk bond’ or ‘high yield’ debt borrowed at high interest rates and is dollar denominated. That means borrowed from US investors and their shadow banks and commercial banks and therefore payable back in dollars—dollars obtainable from export sales to US customers which are slowing. An idea of the poor quality of this debt is indicated by the fact that monthly interest payments for Brazilian private sector companies is already estimated to absorb 31% of their income.

With falling income from exports, with money capital fleeing the country and becoming inaccessible, and with ever higher interest necessary to refinance the debt when it comes due—Brazil’s private sector is extremely ‘financial fragile’. How fragile may soon be determined. Reportedly Brazil’s nonfinancial corporations’ have $50 billion in bonds that need to be refinanced just next year, 2016. And with export and income declining, foreign capital increasingly unavailable, and interest rates as 14.25%–it will be interesting to see just how Brazil will get that $50 billion refinanced? If the private sector cannot roll over those debts successfully, then far worse is yet to come in 2016 as companies default on their private sector debt.

Brazil’s monetary policy response to the EME crisis of collapsing demand and exports, falling currency values, capital flight, and domestic inflation and unemployment has been to raise interest rates. Brazil’s fiscal policy response has been no less counter-productive. Its fiscal response has been to cut government spending and budgets by $25 billion—i.e. to institute an austerity policy. Like its monetary policy response of raising rates, its fiscal policy response of austerity will only slow its real economy even further.

The lessons of Brazil are the lessons of the EMEs in general, as they face a deepening crisis, a crisis that originated not in the EMEs but first in the AEs and then in China. But attempting to stop the capital flight train that has already left the station and won’t be coming back’ (to use a metaphor) will fail. So too will fail competing for exports in a race to the bottom with the AEs. Japan and Europe are intent on driving down their currencies in order to obtain a slightly higher share of the shrinking global trade pie. The EMEs do not have the currency reserves or other resources to outlast them in a tit-for-tat currency war. Instead of trying to rely on somehow reversing AE money capital flows or on exports to AE markets as the way to recovery and growth, EMEs will have to try to find a way to mutually expand their economic relationships and forge new institutions among and between themselves as a ‘new model’ of EME growth. They did not ‘break the old EME model’; it was broken for them. And they cannot restore it since the AEs have decided to abandon it.

posted May 11, 2017
Is Trump Really President?

These are strange times in American politics. And stranger still is the emerging character of the Trump presidency. Events are appearing with growing frequency, raising the question who is really running the White House and the US government? Is Trump really the President?

Trump sits there on the second floor, spending late evenings into early mornings tweeting to the world. In itself, that’s politically weird. But even more strange is what he’s tweeting and the next day fallout. We hear about the aircraft carrier task force in Asia that was reportedly steaming at full speed to the North Korean coast a few weeks ago, only to learn soon after it was actually headed in the opposite direction to Australia. Did Donald imagine that? Was the US Navy informed or requested by its titular commander in chief to turn around and go north…and then didn’t? Was Trump’s command to go north perhaps countermanded by some head of Naval operations, or maybe someone else in the White House or government? Or did he just imagine it all and never even informed the Navy to head to Korea? All the possibilities are strange. Very strange.

And then there was the announcement by Trump that his big budget was going to be announced in a few days. It wasn’t even prepared. Government bureaucrats had to quickly slap something together in a couple of pages to provide to the press.

Trump did it again, tweeted announcing his big tax cuts. Again the bureaucrats were caught off guard and had to throw some general outline together and issue it to the press. All this happened after it was generally known that the tax cut proposals were not going to be developed until late summer, and that the Obamacare Repeal bill had to go forward first. The Obamacare repeal was a necessary prerequisite for the general tax cut. Its $592 billion in tax cuts for business and investors had to come first. Until it was resolved, it made no sense to publicize elements of the yet bigger tax cuts of trillions of dollars more scheduled to follow. But Trump tweeted it anyway, and the bureaucracy jumped, putting something down on paper. Who’s communicating what to whom? Is Donald just lobbing electronic policy missiles out of the second floor of the White House, hoping some bureaucrat will catch them before morning?
Or perhaps Trump is being allowed to sit up there on the second floor of the White House and do his tweet thing, while others actually run the government. By others, perhaps it is vice-president Pence in charge, working with some inside committee of key cabinet officers and the intelligence spooks in the NSA-CIA-FBI?

Is Trump being allowed to ‘play at President’ for public consumption, while the generals, spooks, and Goldman Sachs financial pirates run the show?

It’s hard to believe that the members of his administration and the government State bureaucracy knew in advance of Trump’s recent tweets welcoming Philippines President, Duterte, to the White House. Or that Trump would tweet recently that he’s willing to meet with North Korea’s president, for whom he, Trump, had great respect. You can imagine the political constipation that comment caused the spooks and the generals in charge of State, Defense, and National Security.

Last November 30, 2016 this writer wrote a piece predicting that Trump the right wing populist would be successfully ‘tamed’ by the political elites of this country that really run the show. I laid out some ideas how that would be accomplished. (see my blog, jackrasmus.com). But I didn’t think it would happen so fast and so easily.

The past month has witnessed Trump doing a total ‘about face’ on virtually all his right wing populist proposals during the election. He’s backtracking so fast it’s a wonder he hasn’t tripped over himself. (Check that, he has). What explains his 180 degree turnabout?

Was his talk of right wing populism during the campaign all political election hype? Tell the people whatever they want to hear to get elected, and then go do whatever the moneybags really running the show want from you—which is big tax cuts, massive across-the-board deregulation, end the taxation on Obamacare and we don’t care what happens to the rest of it, give us some infrastructure spending deals that resurrect wheeling-dealing commercial property investments with big tax loopholes, and just tweak and rearrange existing free trade treaties.

So what we actually got so far from Trump during his first 100 days is government by ‘executive orders’—i.e. repealing environmental protections, gutting immigrants’ rights, going after sanctuary cities, opening up national monuments and parks to mining and cattle exploitation, subsidizing killer coal companies, attacking consumer protection, smoke and mirror changes to H1-B skilled worker import quotas that haven’t changed, gutting K-12 education and shifting funds to private schools from public, opening up offshore drilling, and so on. But elsewhere it’s been a wholesale retreat from his election positions, proposals and promises. Here’s a short list:

Trump does a reversal on China, from declaring it a currency manipulator to offering it major concessions at the Mar-a-Lago meeting, in exchange for help with North Korea. One wonders if China’s offshore islands expansion is also part of the deal.

From NATO is a waste of money and unnecessary, Trump shifts to NATO is the great bulwark against Russia. From Putin the great leader to Putin is responsible for Syria using poison gas–of which still no proof thereof by the way. (Is it true, or is it all in that great American tradition of ‘yellow cake’ (2003), ‘babies thrown from incubators’ (1990), ‘tonkin gulf’(1965), ‘the war on drugs’ (Panama invasion), ‘Soviets are in Grenada’, and ‘remember the Maine’ (Spanish-American War) incidents that always precede and justify US going to war).

From Mexico is going to pay for the wall, to there’ll be no wall (latest per Homeland Security Secretary). From dumping NAFTA, to ‘I’m not going to terminate NAFTA’ (Trump quote).
And then there’s Trump’s staged press conferences with companies like Carrier Corp., indicating they’re not going to export some jobs to Mexico for now (as they continue to plan to export still others at the same time). And the list of companies announcing jobs they intend to hire in the US without saying when, or that they already had planned to hire them anyway prior to the press conference.

From cancelling the TPP free trade deal (already killed in Congress), to declaring a reopening of the TTIP free trade deal with Europe. And what about the silent deal Trump struck with Japan’s prime minister, Shinzo Abe, when he was here? It’s been leaked that Japan will pick up the lead on the TPP renegotiations and the US will join it later. Or Mexico’s recent offer to the US to just apply the TPP terms to a new ‘reform’ of NAFTA by Mexico and the US? Watch both these back door free trade resurrections, they’re coming too.

And what about Trump’s organizational about face, with right wing ideologue Steve Bannon banished from the National Security Council and pro-Russia general Flynn banished from the government?
What I also find interesting is the intense media attack on Trump— focusing on his Russia connection, his tax returns, nepotism in the White House, his companies’ benefiting (a violation of the emoluments clause of the US constitution) and calls for impeachment in Congress—all of sudden all the above have disappeared from view in the media front page. They’ve been put on the back burner in Congress and the press. And there’s no more damaging leaks coming weekly from the intelligence spooks either. Instead, what we hear is talk about ‘now he’s coming around’, beginning to appear presidential! Is all that just coincidental? Hmmm.

Is this a presidency where the Donald gets to sit on the second floor of the White House and do his late night tweets, and the bureaucrats scurry the next day to clean up? Where Donald is brought downstairs to the oval office for Executive Order signings or occasional reporter interviews and then trotted back upstairs? Is it a presidency where he makes his late night calls to his moneybag friends, like the billionaire Mercers and others, to find out ‘how am I doing guys’? While the rest of the representatives of the economic and political elite run the show?

Is this a Trump presidency, or a government by Generals-Goldman Sachs-Pence, with son in law Kushner functioning as intermediary between them and the Donald? A government of second floor tweets and first floor executive order signing events?

The quality of the American presidency has been in steady decline for decades. From the crook Nixon to the inept peanut farmer, Carter; from the movie-actor, camera friendly Reagan to the morally sleezy opportunist Bill Clinton; from know-nothing George Bush to the super-cautious false progressive Obama; and now to the fake right populist, blowhard, tweety-bird called Donald Trump.

We’re going to need a lot of luck to get through the next three and a half years folks!

Jack Rasmus is the author of ‘Systemic Fragility in the Global Economy’, Clarity Press, 2015. He blogs at jackrasmus.com. His website is www.kyklosproductions.com and twitter handle, @drjackrasmus.

posted May 11, 2017
Macron as President: EuroNeoliberalism Counterattacks

On May 7, 2016, France elected Emmanuel Macron, the former banker, as its next president. The voting result was 65% for Macron, a newcomer in the election cycle who didn’t even have a political party, but who did have the massive business backing and traditional political elites united behind him, providing unlimited media and financial assistance to his campaign.

Approximately 25% of all voters in France, the most in nearly fifty years (since 1969), abstained from voting, however. It is also estimated that 25% of Macron’s 65% vote margin were voters who voted ‘against Le Pen’ and the far right national front party, and did not vote ‘for’ Macron. How solid is Macron’s support, and whether the French people support what will be his continuation of European neoliberalism, remains to be seen.

Macron’s victory as an ‘independent’, with no party, just a ‘movement’ called En Marche, was made possible by several unique developments during the recent election cycle.

First was the convenient scandals that early on knocked out of the election cycle his other business-backed challengers, Juppe and Fillon. It appears the political elite may have encouraged the publicizing of the scandals in order to unite business, bureaucracy, traditional elites, and professional classes behind one candidate, the newcomer Macron. Business interests were thus united, while the left and right alternative parties were divided.

Another convenient development enabling Macron’s election victory was the failure of the French left to unite early behind a challenger. The Socialist party’s candidate, Benoit, was burdened with the massive failure of the Socialist Party that ruled France under Francois Holland, the outgoing president, who leaves office with barely 5% popularity. Benoit’s candidacy in part split the left alternative. The strongest ‘left challenge’ was led by a new face, Melenchon, who started late in the campaign and could not shift the election media-driven message from ‘vote for Macron to stop Le Pen and the far right’. Other left parties failed to unite behind Melenchon as well.

A tactical failure in the campaign appears to have been the ‘leaks’ posted on the internet about Macron’s campaign and backers. Whoever was behind them is unknown, but the leaks appeared just a hour before the ‘black out’ on the election last friday, not enough time for voters to digest the results. As in the US, the media and Macron are now claiming Russian hackers were behind the leaks.

Other similarities with the US 2016 election are also interesting. US voters last November rejected the US Democrat party’s neoliberal policies advocated and defended by Hillary Clinton, thinking they would get something else in Trump. Trump won by creating the appearance he was against these policies.

However, in just 100 days it is now clear Trump represents a continuation of the same US neoliberalism–with a nasty social twist of anti-immigrant, anti-environment, anti-social program overlaid on traditional pro-business tax cuts, deregulation, and bilateral free trade proposals.

Macron further represents a strategy to save European neoliberalism similar to that which Britain and the US economic elites put forward in the 1990s when they put Tony Blair and Bill Clinton in office.–i.e. so-called ‘new democrats’ at the time. Emmanuel Macron is France’s ‘new democrat’, and a reflection of elites in France putting a ’shiny new young face’ on its prime politician just as UK elites did with Tony Blair and US with Bill Clinton. Macron is thus the ‘Tony Clinton’ (or ‘Bill Blair’ if you prefer) of France. However sustaining a ‘Tony Blair’ or ‘Bill Clinton’ strategy and solution in France may not be possible at this juncture, nor in the case of France in general. Time will tell if the ’shiny young new face’ solution works in France, given its current discrediting in UK and US.

Macron is also a former banker, and therefore also represents the trend of a deepening influence and control of bankers and finance capitalists in the governments of the advanced economies like the US, UK, Japan and Europe in general.

In the US, big bankers like Goldman Sachs now run nearly all the key cabinet positions and agencies in the US administration under Trump. Under Obama in 2008, all the recommendations for cabinet-agency positions put forward by the megabank, Citigroup, were eventually adopted by Obama. France 2016 appears a continuation of this trend, as banker-finance capitalists maneuver in new ways to retain their dominance of the political system in the advanced economies in an age of growing economic disruptions.

Macron has promised to pick up the baton of ‘labor reform’ in France introduced by Socialist Party Holland. That means laws that will weaken unions, collective bargaining, allow firing of workers, eliminate strikes, cut social benefits, privatize the healthcare and education systems in France. So now the conflict in France moves from the electoral arena to the workplace. During the recent election cycle shopfloor resistance in France continued to grow rapidly. Many unreported short strikes were called to protest the plans to implement the new anti-worker labor laws. It is not unlike what began to occur in 1967 as DeGaulle and the capitalist parties laid out plans to strip workers of rights and benefits. That plan resulted in nationwide strikes and a shutdown of the economy and widespread protests called ‘May 1968′, which in turn led to the resignation of then president, DeGaulle. Will Macron’s presidency be a repeat? Is France now embarking on the same trajectory with Macron, who like deGaulle, has vowed to aggressively implement the anti labor reform laws? The largest union in France, the CGT, has already called for more intense opposition at the company level and preparation for a general strike. Whether Macron, a champion of the anti-labor laws is willing to stake his presidency on the direct conflict with labor at the economic level will be interesting to watch.

As US workers today cross their fingers and hope that Trump isn’t lying about bringing jobs back to the US (which he is), France’s workers may be preparing for a confrontation in coming months of a more united and militant kind. It will be interesting to see how far the Macron-Business-Banker elites in France are willing to go to face off the growing militancy ‘from below’ in the coming months.

In any event, with the election they have bought themselves some additional time. Watch the stock markets boom in Europe on Monday, as investors intensify their financial bets on the rise in stock markets in France, Europe and elsewhere and cash in on yet more capital gains and financial profits.

Jack Rasmus is author of the forthcoming book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Next Depression’, by Clarity Press, June 2017; and the previous ‘Systemic Fragility in the Global Economy’, Clarity, 2016 and ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity, 2016. He blogs at jackrasmus.com

posted April 26, 2017
The Great American Tax Shift 1980-2005

CHAPTER TWO
Excerpt from ‘The Great American Tax Shift’ Chapter 2
The War at Home: Corporate Offensives from Reagan to Bush
Copyright 2004 Jack Rasmus

(For the evolution of US tax policy from 1913 to 1978, see the book)

The Coming Tax Storm: 1978

While Carter essentially did nothing about bracket creep and rising income taxes on workers and then turned and raised payroll taxes, two important tax events occurred on his watch that would have importance in the years to come. One was the ‘shadow’ tax challenge to his policies that was growing in the US Congress, driven by a coalition of right wing Republicans. This challenge became known as the Kemp-Roth bill. The other important event with historic import was the State and Local level tax revolt in California embodied in that state’s ‘Proposition 13’ Initiative. Prop 13 targeted the roll back of property taxes and provided an example for countless ‘me too’ efforts that followed thereafter elsewhere in the country.

The 1977 Kemp-Roth bill proposed a radical reduction in the top rate of the federal income tax, from the 70% level it had been at since 1964 to a new sharply lowered rate of 50%. It also proposed a three year 30% overall reduction in the federal income tax plus indexing of the tax brackets for inflation to deal with ‘bracket creep’. Kemp-Roth didn’t pass that year but it did become the tax policy centerpiece for Reagan’s 1980 Presidential election campaign. It later became the core idea for Reagan’s even more dramatic tax cuts for the rich in his first term.

While Kemp-Roth (and Reagan’s subsequent 1981-82 tax cuts) claimed to cut taxes for the middle class, in reality “Kemp-Roth was always a Trojan horse to bring down the top rate”, as Reagan’s Director of the Budget and his central tax architect, David Stockman, would later admit in 1986 once all the damage had been done. 18 In an act of ideological contrition, Stockman would later describe in his memoir of the period that the Reagan tax cuts of 1981 were simply driven by outright corporate greed. As he put it himself in an exclusive interview, “The hogs were really feeding. The greed level, the level of opportunism, just got out of control”. 19

The main target of Kemp-Roth was bracket creep. By the late 1970s rising inflation was beginning to significantly increase the federal income tax’s impact on a growing number of workers, particularly those in the 60%-80% income percentile range. Having begun to flex its new political muscle circa 1978, the nascent Republican radical right sensed the power of the bracket creep-inflation issue even if Carter and the Democrats did not. The origin of what would later be called the ‘Reagan Democrats’—i.e. working class voters who turned to Reagan in 1980—had much to do with this bracket creep issue and the increasing tax bite from the federal income and payroll tax hikes under Carter.

The second warning event was the Prop 13 revolt in California in 1978, which also had its origins in inflation and a kind of bracket creep but this time bracket creep associated with rising property taxes. Rapid increases in property values due to inflation pushed local property taxes to intolerable levels by the late 1970s for many mid and upper income level workers. Corporate and right wing forces grabbed the political initiative here once again.

The major beneficiaries of Proposition 13 in the long run, however, were business property owners and not working class homeowners. Prop 13 was written such that if a homeowner sold his property the property tax cap would lapse for the new owner who bought it and for the original owner buying another home in California. Given home sales turnover in California, this meant over time home property owners as a group would lose the benefit of Prop 13. In contrast, property values for business property, which seldom turned over, would remain over the long run. Even worse, business property owners could ‘buy and sell’ rights to each other if they did turn over property. A feature not extended to the individual homeowner. Efforts to reform or amend this inequity for the past 25 years have failed to pass the legislature or have been defeated by massive lobbying campaigns by business interests targeting the state legislature or financed by business through the Initiative process.

Proposition 13 was significant in yet another way. It meant California’s pre-1978 state budget surplus of $6.8 billion would quickly turn into chronic long term deficits, which in fact happened, requiring significant cuts in education and social services and equally significant increases in regressive sales taxes to make up for the revenue losses that resulted from Prop 13.

California was thus a kind of dress rehearsal for subsequent income tax cuts to follow under Reagan. The similarities were notable in terms of who benefited, in the massive reductions in social services that followed the tax cuts, and in the growing reliance on regressive tax hikes to make up for the losses in revenue from lower income taxes enjoyed by the wealthy and corporations. Parallels exist here too with today, decades later. With taxes on capital incomes having been significantly reduced during George W. Bush’s first term, the talk has turned increasingly in his second term to how to impose some kind of regressive national sales tax to make up for the income losses and the budget deficits that have resulted from the big tax cuts during Bush’s first term.

In summary, the central dynamic of the last half of the 1970s was that inflation and bracket creep—whether impacting income taxes at the federal level or property taxes at the state and local levels—provided critical political ammunition for the emerging radical right and its corporate allies. They grabbed the issue while Carter, the Democrats, and Labor’s lobbyists sat idly by. They then creatively turned the real concern with inflation and bracket creep into proposals for tax cuts for the rich and corporations.

In the early 1950s the median income American family was paying barely 5% of its earnings for federal income taxes, and only 1%-2% of its earnings at most for the payroll tax. Even by the early 1960s the annual tax burden of $700 for a median income family earning $6,000 a year was nearly double, at 11.6%, but not yet especially burdensome. 20

But by Carter’s last year in office, 1980, the median
income working family in America was paying a total
federal tax burden (income and payroll tax) equal to
24% of that family’s income.

The corporate elite and its new radical right allies in 1978 jumped on the new tax discontent and opportunity. Their candidate, Ronald Reagan, made it the centerpiece of his 1980 election campaign, as well as his primary policy objective when first entering office in 1981. In contrast, Carter and the Democrats in 1977-78 chose to ignore the significant political dangers (and corresponding opportunities) posed by the inflation-induced tax burden shift to the working class. The consequences of those strategic choices, for the Democratic party and for workers alike, still reverberate today.

The Reagan Tax Revolution

The Reagan Tax Revolution was a double-edged sword: One edge reserved for capital incomes, subsidies and shelters, and still another for payroll taxes. One edge cut taxes for the wealthy; the other cut take home pay for workers. On the one hand a shift occurred within the federal income tax structure under Reagan with capital incomes benefiting at the expense of wages and salary income; on the other a second shift also occurred between taxes on capital incomes (i.e. the personal income tax, corporate income tax, capital gains tax, estate & gift tax, etc.) and the payroll tax levied on workers wages and salaries.

Reagan’s Record 1981 Tax Cuts

The Reagan 1981 Tax Act reduced taxes by $752 billion and provided the single largest tax cut to date. The majority of that $752 billion was targeted for high income groups and corporations. The 1981 cuts dwarfed all the preceding tax cuts in quantitative terms but nevertheless borrowed heavily in terms of ideas from the Kennedy Tax Cut of 1964, the Nixon cuts in 1971, and the Kemp-Roth proposals of 1978.

From Kennedy and Johnson, Reagan took the idea of reducing the top income tax rates by lowering top rates from 70% to 50%. Taking a page from Nixon, the Reagan cuts increased the Investment Tax Credit, raising it once again back to 10% and then adding even faster business depreciation as well. From Kemp-Roth, it carried over the idea of an additional 25% reduction in total personal income tax rates phased in over two years. From Kemp-Roth it also borrowed the idea of indexing income taxes to offset bracket creep. But there was more. Much more.

A host of additional measures reduced the tax burden on the richest 5% even further. The capital gains top tax rate was reduced from 49% to 20%. The first 60% of long term capital gains were also made tax free. Estate and Gift taxes were cut. All limits on gifts to spouses were eliminated and ceilings tripled for other recipients of gifts. Estate taxes were eliminated for spouses, and otherwise ended altogether for 99.7% of all families. The remaining 0.3% still subject to Estate taxes had their rates reduced from 70% to 50%. Totally new items like the IRA and the ‘All Savers Certificates’ were also introduced, targeted in particular for taxpaying households in the 60%-95% income range.

In terms of corporate taxation, several generous new loopholes were introduced in 1981. Depreciation of equipment was compressed to just three categories of goods, with autos fully depreciable after only 3 years, business equipment after five, and buildings after fifteen. For small business, some equipment was fully depreciable in the first year. The top tax rate for small business was also reduced from 25% to 15%.

Oil facilities and railroad cars were also added to the Investment Tax Credit in 1981. Also for the first time, a corporation that didn’t use the Investment Tax 10% Credit could sell that credit to another corporation (which would now have a 20% credit). Credits could be bought and sold between corporations to avoid paying any tax altogether. This was called ‘Safe Harbor Leasing’. 21 The General Electric Corporation used ‘Safe Harbor Leasing’ not only to eliminate all tax liabilities in 1981 but to “pick up $110 million in refunds for previous years”. 22 According to one reputable source,

The sum of corporate-claimed depreciation for
1982-1987 was an extraordinary $1.65 trillion.23

Borrowing a page from Kennedy-Johnson and Nixon, the Reagan tax cut was wrapped in a public relations package promising 13 million more jobs by 1986. 24 However, what followed in 1982-84 was not more but fewer jobs, a recession even worse than that of 1974-75, and the highest unemployment rate since the Great Depression of the 1930s. In the two years immediately following the 1981 tax cuts unemployment shot up more than 10%. It was not until nearly three years later than unemployment started to come down, and then only to the 7%-8% range for much of the mid-decade—an unusually sluggish ‘jobless recovery’ by historical comparison to earlier recessions. Reagan’s recession following his 1981 tax cuts was thus a first in yet another important way: it marked the beginning of jobless recoveries that would become progressively worse in 1990-93 and 2001-04.

Apart from this failure to produce promised jobs, the nearly $600 billion in personal income tax cuts contained in the 1981 Tax Act did not mean significant tax reduction for the middle and lower income taxpayers. With median family income in 1980 around $25,000 a year, there was virtually no net tax reduction for those with annual incomes of $50,000 or less. Most of the cut in income taxes went to the top 5% of taxpayers, the lion’s share of which went to those with incomes of $100,000 and more. 25

The following Table 2.1 gives a representation of who benefited from the Reagan Tax Act of 1981:

TABLE 2.1

Distribution Effects of Reagan 1981 Tax Cuts 26

Income Percent of All Taxpayers Net Change in Percent of Tax
($0000) (in 1981) Tax Liability Liability Changes

< $10K/Year 33.3% $125 27.7%
$10K-$15K 14.9 83 4.7
$15K-$20K 12.2 18 0.6
$20K-$30K 19.1 -26 -0.6
$30K-$50K 15.4 -84 -1.1
$50K-$100K 4.1 -756 -4.9
$100K-$200K 0.7 -4408 -11.4
>$200K 0.2 -19427 -15.1
(Source: R. Lekachman, Greed Is Not Enough, p. 66)

If $84 a year was the most a worker at the median income level got from the 1981 Reagan tax cuts, that paltry amount was soon more than offset by payroll tax increases beginning in 1984.

The Payroll Tax Revolution of 1983-84

In 1983-84 a major change in the payroll tax for Social Security and Medicare was enacted. This change would have momentous impact not only over the remainder of the decade of the 1980s but through the 1990s and up to the present. A special commission chaired by Alan Greenspan, later appointed his chief of the Federal Reserve system by Reagan, recommended a payroll tax hike to ‘save’ the Social Security System in 1983 and make it financially sound until the second half of the 21st century. Or so it was promised. A rise in the payroll tax would save Social Security for another century, Greenspan argued, avoiding the need for any additional ‘reform’ for another fifty years at least. Congress followed Greenspan’s recommendations and passed legislation and started raising the payroll tax effective 1984. Both payroll tax rates and the amount of annual income on which they were collected rose steadily thereafter. Two decades later, under George W. Bush the payroll tax would amount to a bigger deduction from many workers’ paychecks than the income tax.

One might logically argue that the payroll tax hikes were really deferred income that workers would collect after retirement. But not so. The surplus generated from the payroll tax hike over the next 20 years, 1984-2004, amounted to more than $1.6 trillion dollars. 27 But all of that $1.6 trillion would be spent by Congress during the 20 years to help cover the U.S. general budget deficit (caused to a significant degree, ironically, by the same huge tax cut of 1981-83 for the rich and corporations).

The following Table 2.2 illustrates the increases in the payroll tax rate and its taxable income base during the Reagan years, and includes the maximum payroll tax payment required by workers for the given rate and base.

TABLE 2.2

The Social Security Payroll Tax Increase, 1980-1989

Year Tax Rate Tax Base Maximum Payment

1980 5.80% $25,900 $1,502
1981 6.65 29,700 1,975
1982 6.70 32,400 2,170
1983 6.70 35,700 2,391
1984 7.00 37,800 2,646
1985 7.05 39,000 2,749
1986 7.15 42,000 3,003
1987 7.15 43,800 3,131
1988 7.51 45,000 3,379
1989 7.51 48,000 3,604
(Source: Social Security Administration)

The record rise in the payroll tax after 1983—combined with the equally record cut in income and other taxes for the rich—meant that forces shifting the share of total federal taxes from the wealthy to workers occurred from two directions during the Reagan years.

The combined federal tax rate (income and payroll tax) for a median income worker in the early 1950s was only 6%-7%. By the mid-1960s, 11%. Under Carter 24%.

By the mid-1980s the total federal tax burden for
the same median income family had risen to 28%.
For taxpayers with annual incomes over $500,000
the total burden had fallen to 28%. 28

In addition to the combined federal tax rate, it is estimated the middle income family’s burden for state and local taxes in 1985 amounted to another 9.1% of the family’s income. 29 For federal and state together that’s a total tax burden of almost 40% of income for a median or average working class family.

Tax Reform Act of 1986

The third major tax event closing out the Reagan tax revolution of the 1980s was the so-called Tax ‘Reform’ Act of 1986. But reform in this case was certainly a misnomer.

The 1986 Act reduced the top income tax bracket further, from 50% to 28%, and included more than 650 special provisions—i.e. loopholes and shelters. Another remarkable feature of the 1986 Act is that it created what was called at the time the ‘bubble’. This meant that the very wealthiest households had their top income tax rate reduced to the 28% rate, but the income group just below them, households in the $70,000 to $170,000 range, actually were left with a higher top rate of 33%. The ‘Alternate Minimum Tax’ (AMT) designed to make sure even the richest paid some kind of tax despite all their loopholes and shelters was also changed to soften its impact on wealthier taxpayers. In addition, the corporate income tax top rate was further reduced from 46% to 34% and there were other reductions in taxes on capital incomes in the 1986 Act.

By 1986 a median working class family earning in the $30,000-$40,000 annual income range received a total annual income tax cut of $467 while a millionaire received a cut of $281,033. 30 But much of that $467 cut in taxes was largely offset by rising payroll taxes. What little the American worker got in the way of income tax cuts in Reagan’s first term was taken away by payroll tax hikes and other tax increases in Reagan’s second term.

Republicans and Democrats, Liberals and Conservatives alike, hailed the passage of the 1986 Act as legislation that would make tax “unfairness a thing of the past” and permit “the American people to move once again to trust their federal government”. 31 The Democratic National Convention refused to actively take up the question of raising top tax rates or closing loopholes for the rich in the 1988 election year. And its Presidential candidate, Michael Dukakis, said virtually nothing about the issue during the election campaign of that year.

Perhaps the best summary of the effects of the Reagan tax cuts by mid-decade was expressed by Nobel Prize winning economist, James Tobin, who wrote that the Reagan program would neither stimulate productivity nor revive jobs. “What it is sure to do is redistribute wealth, power and opportunity to the wealthy and powerful and their heirs. That is the legacy of Reaganomics.” 32

It was claimed that the Tax Reform Act of 1986 redressed some of the worse excesses of the preceding Reagan tax cut legislation. But that view conveniently ignores the huge cuts in the top marginal income tax rate for the wealthy and the ever growing tax bite on workers from the rising payroll tax. The view also ignores the proliferating tax shelters and other avoidance schemes at the time. The 1986 Act was a good example of the ‘tax reform shell game’ mentioned earlier, in which periodically top tax rates were raised (or lowered) while tax shelters, loopholes, and legalized tax avoidance schemes were eliminated (or restored) so that, in the end, the top 5% households and corporations continued to have their net taxes reduced from one source or the other.

To cite just a few examples of the loopholes and shelters introduced or expanded in Reagan’s second term and the 1986 Tax Act:

Among the more notable was the interest on loans deduction for corporations. With the boom in corporate borrowing in the 1980s, this loophole resulted in more than $100 billion a year loss to the US Treasury. Then there was the Net Operating Loss (NOL) deduction, which allowed corporations to reduce current year taxes and carry forward what was not used in the current year as tax deductions to future years. That loophole also cost at least $100 billion. Write offs for intangible property, for incorporation of shipping companies offshore, and hundreds of similar special interest tax breaks for individual companies and entire industries resulted in a cut in corporate Capital income tax revenues which more than offset any temporary increases in other taxes in 1986 affecting corporations and personal income taxes of the top 5% households.

George Bush Senior Targets the Middle Class

Under George H.W. Bush and Clinton the shift in taxes continued but at a slower pace.
The Reagan tax and defense spending policies of the 1980s had produced huge, record U.S. budget deficits. A second critical legacy of Reagan was the Savings & Loan scandal and the widespread bankruptcies of S&Ls throughout the country. The federal government had the burden of cleaning up that debacle, at a cost to the taxpayer of $500 billion to $1 trillion, depending on the estimates. 33 The onset of another recession in 1990-92 still further exacerbated the deficit problem. Bush senior’s administration was left to task of trying to cope with the growing deficit crisis. It turned to raising taxes.

But the focus and target of George Bush senior’s tax increases was not on the wealthy 1%. It was on those in 60% to 90% incomes ranges—families earning annually between $58,000 and $150,000 at the time. Their effective top income tax rate was raised to 33% to 37%, actually higher than the top rate for the wealthiest 1%. They would now also have to pay an additional 1.45% for the Medicare tax, which previously had a ceiling of $53,400 but now was raised to a $125,000 income base. Bush senior clearly avoided taxing his super-wealthy friends and instead went after professionals, mid-level managers, self-employed small business, and upper income level workers.

On the other hand, while tax rates were raised for some, between 1990 and 1993 tax loopholes and tax shelters were added back in by the dozens as amendments to various bills in Congress.

Bill Clinton’s ‘Republican Lite’ Tax Policy

For the Clinton period, 1992-2000, three further notable tax events took place.

The first was the diversion of the huge surpluses then beginning to appear in the Social Security fund as a result of the major hike in Social Security payroll taxes in 1983-84. Throughout the 1990s under both Bush senior and Clinton, payroll tax rates and the taxable income base were permitted to rise further. Larger and larger surpluses began to occur in the Social Security Trust Fund. During the 1992 election campaign both parties, Democrat and Republican, promised that the Social Security surplus would be reserved in a ‘lock box’ and not opened or diverted to other federal uses—such as covering the chronic and growing yearly U.S. general budget deficits.

But the ‘lock box’ was broken into every year during Clinton’s eight year term in office and the more than $1 trillion surplus it generated by 2000 was diverted to offset federal budget deficits.

The second notable tax event under Clinton was his decision in 1993 to provide some modest tax cuts in order to stimulate recovery from the Bush recession and the slow jobless recovery. When Clinton took office in 1993, modest tax rebates were given to workers with this intention. However, as rebates they were one time events and never structured in as permanent cuts and changes to the tax system—in contrast to that done for tax cuts for the wealthy under Reagan. At the same time taxes were increased for upper income levels of workers, professionals, and those in the 60%-90% income ranges. They were not raised, on the other hand, for those in the wealthiest 5%-10% category.

The third tax event occurred in Clinton’s second term. In 1997 yet a third benchmark tax bill called the Taxpayer Relief Act of 1997 was passed. This amounted to yet another, and in this case the largest, personal income tax cut for the rich and wealthy during the decade. It focused primarily on changing the capital gains tax.

The main features of the 1997 Clinton Act were a reduction in the top rate for capital gains from 28% to 20%, with a further reduction after 2001 (to 18%) for long term gains. The Estate tax minimum level was raised from $600,000 to $1 million, plus small business was provided with an Estate tax exemption for the first $1.3 million value of a business passed on to heirs. Gift taxes were also allowed to rise and the Alternative Minimum Tax for small businesses was also repealed. There were also other tax rules included in the 1977 legislation that were decidedly favorable to business. For example, the Corporate Alternate Minimum Tax, which would have raised taxes paid by corporations as their profits grew in the 1990s, was changed in 1993 and again in 1997 in order to prevent its impact on businesses. 34 Capping off the 1997 Act the following year was an addendum tax bill called the IRS Restructuring and Reform Act of 1998. It made it highly difficult for the IRS to challenge and collect back taxes in cases where the estate and gift tax provisions of the 1997 Act were involved.

To get these reductions through Congress various provisions were added to the 1997 Act that provided some benefit for working class taxpayers. The child tax credit was raised modestly and tuition tax credits were introduced, along with modest changes in IRAs. Individual company and industry tax breaks and shelters were also part of the legislation. In all, more than 800 changes to the tax code were included in the 1997 Act, a large number of them special interest company and industry changes.

George W. Bush’s tax cuts would look very much like the Clinton cuts in some ways. Minor concessions to working families in the form of credits and modest one time rebates, which collectively made up less than a third of the total tax cut, were similarly offered by Bush in his tax bills. But the overwhelming weight of the cuts went to the wealthiest taxpayers and to corporations. Bush’s 2004 corporate tax cuts also followed the Clinton trend set in 1977 by providing hundreds of pages (literally 600) containing specific tax cuts for individual companies and industries.

As with Bush, tax cuts for business and the wealthy were at the heart of the 1997 Clinton tax proposals. It was estimated the 1997 Act reduced taxes by an amount of $100 for every upper income household compared to only $5 for median income households.

With the passage of the 1997 Tax Act the wealthiest 1%-5%, who owned most of the publicly traded stock in the country, were now well poised to reap the benefits of the boom of 1996-2000. Clinton’s focusing in 1977 primarily on capital gains was not a mere coincidence. From 1996 on the stock markets began their record march upward, driven by the new technology industries where compensation to CEOs, executives, and top shareholders came not in the form of salaries but in stock options and shares. It would soon be time to ‘cash in’ on the speculative gains in stock prices. In addition, the latter half of the 1990s was a period of major real estate profits. The significantly reduced 1977 capital gains tax would allow realization of record gains from real estate as well.

Those within the Clinton administration maintained at the time that the impetus for the 1997 capital gains cuts was the desire to increase federal revenues. In the short run, they argued, a capital gains cut meant stockholders would ‘cash in’ and thus pay more taxes. This was true—but only over the very short run. And at the expense of eventually less revenues later in the longer run, which is what in fact occurred after 2000. In a way, Clinton tax policy in the area of capital gains contributed in a delayed fashion to the sharp fall in U.S. government revenues that would later occur under George W. Bush.

The true total estimate of the cost of collective tax cuts during the 1990s is even higher than official estimates. Not just the reductions in top rates for capital gains, estate and other income taxes on the wealthy were involved, but countless new tax loopholes and new tax shelters were passed during the decade as well. Due to the shelters and loopholes,

The number of individuals who filed income taxes
but did not pay a penny increased from 24 million
in 1990 to 29 million in 1997. This trend was the
opposite of the years 1950 to 1970 when those who
filed but paid no taxes declined by 3 million. 35

As Joseph Stiglitz, Nobel economist and head of Clinton’s Council of Economic Advisers in the 1990s, would admit much later that Clinton “raised taxes on upper-middle-income individuals who worked for a living, but he had lowered taxes on very rich individuals who made their money from speculation, and on CEO’s who were making millions from stock options…It was a pure gift to the rich”. 36

In a number of other ways Clinton’s 1997 Tax Relief Act was also a forerunner of Bush’s 2001 tax cut legislation. In particular, the Clinton Act introduced the idea of a major restructuring of Estate and Gift Taxes even before George W. Bush, producing huge tax savings for the richest 1% taxpayers. ‘Selling’ the Tax Act with sweeteners for the general public in the form of tuition credits and token IRA improvements was also a Clinton ‘first’, adopted later by George W. Bush. It might even be argued that Bush’s subsequent 2001 tax cut proposals were Clinton’s 1997 Tax Cuts simply “writ large”.

By the end of Clinton’s second term tax avoidance, both individual and corporate, as a result of spreading shelters and loopholes had become a scandal. According to IRS data

In 2000, 63% of all companies in the U.S. reported
they paid no corporate income tax from 1996
through 2000 on revenues totaling $2.5 trillion.

And the effective tax rate for the 37% of companies that did pay some taxes in 2002 was only 12%, compared to 18% as recently as 1995. Clinton’s 1997 tax bill and the many gifts it provided to the wealthy and to corporations had much to do with this dramatic tax avoidance trend.

George W. Bush 2001-2004: The Tax Revolution in High Gear

In each of the four years of George W. Bush’s first term major tax cut legislation was passed that overwhelmingly benefited the richest households, corporations, and capital incomes in general. The total dollar value of Bush’s first three tax cuts enacted between 2001-03 was initially estimated at more than $3.3 trillion. However, that $3.3 billion does not include the costs of interest payments due to the budget deficits created by the tax cuts. When interest on the deficit caused by the cuts and other indirect costs are included, the full cost of the Bush tax cuts rises to $4.5 trillion. 37

The Bush Plan Year One (2001): Slash Taxes on Personal Capital Incomes

Like Reagan before him, tax cuts were Bush’s first policy priority if elected. There were many other issues and programs discussed in the course of the 2000 elections campaign, but tax cuts were at the top. Once in office, major tax legislation was proposed by Bush within days of his inauguration in January 2001.

Bush’s first tax bill was called the Economic Growth and Tax Relief & Reconciliation Act of 2001, or EGTRRA for short. But as in the case of Reagan’s tax cuts in 1981-82 and promises of job creation twenty years earlier, the recession continued to deepen following the passage of Bush’s first tax cut in June 2001. Three years later jobs were still millions short of January 2001 levels when Bush first took office. 38

Both conservative and liberal think tanks alike estimate the lost revenue due to the 2001 tax cuts at approximately $1.35 trillion. 39 The $1.35 trillion does not include, moreover, interest costs of $383 billion due to increased debt service payments.

The total revenue loss and costs associated with the
Bush 2001 tax cut alone amount to more than $1.7
trillion through 2011, and $2.2 trillion if the cuts
were made permanent after that. “The funds that
finance the tax cut would be more than sufficient to
completely resolve the Social Security financing
problem through 2075”. 40

$875 billion of this $1.35 trillion was the result of cuts in personal income tax rates, especially for those taxpayers in the four top rates of 39.6% to 28%. These rates were reduced 1% each year for the next three. According even to the conservative think tank, The Heritage Foundation, this reduction in the top tax rates would affect at most only 4.7% of the 131 million taxpaying households at the time in 2001. 41 In contrast, more than 72% of tax households (95 million taxpayers) received no tax cut benefit at all from the rate reduction feature of the 2001 Bush Act. The 95 million taxpayers include not only virtually all working class taxpayers, but 70% of all small businesses and the self employed as well. 42

A second major tax cut element favoring capital incomes in the 2001 Act was a $138 billion further reduction in the Estate Tax. Once called the ‘Inheritance Tax’, then ‘Estate Tax’, and since 2001 the Bush spin has been to refer to is as the ‘Death Tax’. But of the roughly 2.5 million taxpaying heads of households who die each year in the U.S., barely 2400 families, or less than 0.1% of all families, were subject to the Estate tax prior to 2001. That’s before Bush’s further reduction in the Estate Tax. With 99.9 of families exempt today after the Bush cuts, it is nonetheless still called the ‘Death’ tax by radical tax cutters in Congress.

The trend toward eliminating the Estate Tax was begun in 1997 under Clinton. Bush merely took up where Clinton left off and accelerated the process of phasing out the Estate tax. Whereas Clinton raised the exclusion for the Estate Tax from $600,000 to $1 million and exempted small businesses with estates less than $1.3 million, Bush simply went one step further. He raised the exclusion to $3.5 million ($7 million per couple) and lowered rates on estate values above $7 million from 55% to 45%. What Clinton therefore began in terms of reducing Estate and Gift taxation, Bush finished by virtually eliminating Estate and Gift taxes altogether, providing another $138 billion windfall for the wealthiest 1% of taxpaying households.

To ensure the 2001 tax handout was supported by the public the 2001 tax act provided for a token $100 increase in the childcare credit, minor adjustments to education tax credits and a temporary reduction in the marriage penalty. Altogether these three elements amounted to around $265 billion over the decade, or about one-fourth of the total tax cut. This compares to the $1.013 trillion for income tax rate reduction, the estate and gift tax cuts which the top income group benefited from almost exclusively. The remainder of the $1.35 trillion in the 2001 Tax cuts were for minor changes in IRAs, adjustments to the alternative minimum tax, and other measures.

Nearly all sources admit the 2001 tax cut was skewed strongly toward the wealthiest taxpayers. The top 5% richest households—those with annual incomes on average of more than $373,000—received 47% of the total $1.35 trillion cut. The next richest 15% households received an additional 24% of the $1.35 trillion. That’s a total of approximately 6 million out of 132 million households. The remaining 126 million taxpaying households—the lower 80% of which are predominantly working class and earn less than $76,000 in annual incomes on average—were left to share the remaining 29% of the 2001 tax cuts. And much of that 29% would be absorbed by rising payroll taxes and major increases in state and local income, sales and residential property taxes.

The wealthiest taxpayers earning more than $147,000
a year in annual income will receive 71% of the total
2001 Bush tax cut, or nearly $1 trillion. 43

As a well-known tax economist summed up, “by a variety of reasonable measures, the (2001) tax cut is disproportionately tilted toward high income households”. 44

The following Table 2.3 summarizes the skewed distributional character favoring the wealthiest taxpayers in Bush’s first 2001 tax cut, the EG&TRRA.

TABLE 2.3

Distributional Effects of Bush 2001 Tax Cuts 45

Income Group Income Range Ave. Value of 2001 Share of
Percentile Ending At Tax Change Tax Cut

Top 1% — -$45,715 36.7%
Next 4% $373,000 -$3,326 10.7%
Next 15% $147,000 -$1,978 23.8%
Fourth 20% $72,000 -$951 15.3%
Third 20% $44,000 -$570 9.2%
Second 20% $27,000 -$368 5.9%
First 20% $15,000 -$67 1.1%

Source: William Gale and Samara Potter, “An Economic Evaluation of the Economic
Growth & Tax Relief Reconciliation Act of 2001, National Tax Journal, March 2002,
Tables 4 and 5.

The Bush Plan Year Two (2002): Expand Corporate Tax Subsidies

One of the largest areas of tax subsidy in the U.S. tax code involves what’s called corporate depreciation write-offs. The 2001 Tax Cuts focused primarily on capital incomes associated with the personal income tax, but it was quickly followed the next year with the Job Creation and Worker Assistance Act of 2002.

As in the case of its 2001 predecessor, the 2002 tax cuts created jobs in name only. Job losses accelerated in 2002 compared to 2001, even though the recession of 2001 officially ended by November 2001. 2002 may have been a recovery for those earning capital incomes, but not for workers who earn virtually all their income from wages and salaries and for whom jobs were continuing to disappear at a faster rate in 2002 and 2003 than in 2001 during the ‘official’ recession.

The jobless economic recovery phenomenon that began under Reagan and was repeated under Bush senior was once again underway by 2002. This time, under George W. Bush, it was an even slower jobs recovery than occurred during the two prior recessions. Jobless recoveries were becoming progressively more drawn out, with Bush’s 2001-03 the worst of the three recessions since 1980. Despite the jobless recovery in progress, Bush linked tax cuts with jobs once again in 2002. It was not the first time such a false claim had been made since 1980; nor would it be the last.

The 2002 Tax Act provided a new bonus depreciation deduction equal to 30% of the cost of new equipment. Now businesses could take the regular depreciation write off, plus 30% more. But even this was not all. In addition to the regular and the 30% bonus, there was an additional ‘Section 179’ expense deduction which permitted the full write off in the first year of the first $24,000-$59,000 of equipment costs. In other words, three layers of depreciation were now available to companies as a consequence of the 2002 Tax Act. Businesses in general and corporations in particular could now immediately write off—that is deduct the cost from their taxes owed—of up to two-thirds or more of the cost of equipment in the very first year. That compared with depreciation rules prior to 2002 that permitted writing off equipment over 15 years, not one year, with only one simple depreciation opportunity. Another huge change in 2002 allowed full depreciation on commercial buildings within five years instead of what was previously 39 years. 46

The 2002 Act also increased the amount of depreciation claimable on luxury SUVs by $4,600 in the first year. How this particular provision related to job creation is, of course, even more questionable.

Still another major element of the 2002 act benefiting corporations was a significant change in “Net Operating Loss’ rules. A loophole originally expanded under Reagan in the 1980s, NOL allows a company to re-file taxes and get refunds if its losses in a current year exceeded its tax claims in that same year. NOL means a company can ‘go back’, re-file tax returns for past years, and claim further refunds for those past years based on current year losses. It’s like allowing a worker who is unemployed in a current year to re-file his back taxes and get refunds on taxes paid in the past equal to the drop in his normal income in the current year due to unemployment. Of course, that’s not allowed for workers. But it is for corporations and businesses. This provision constitutes a ‘tax subsidy’ pure and simple.

In the 2002 Act the NOL provision was expanded, increasing from two to five the years over which a company could carry its losses backward to get refunds for previous taxes paid. The NOL carry back provision of the 2002 Act resulted in many corporations avoiding having to pay any taxes at all, despite attaining significant profits growth in that year.

Theoretically, depreciation tax cuts are supposed to generate investment in replacement plant and equipment faster than otherwise would be the case. In practice, depreciation is seldom linked to actual job creation. But that doesn’t stop businesses from claiming the tax write off since proof of job creation is not required and, in fact, proof of investment by the IRS is not even demanded in many cases. The benefits of faster write-off of equipment go directly to the corporate bottom line. When depreciation does result in actual equipment replacement, the greater productivity that results often eliminates the need to hire and create new additional jobs. Thus depreciation often means the destruction of jobs, not the creation of net new employment.

The focus on depreciation in the 2002 tax cuts was part of a long tradition of expanding depreciation write-offs since the 1960s and the Kennedy tax cuts. Every major tax cut over the past three decades has expanded the depreciation loophole for corporations. The result has been huge tax reductions for corporations and business in general and greater corporate net income as a result.

The Bush Plan Year Three (2003): Dividends, Capital Gains, & Accelerated Write Offs

Once more with the political spin machine in gear, Bush named the 2003 tax cut the Jobs and Growth Tax Relief and Reconciliation Act of 2003. But no sooner was the bill signed in June 2003 that the much heralded jobs recovery, predicted by Bush to create 300,000 jobs a month, began to stall. The Bush jobs recovery once again aborted in the second half of 2003 for a second time in three years.

The third year of the Bush Tax offensive revisited the 2001 and 2002 tax cuts and went even further in expanding tax cuts for the rich and for corporations by combining even more generous personal income tax reductions and corporate depreciation write-offs.

At the heart of the 2003 Bush tax cut were even more radical reductions in dividend and capital gains taxes, nearly all of which accrued to those with the highest incomes, plus a speeding up of the 2001 reduction in top individual income tax rates for the wealthy. On the corporate side, depreciation write offs and other tax subsidies were also accelerated.

Reductions in the top income tax rates scheduled for 2003 were now also made retroactive to 2001. The tax rate on dividend income, previously at 39.5%, was dramatically reduced to a maximum 15% rate. And the Capital Gains top rate was lowered further from 20% to 15% as well. When combined with the cuts in the estate tax, these measures reduced taxes on capital incomes and provided a record windfall for the top 5% of taxpaying households. As recently as1990 the top rate for the capital gains tax was 28%, nearly twice that in effect today.

On the corporate side of the 2003 tax cuts, the ‘Section 179’ depreciation-deduction allowance for businesses was raised from $25,000 to $100,000. A business could now deduct off the top in the first year $100,000 in spending on equipment, including software. In addition, the 30% ‘bonus’ depreciation write-off passed in 2002 was also raised significantly in 2003, to 50%. After the first $100,000 in write-offs, half of all remaining expenditures on business equipment could now also be written off. And after these two special write-offs, normal depreciation could also be taken on whatever cost of equipment purchases remained. These further expanded write-offs were estimated alone at around $30 billion in savings every year for businesses. 47

For the remaining 100 million taxpayers unable to enjoy such tax largesse, the 2003 tax cuts slightly improved the child credit, marriage penalty, and 10% bracket eligibility—but only temporarily. In contrast to the 2003 tax cuts’ huge reductions for dividends and capital gains, the provisions for child care, marriage penalty, and similar consumer elements of Bush’s 2003 proposals were made temporary for only two years in order to make the total cost of the 2003 tax legislation appear lower (and thereby no doubt to help sell the package to holdouts in Congress and to the public).

The child credit was raised from $600 to $1000 for 2003-04 but was set to revert back to $700 levels thereafter. The marriage penalty was improved, but also for 2003-05 only,
reverting back to previous levels in 2005. Similarly, the low income bracket was improved but only for two years. In contrast, tax cuts involving dividends, capital gains, top tax rates for the rich, and corporate write-offs and tax subsidies were etched in stone for the life of the tax act, until 2013.

The Bush tax cuts of 2002 and 2003 will result in a
reduction in corporate taxes amounting to at least
$414 billion for the period 2002 through 2013. 48

The official estimate of the revenue loss due to the 2003 personal income tax cut provisions (Dividends, Estate Tax, Capital Gains Tax) in the 2003 Act was $350 billion. But if provisions are made permanent through 2013, which is highly likely given the composition of the 2005 Congress, the personal income tax reductions are estimated at $800 billion.

Distributional Effects of the 2001-03 Tax Cuts

In terms of income distribution the 2003 tax cuts were even more generous to capital incomes than were the 2001 and 2002 tax cuts combined.

According to the Institute on Taxation and Economic Policy’s Tax Model the cumulative three years of Bush tax cuts (2001-2003) mean the top 20% richest taxpayers get more than 70% of the combined tax cuts in 2004. The wealthiest 1% of taxpayers do even better than the top 20%. They get 30% of the total tax cuts in 2004 and their share of the cuts rises to 39% by 2010. 49 In contrast, the bottom 80% income groups—mostly workers with average annual incomes no higher than $76,400 a year—get only 14% of the three years’ of tax cuts by 2004. And their share of the cuts not only do not grow by 2010 but drop from 14% to 10%. 50

In 2005 it is projected that of the more than $100 billion of the tax cuts taking effect that year, 73% will go to the top 20% of tax payers. Those with incomes over $1 million a year in 2005 will receive a tax cut of $135,000 a year. All those with incomes less than $76,400 will get about $350 on average with millions receiving no tax cuts at all.

Stated another way, as skewed and biased the Bush tax cuts are, this skew and bias grows worse over time between 2003-2013. Tax cuts for corporations and the super rich are ‘back loaded’ in the Bush cuts. The worse is yet to come.

The following two tables show this highly skewed character of the Bush personal income tax cuts, 2001-2003. Table 2.4 illustrates the ‘Shares of the Tax Cuts by Income Groups’ for three select years. Table 2.5 shows the ‘Effect of the Tax Cuts on After-Tax Incomes’ of the different income groups.

TABLE 2.4

Shares of Tax Cuts 2001-03 by Income Groups 51

Income Average Average Share Share Share
Income Group Range Income Tax Cut 2004 2007 2010

Lowest 20% <$16K $9,800 -$61 0.9% 0.9% 0.7%
Second 20% $16-$28K $21,400 -$327 4.6% 4.0% 3.6%
Middle 20% $28-$48K $35,300 -$586 8.7% 6.6% 5.9%
Fourth 20% $45-$73K $57,400 -$967 15.5% 11.9% 10.6%
Next 15% $73-$145K $97,500 -$1,538 25.4% 22.1% 19.2%
Next 4% $145-$337K $200,100 -$2,907 15.0% 18.9% 21.2%
Top 1% $337K or more $938,000 -$66,601 29.8% 35.5% 38.9%

Source: Institute on Taxation and Economic Policy Tax Model, June 2003

The above table 2.4 shows that while the richest 20% will get just over 70% of the tax cut share in 2004, their share will rise considerably by 2010 to nearly 80% of the total cuts. The data also illustrate that the approximately 71% share going to the wealthiest 71% in the 2001 tax cuts, noted previously above, continued in roughly the same distributional mix in the combined tax cuts from 2001 through 2003.

TABLE 2.5

Percent Total After-Tax Income 52
(Before & After 2001-03 Tax Cuts)

Income Group Before After Percent Change

Lowest 20% 4.0% 3.9% -0.1%
Second 20% 7.8% 7.7% -0.1%
Middle 20% 12.1% 12.0% -0.1%
Fourth 20% 19.3% 19.2% -0.1%
Next 15% 24.3% 24.1% -0.2%
Next 4% 13.8% 13.6% -0.1%
Top 1% 18.8% 19.6% +0.8%

Source: Institute on Taxation and Economic Policy Tax Model, June 2003. Figures
do not include corporate taxes, payroll taxes or state and local income taxes.

Table 2.5 shows it is clear that only the richest 1% have a significant gain in after tax income due to the Bush tax cuts. That top 1% wealthiest taxpayers +0.8% gain is equivalent in dollar terms to $1.078 Trillion in tax cuts from 2001 to 2010 alone. 53 In other words, the wealthiest 1% gain at the relative expense of the other 99%.

The Brookings and Urban Institute’s Tax Policy Center estimates the annual transfer in income to the rich and super rich flowing from the Bush 2001-2003 tax cuts is $113 billion a year from 2003 through 2013. And this does not even include the Corporate Tax cuts of 2004.

The cost of the 2001-03 tax cuts is estimated at $3.4 trillion for the first decade, while the total impact of the Bush 2001-2003 tax cuts when made permanent through 2075 is $11.6 trillion—45% of which will go to the wealthiest 5% of taxpayers and 70% to the wealthiest 20%. Once again, these numbers reflecting after-tax income redistribution do not include the corporate tax cut provisions in the 2004 tax act passed in late fall 2004. Nor do they address the income redistribution occurring before taxation even begins. As two highly respected economists in the field of tax policy, William Gale and Peter Orszag, have recently noted, “all the proposed tax changes are taking place against a backdrop of increasingly unequal pretax income that has continued largely unabated since the late 1970s.” 54

Shelters: Reducing Taxes Before the IRS Gets To See

Most assessments of the distributional effects of taxes and relative tax burdens do not consider the amount of taxable income that the wealthy and corporations ‘put aside’ (i.e. shield) as a result of tax subsidies and tax shelters. In recent decades more and more pre-tax income is shielded and never allowed to enter the tax system and tax determination process.

The cost of the Bush tax cuts above do not include the proliferation of countless tax shelters building up over the last two decades prior to 2004, and the new shelter provisions contained in the 2004 Act, all of which skim pre-tax income off the top before IRS tax rules and procedures even come into play. Like a mafia-run casino, a certain percentage of revenues, especially those earned offshore in subsidiary operations or foreign branches of a corporation, are put aside. They may even be run through the corporate calculating machine in a back-room in Bermuda, or some Caribbean bank. Whichever the case, they are not even considered in the process of determining a company’s taxation. Not even the US government has an accurate estimate of how much is shielded in pre-tax income, especially for corporate income generated or held offshore. A similar difficulty exists for estimating accurate corporate depreciation claims when companies ‘mix’ their U.S. and foreign business.

The scope and magnitude of the pre-tax skimming is indicated in that relatively small portion of foreign tax shelters for U.S. companies and wealthy individuals that get reported. 55

One of the biggest scandals of Bush’s first term was how big U.S. accounting companies advised and urged their corporate clients to deny their U.S. citizenship and relocate, on paper, to Bermuda. In other words to become a foreign company in order to shelter and avoid U.S. taxes. Yet the Bermuda connection represents only “a tip of a vast iceberg of corporate offshore tax sheltering—all designed to shift U.S. profits, on paper, outside the United States”. 56 Estimated at more than $50 billion a year in Bermuda-based tax losses to the U.S. Treasury in 2002, corporate tax sheltering extends well beyond Bermuda and has gone global.

In 1983 offshore tax havens sheltered $200 billion.
Today that total has grown to more than $5 trillion.

Of 370,000 corporations registered in Panama, only 340 bothered to file income tax reports in the US. And according to a study by the Federal Reserve Bank of New York, U.S. deposits in the Cayman Islands tax haven amount to more than $1 trillion and are growing by $120 billion a year.

Instead of working to reduce tax shelters, the Bush tax radicals in the U.S. House of Representatives have been doing all they can to expand them. In 2003 the Chairman of the Ways and Means Committee, Bill Thomas, for example, publicly declared he favored an expansion of offshore tax sheltering and proposed amendments that would promote $83 billion in additional offshore tax avoidance in the corporate income tax cut bill introduced at the end of that year. 57

Why Have Payroll Taxes Not Been Cut?

With all the broad cuts in taxes on personal incomes and the corporate income tax, it is perhaps at least curious why cuts in the payroll tax have been so assiduously avoided by Bush and his radical friends in Congress? The answer, however, is not so difficult. There are at least three major reasons why payroll taxes are not reduced.

First, payroll taxes have created trillion dollar surpluses in the Social Security Trust fund since 1984. Those surpluses are politically convenient for Bush, as they have been for all his predecessors since Reagan. That Trust Fund surplus amounts to $1.6 trillion since 1984 through 2004, not counting several trillions more in interest earned. That surplus has been ‘permanently borrowed’ by the U.S. government every year to help offset the chronic U.S. general budget deficits that have averaged hundreds of billions each year since 1981. Cutting payroll taxes would mean less to borrow and therefore even greater budget deficits each year than now occur.

Second, the continued growth of payroll tax revenues is necessary for Bush to implement his plan to privatize Social Security over the next decade. The Social Security Trust fund is expected to generate another $1.1 trillion surplus between now and 2018. Cutting payroll taxes would require Bush to propose even more borrowing from bond markets to finance his Private Investment Accounts for Social Security or cutting benefits for retirees to cover the transition costs for the privatization of Social Security. These issues are addressed in more detail in Chapter Ten on Social Security in this book. For the moment, it is sufficient to note that, in all likelihood, payroll taxes will be raised by some amount as part of a political settlement in Congress should Bush’s plan pass.

Third, payroll taxes include 12.4% for Social Security plus another 2.9% for Medicare funding. Within Medicare there are two plans, ‘Plan A’ which covers hospitalization expenses, and ‘Plan B’ which covers non-hospitalization medical costs. At present, funds are transferred every year in large amounts from Plan A where there is a surplus to Plan B where there is a major deficit. Growing payroll tax revenues allow this transfer to continue. It allows Congress not to have to address raising taxes to properly finance Plan B. If it did, there would be less available for income and corporate tax cuts. Were the 2.9% Medicare tax reduced, in other words, the transfer of funds from Plan A to Plan B would no longer be possible and tax increases would be necessary. Congressional tax radicals would face an untenable political situation of permitting tax cuts for their rich friends and corporations while they refused to provide funds for elderly Americans’ doctor visits. Allowing Medicare payroll tax revenues to rise conveniently allows with game to continue. Cutting the Medicare payroll tax rate would jeopardize it.

The Bush Plan Year Four (2004): Manufacturers & Multinationals Have Their Turn

Conservatives continually rail against ‘double taxation’ of the rich—aimed first at their companies and then at their incomes derived from those same companies. What the Bush record shows, however, is that the U.S. under Bush has been experiencing a new policy of ‘double reverse taxation’—record tax cuts for the rich as individuals as well as tax cuts for their companies.

The first four years of Bush’s administration witnessed an alternating shift in tax policy focus. Initially, Bush’s 2001 proposals targeted tax cuts for individuals. In 2002 the focus was primarily on small business and corporate tax cuts. In 2003 once again the tax cuts mostly reduced taxes for wealthy individuals by lowering capital gains, reducing dividends, phasing out estate taxes, and the like. In 2004 the focus shifted back yet again almost exclusively to further tax cuts for corporations—for large multinational corporations in particular.

The corporate tax top rate alone declined from 1988 to 2003 from 27% to 17%. But this was only part of the picture. Total corporate tax revenues were reduced by various other means as well.

A study done by the Institute on Tax and Economic Policy (ITEP) in September 2004, on the eve of the passage of the 2004 Corporate Tax Cut Act, showed the corporate tax provisions in Bush’s 2002 and 2003 tax cuts amounted to $75 billion for the period, 2002-04, for the largest 275 corporations in the survey. While pretax profits of these 275 corporations went up 26% between 2001-03, “over the same period corporate income tax payments to the federal government fell by 21%”. 58 And this was before the additional major corporate tax breaks in the 2004 tax cut bill were passed.

The ITEP study focused not only on top tax rates but also on tax subsidies—i.e. the tax rebates these 275 companies received from 2001 through 2003. In at least one of the three years 82 of the 275 corporations paid no taxes at all due to subsidies, and they received significant tax rebates even though these corporations were highly profitable. Some of the more astounding examples of tax rebates received by profitable companies from the U.S. treasury are noted in Table 2.6 below.

TABLE 2.6

Corporate Tax Rebates 59
Company Profits Tax Rebates Received

General Electic $11.9 billion -$33 mil.
Pfizer $6.1 bil. -$168 mil.
Verizon $5.6 bil. -$685 mil.
AT&T $5.6 bil. -$1.39 billion
Wachovia Bank $4.1 bil. -$164 mil.
Metlife $2.9 bil. -$67 mil.
JP Morgan Chase $2.5 bil. -$1.38 billion
Lehman Brothers $1.8 bil. -$39 mil.
Bank of New York $1.7 bil. -$29 mil.
Boeing $1.0 bil. -$1.7 billion

Source: Robert McIntyre and T.D. Coo Nguyen, “Corporate Income
Taxes in the Bush Years”, Center for Tax Justice, September 2004.

Tax rebates, corporate tax subsidies, expansion of offshore tax havens and tax shelters, the foreign tax credit, accelerated depreciation and investment credits, and scores of other special interest tax loopholes by the end of 2003 all played an important part in the freefall in the corporate income tax’s contribution to total federal taxes.

The corporate income tax’s contribution to total U.S.
tax revenues has declined from more than 20% in
the 1960s to 11% in the 1980s under Reagan, and
now to barely 6% under George W. Bush. 60

With the share of corporate income taxes at 6% at the close of 2003, yet another corporate tax cut, the Corporate Tax Reduction bill of 2004, was introduced. It provided a further major business tax cuts that would be called “the largest business tax relief program in more than a decade”. 61

Having just passed the 2003 tax cuts targeting personal incomes, capital gains, dividends, and estates in June of that year, Bush publicly declared in August 2003 he would seek no
further tax cuts. But within days tax radicals in the House of Representatives immediately proposed an additional $128 billion in corporate tax cuts, which was named once again ‘The American Jobs Creation Act of 2004’. The 2004 proposals originated in the need to repeal of U.S. export subsidies that were declared illegal by the World Trade Organization. The illegal U.S. export subsidies resulted in counter-tariffs imposed by European and other nations on the U.S.. This dispute served as an excuse to open corporate tax cut floodgates once again, allegedly to compensate for the eventual repeal of the export subsidies to comply with the WTO. But that compensation would end up a very minor part of the total corporate tax cut bill.

No fewer than three separate corporate coalitions lobbied for their preferred versions of tax cuts, bidding up a Congress stumbling over itself trying to satisfy all corporate comers.

One corporate lobbying group, the ‘Coalition for Fair International Taxation’, led by General Electric, sought to increase the foreign profits tax exemption, which allows US corporations doing business abroad to subtract from their US taxes the amount they pay in foreign taxes. As it would turn out, GE would prove to be one the biggest beneficiaries of the tax bill when passed. 62 A second group, led by Boeing and Microsoft, called the ‘Coalition for U.S. Based Employment’, lobbied for a $60 billion permanent reduction in the corporate tax rate, from 35% to 32%, to make up for the repeal of the export subsidy. A third, led by Hewlett-Packard, pushed for the one year ‘tax holiday’ on an accumulated $500 billion in profits made abroad that corporations continued to hold offshore to avoid paying US taxes. By mid-year 2004 all three groups ended up with nearly everything they each sought in the combined tax cut legislation that came before the House and Senate for a vote.

The pork barrel got even larger as other special interests and lobbyists jumped on board over the summer. A parallel $31 billion tax cut for oil and energy companies, which failed to pass in November 2003 by only two votes in Congress, was resurrected as a $19 billion add on to the general corporate tax cut by mid-2004. More than $10 billion was added for the Tobacco companies, to compensate them for tobacco subsidies previously received from the U.S. government and taxpayers. Other special interest provisions were thrown in for the wine industry, aerospace, and the child tax credit extended to families with annual incomes up to $309,000 by right wing tax radicals in the House of Representatives. By summer 2004 the various corporate and special interest tax cuts proposed amounted to $155 to $170 billion, depending on the House or Senate versions.

Initially the Bush legislative strategy in the summer of 2004 was to hold ‘hostage’ those modest provisions (child care, marriage penalty, 10% bracket, etc.) of the 2001 and 2003 laws that would benefit working families. Bush insisted tax cut provisions for the rich and super rich would have to be made permanent for the next 10 years first. Otherwise, he declared, he would veto any bill.

But as the drums of the November 2004 elections grew louder, in July 2004 Republican leaders in Congress attempted to cut a deal with moderates permitting a two-year extension of the modest provisions. This would have allowed the immediate extension of the child care credit, the marriage penalty, and other relatively minor benefits affecting working families,

posted March 15, 2017
The Ryan-Trump Healthcare Act: Economic Consequences

While Republicans on the Right and the Far Right wrangle over whether to repeal the Obamacare Affordable Care Act (ACA), or just revise it, the Ryan proposal does both. How can that be? Revise and yet repeal?

The repeal is every dollar and cent that the Obamacare Act taxed the rich and their corporations. The rest, the non-funding features is what’s being revised.

Only in the past 24 hours is the corporate press even discussing the tax increases under the ACA now being totally repealed by the Ryan-Trump bill. That’s because they can no longer ignore it, since it was reported today by the Congressional Budget Office (CBO). But they knew the details weeks ago. So did the Democrats in Congress. Yet they said nothing. How much in tax cuts for the wealthiest individuals and their corporations are we talking about? Over $590 billion over the decade.

About a fourth of the total cost of the ACA, was paid by taxes on wealthy households. The Ryan-Trump proposal calls for a repeal of the 3.8% tax on earned income of the wealthy. Another repeal of the tax on net investment income. Both are gone by the end of this year. Add to that the following business taxes are also now totally repealed: the tax on prescription drug makers that provided $25 billion in annual revenue. The $145 billion repeal of the annual fee on Insurance companies. And the $20 billion on medical device makers. That’s another $190 billion tax cuts for businesses. But there’s still more ‘tax’ repeal. The employer mandate is also repealed. If companies didn’t provide their own employer health insurance, they too had to pay into the system. The CBO report estimates the mandates—employer and individual (also repealed) amounted to $156 million in 2017 alone. That’s inflation adjusted. So the market price is at least 5% higher, for a total of around $165 million. The mix in the employer-individual contribution from the mandates, let’s assume, is 50-50. So the corporate tax cut is at least $82.5 million from the repeal of the employer mandate. Added all up, the total reductions for businesses and the wealthy, according to the CBO’s own estimate, is $592 billion, “mostly by reducing tax revenues”.

What we have in exchange for the $592 billion tax cuts on the rich is a de facto tax hike on the 10 million plus consumers who bought plans on the exchanges, in the form of the elimination of the subsidies that had been provided to help them purchase plans. Subsidy repeal is just a tax hike by another name. How much ‘savings’ per the CBO from the repeal of all premium subsidies and assistance under the ACA? CBO estimates $673 billion.

So the Ryan-Trump Taxman taketh $673 billion from the 10 million consumers who bought plans and he giveth $592 billion to the wealthy and their corporations that need it more than the rest of us, right?. After all, their corporate profits only tripled since 2010 and the wealthy captured only 95% of all the national income gains since 2010, according to studies by the University of California, Berkeley economists (based on IRS data). And the rest of us have done so much better! (By the way, here’s another business-health care trivia item: companies that provide employer health insurance get to write off their contribution costs. Their workers don’t get to write off their share deducted from their wages, but the companies do. Their tax cut savings amounts to $260 billion a year). Employers already providing health plans were supposed to pay an excise tax on their plans, but even the Obama administration put that one off, so the Ryan-Trumpcare delay of that excise tax hike until 2026 is not really a new tax cut or part of the $592 billion.

As the slick marketers on the online sales channels say, ‘But wait, there’s more. There’s a two for one offer!’ The double whammy offer in the Ryan-Trumpcare plan is an additional whopping $880 billion cut in Medicaid spending by the government. Another 10 million of those citizens most in need of health care services—composed mostly of the elderly, the disabled, and single mothers heads of households—will be now thrown under the Trumpcare bus as virtually the entire change in Medicaid will be, yes, repealed.

The ‘Multiplier Effect’ Is Bad News for Ryan-Trumpcare

So how does the $673 billion in subsidy assistance spending cuts and $880 billion in Medicaid spending cuts, plus $592 billion in wealthy-corporate tax cuts, and the new spending of $303 billion, impact the US economy in net terms? It will be a big negative hit on economic growth as measured in Gross Domestic Product terms. Here’s why.

There’s this thing called the ‘multiplier effect’ in calculating GDP. It’s not a theory. It’s an empirical observation. A fact. A dollar in spending gets spent several times over and the total at the end of the year adds up to more than a dollar added to GDP. Spending on lower and middle income groups results in a bigger ‘multiplier’. Spending on the wealthier a smaller. They save more than the net change in income they receive than do lower income households. Furthermore, empirical observation shows that tax cuts of any kind (business, investor, or consumer) have less a ‘multiplier’ effect than do spending, and tax cuts for the wealthy and for corporations even less an effect than consumer tax cuts. Ok. That’s all ‘economics 101’ but it’s true.

The Ryan-Trumpcare plan gives the wealthy and their corporations $592 billion in tax cuts. Will they spend all that? No. Their ‘multiplier’ is about 0.4 according to best estimates. Give the rich a tax cut, in other words, and they’ll spend 40% of it. That 40% means they will spend in the US economy about $230 billion over the course of the decade, or $23 billion a year on average due to their tax cuts. (They may spend more offshore, of course, especially the corporations, but offshore spending adds nothing to US economy and GDP growth).

Unlike the wealthy and corporations, the average consumer has a multiplier of at least 2.0, and the poor on Medicaid higher than that. But let’s conservatively estimate the government spending multiplier for consumers on the $673 billion spending for insurance subsidies and the $880 billion in Medicaid spending is only 2.0. That means a contribution to GDP of $1.55 trillion ($673 billion plus $880 billion) is times two, or $3 trillion total over the decade. That’s $300 billion a year contribution to GDP. But that subsidies and Medicaid spending is now repealed so it’s a reduction of $3 trillion, or $300 billion a year.

In net terms, we therefore get $23 billion a year in wealthy-corporate added contribution to GDP due to their tax cuts and $300 billion a year reduction in GDP due to the repeal of the subsidies and Medicaid. That’s a net reduction of about $275 billion a year from GDP, which occurs in 2018 and every year thereafter (on average) until 2026.

Based on the US current $20 trillion annual GDP, $275 billion annual net reduction is a little over 1% of the total GDP growth, which according to official government estimates is about 2% annually. The annual reduction in GDP from the multiplier and secondary effects is likely around .2% per year. That reduces annual US GDP to 1.8%.

That GDP reduction includes further ‘knock on’, secondary effects as well.

Premium and Price Inflation

The Ryan-Trumpcare proposal will almost certainly result in higher premiums and higher out of pocket costs for healthcare services. The higher inflation will reduce consumer household disposable income. That will leave households less income to spend on other items. Since the inflation in health care spending adds nothing to ‘real’ GDP, there’s no gain in GDP from that. But the reductions in household other items, in order to afford paying for the higher cost health insurance, will reduce ‘real’ GDP. So the net inflationary effect is significantly negative, depending on how much health insurance premiums (and deductibles, copays, etc.) actually rise.

Ryan and Republicans claim that premiums are already rising rapidly under Obamacare, which is true, especially the past year. But that is likely to continue. The Health Insurance companies have been ‘gaming’ the system and the Obama administration did little to stop them. They will continue to do so in the transition to Ryan-Trumpcare and under it going forward as well.

The Ryan-Trumpcare proposal allows insurance companies to hike premiums for older customers up to five times more than premiums charged to younger customers. That’s up from three times under Obama. Trumpcare also now allows insurers to offer ‘barebones’ plans, with lower premiums but with hardly any coverage whatsoever. This trend was a growing problem under Obamacare, as consumers were signing up for super-high deductible plans ($3 to $5,000 per year) just to be able to afford the lower premiums. They were essentially ‘disaster-only’, called “leaners”, super-stripped down health care plans. The new ‘barebones’ policies will cover even less. This less and less coverage for the same (and sometimes higher) premium is in effect a price hike. Less for the same price is a de facto price hike in premiums. The Trumpcare plan also now permits insurers to charge a 30% surcharge for consumers who drop and then re-enroll. It assumes that premiums will decline, according to the CBO, after 2020. Sure, after 30 years of constant health insurance premium hikes, sometimes double digit, now the insurance companies four years from now will start reducing premiums! If anyone believes that, there’s a bridge on sale in Brooklyn they might look into.

What About the US Budget and Deficits?

The Ryan-Trumpcare proposal takes $673 billion and $880 billion out of spending by government and households (not counting ‘knock on’ negative effects on household consumption) and another $592 billion out in tax cuts for the wealthy and their corporations. That’s a $2.145 trillion hit to the US budget over the next decade. The Trumpcare advocates claim the wealthy-investor-corporate tax cuts will stimulate the economy and therefore tax revenues. But the 0.4 multiplier effect suggests only a fraction of that will positively affect the economy and tax revenue growth.

The Trumpcare advocates also claim their plan proposes to give tax credits costing $361 billion to consumers to buy insurance. But that starts only in 2020, so it’s really only $180 billion averaged over the decade. They further point out that another $80 billion in spending will occur in a grant for New Patient State Stability Fund to the States to spend, plus another $43 billion in government spending to hospitals to cover Medicare costs. So that’s about a total of $303 billion new spending to offset the $1.553 trillion spending cuts. Even if the spending additions of $303 billion have a multiplier of 2.0, the net deficit and national debt increase of Ryan-Trumpcare is still more than $900 billion.

So there’s hundreds of billions in net loss from the tax cuts and the net spending. That means massive increases in the US Budget deficit, and consequent rise in US debt, now more than $20 trillion. The CBO summarizes the net deficit growth of only $336 billion. That is ridiculously low.

It should be noted that this net deficit, driven by tax cuts for the wealthy and their corporations, will be quickly followed by another, more massive general corporate tax cut now working its way through Congress as well. That one is estimated to cost more than $6 trillion over the coming decade. It and the Trumpcare tax cuts are in addition.

And both Trumpcare and the daddy of all tax cuts coming follows on more than $10 trillion in business-investor-wealthy tax cuts that have already occurred under George W. Bush and Barack Obama.

No wonder the wealthiest 1% households captured 95% of all income gains since 2009? And if Ryan-Trump have their way, they’ll get to keep at least that much for another decade. America is addicted to tax cuts for the rich, perpetual wars around the world, and the destruction of decent employment and what’s left of any social safety net for the rest. The current political circus in Washington is just the latest iteration of the policy shift to the wealthy and their corporations at the expense of the rest. There’s more yet to come. And it will be even worse.

Dr. Jack Rasmus is author of the forthcoming book, ‘Central Bankers on the Ropes’, by Clarity Press, June 2017, and the recent 2016 publications, also by Clarity, ‘Looting Greece: A New Financial Imperialism Emerges’, and ‘Systemic Fragility in the Global Economy’. He blogs at jackrasmus.com, where reviews are available.

(For a further analysis of the Ryan-Trumpcare proposal in comparison to the Obamacare ACA it will replace, listen to the Alternative Visions radio show of March 10, at: http://alternativevisions.podbean.com)

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