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Only in the past 24 hours is the corporate press even discussing the tax increases under the ACA now being totally repealed by the Ryan-Trump bill.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 Add to that the following business taxes are also now totally repealed: the tax on prescription drug makers that provided $25 billion in annual revenue.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 The employer mandate is also repealed.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 The CBO report estimates the mandates—employer and individual (also repealed) amounted to $156 million in 2017 alone.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)
Trump is not a new phenomenon. He is the latest, and most aggressive to date, repackaging of corporate-radical right attempts to reassert corporate hegemony and control over the global economy and US society. His antecedents are the policies and strategies of Nixon, Reagan and Gingrich’s ‘Contract for America’ in the 1990s.
Trump has of course added his ‘new elements’ to the mix. He’s integrated the Tea Party elements left over from their purge by Republican Party elites after the 2012 national elections. He’s unified some of the more aggressive elements of the finance capital elites from hedge funds, commercial real estate, private equity, securities speculators and their ilk—i.e. the Adelsons, Singers, Mercers, and Schwarzman’s. He’s captured, for the moment at least, important elements of the white industrial working class in the Midwest and South, co-opted union leaders from the building trades, and even neutralized top union leaders in some manufacturing industries with fake promises of a new manufacturing renaissance in the US. He’s firmly united the gun lobby of the NRA and the religious right now with the Breitbart propaganda machine and the so-called ‘Alt-Right’ fringe.
Trump is a political and economic reaction to the crisis in the US economy in the 21st century, which the Obama administration could not effectively address after the 2008-09 crash. Trump shares this historical role with Nixon, who was a response to another decline in US corporate-economic political power in the early 1970s; with Reagan who was a response to the economic stagnation of the late 1970s; and with the ‘Contract for America’, a program associated with a takeover of Congress by the radical right in 1994, after the US housing and savings and loan crash and recession in 1989-1992. All these antecedents find their expression in the Trump movement and the policy and program positions that are now taking form under the Trump regime.
American economic and political elites are not reluctant to either change the rules of the game in their favor whenever warranted to ensure their hegemony, targeting not only foreign capitalist competitors when their influence grows too large but also potential domestic opposition by workers and unions, minorities, and even liberals who try to step out of their role as junior partners in rule.
This restructuring of rule has occurred not only in the early 1970s, early 1980s, mid 1990s, but now as well post Obama—i.e. a regime that failed to contain both foreign competition and domestic restlessness. US elites did it before in the 20th century as well, on an even grander scale in 1944-47 and before that again during the decade of the first world war.
What’s noteworthy of the current, latest restructuring is its even greater nastiness and aggressiveness compared to earlier similar efforts to restore control.
Trump’s policies and strategies reflect new elements in the policy and politics mix. He’s rearranged the corporate-right wing base—bringing in new forces and challenging others to go along or get out. New proposals and programs reflect that base change–i.e. in immigration, trade, appeals to white working class jobs, economic nationalism in general, etc. But Trump’s fundamental policies and strategy share a clear continuity with past restructurings introduced before him by Nixon and Reagan in the early 1970s and 1980s, respectively.
Like his predecessors, Trump arose in response to major foreign capitalist and domestic popular challenges to the Neoliberal corporate agenda. Nixon may have come to office on the wave of splits and disarray in the Democratic party over Vietnam in 1968, but he was clearly financed and promoted by big corporate elements convinced that a more aggressive response to global economic challenges by Europe and domestic protest movements were required. European capitalists in the late 1960s were becoming increasingly competitive with American, both in Europe and in the US. The dollar was over-valued and US exports were losing ground. And middle east elites were nationalizing their oil fields. Domestically, American workers and unions launched the second biggest strike wave in US history in 1969-71, winning contract settlements 20%-25% increases in wages and benefits. Mass social movements led by environmentalists, women, and minorities were expanding. Social legislation like job safety and health laws were being passed.
Nixon’s response to these foreign and domestic challenges was to counterattack foreign competitors by launching his ‘New Economic Program’ (NEP) in 1971 and to stop and rollback union gains. Not unlike Trump today, the primary focus of NEP was to improve the competitiveness of US corporations in world markets.
• To this effect the US dollar was devalued as the US intentionally imploded the post-1945 Bretton Woods international monetary system. Trump wants to force foreign competitors to raise the value of their currencies, in effect achieving a dollar devaluation simply by another means. The means may be different, but the goal is the same.
• Nixon imposed a 10% import tax, not unlike Trump’s proposed 20% border tax today.
• Nixon proposed subsidies and tax cuts for US auto companies and other manufacturers; Trump has been promising Ford, Carrier Corp., Boeing and others the same, in exchange for token statements they’ll reduce (not stop or reverse) offshoring of jobs.
• Nixon introduced a 7% investment tax credit for businesses without verification that he claimed would stimulate business spending in the US; Trump is going beyond, adding multi-trillion dollar tax cuts for business and investors, while saying more tax cuts for businesses and investors is needed to create jobs, even though historically there’s no empirical evidence whatsoever for the claim.
• Nixon froze union wages and then rolled back their 1969-71 20% contract gains to 5.5%; Trump attacks unions by encourage state level ‘right to work’ business legislation that will outlaw workers requiring to join unions or pay dues.
• Nixon accelerated defense spending while refusing to spend money on social programs by ‘impounding’ the funds authorized by Congress; Trump has just announced an historic record 9% increase in defense spending, while proposing to gut spending on education, health, and social programs by the same 9% amount.
• Nixon’s economic policies screwed up the US economy, leading to the worst inflation and worst recession since the great depression; So too will Trump’s.
Similarities between Nixon and Trump abound in the political realm as well.
• Nixon fought and railed against the media; so now too is Trump. The only difference was one used a telephone and the other his iphone.
• Nixon declared he had a mandate, and the ‘silent majority’ of middle America was behind him; Trump claims his ‘forgotten man’ of middle America put him in office.
• Nixon bragged construction worker ‘hard hats’ backed him, as he encouraged construction companies to form their anti-union Construction Industry Roundtable’ group; Trump welcomes construction union leaders to the White House while he supports reducing ‘prevailing wage’ for construction work.
• Nixon continually promoted ‘law and order’ and attempted to repress social movements and protests by means of the Cointelpro program FBI-CIA spying on citizens, while developing plans for rollout in his second term to intensify repression of protestors and social movements; Trump tweets police can do no wrong (whom he loves second only to his generals)and calls for new investigations of protestors, mandatory jail sentences for protestors and flagburners, and encourages governors to propose repressive legislation to limit exercise of First Amendment rights of free assembly.
• Trump’s also calling for an investigation of election voting fraud, which will serve as cover to propose even more State level limits on voters rights.
• Nixon undertook a major shift in US foreign policy, establishing relations with Communist China—a move designed to split the Soviet Union (Russia) further from China; Trump is just flipping Nixon’s strategy around, trying to establish better relations with Russia as a preliminary to intensifying attacks on China.
• Anticipating defeat in Southeast Asia, Nixon declared victory and walked away from Vietnam; Trump will do the same in Syria, Iraq and the Middle East.
• The now infamous ‘Powell Memorandum’ was written on Nixon’s watch, (within days of Nixon’s August 1971 NEP announcement)—a plan for corporate America to launch an aggressive economic and social offensive to rollback unions and progressive movements and to restore corporate hegemony over US society; an equivalent Trump ‘Bannon Memorandum’ strategic plan for the same will no doubt eventually be made public after the fact as well.
• Nixon was a crook; so will be Trump branded, but not until they release his taxes and identify payments (emoluments) received by his global businesses from foreign governments and security services. But this won’t happen until corporate America gets its historic tax cuts, deregulation, and new bilateral free trade agreements from Trump.
The parallels in economic policy and political strategy are too many and too similar to consider merely coincidental. Nixon is Trump’s policy and strategy mentor.
Similar comparisons can be made between Trump and Reagan, given a different twist here, a change in emphasis there.
• Reagan introduced a major increase in defense spending, including a 600 ship navy, more missiles and nuclear warheads, and a military front in space called ‘star wars’; Trump loves generals and promises them his record 9% increase in war spending as well, paid for by equal cuts in social programs.
• Reagan introduced a $700 billion plus tax cut for business and investors in 1981, and an even more generous investment tax credit and accelerated depreciation allowances (tax cuts); Trump promises to cut business tax rates by half, end all taxes on their offshore profits, end all inheritance taxes, keep investor offshore tax loopholes, etc.—more than $6 trillion worth– while eliminating wage earners’ tax credits.
• Reagan cut social spending by tens of billions; Trump has proposed even more tens of billions.
• Reagan promised to balance the US budget but gave us accelerating annual budget deficits, fueled by record defense spending and the tax cuts for business of more than $700 billion (on a GDP of $4 trillion), the largest cuts in US history up to that time; Trump’s budget deficit from $6 trillion in business tax cuts and war spending escalation will make Reagan’s pale in comparison.
• Reagan’s trade policy to reverse deteriorating US trade with Japan and Europe, was to directly attack Japan and Europe ( 1985 Plaza Accord and Louvre Accord trade agreements), forcing Japan-Europe to over-stimulate their economies and inflate their prices to give US companies an export cost competitive advantage; Trump’s policy simply changes the target countries to Mexico, Germany and China. Each will have its very own ‘Accord’ deal with Trump-US.
• The first free trade NAFTA deal with Canada was signed on Reagan’s watch; Trump only wants to ‘rearrange the deck chairs’ on the free trade ‘Titanic’ and replace multilateral free trade with bilateral deals he negotiates and can claim personal credit for.
• Reagan encouraged speculators to gut workers’ pension plans and he shifted the burden of social security taxation onto workers to create a ‘social security trust fund’ surplus the government could then steal; Trump promises not to propose cutting social security, but refuses to say if the Republicans in Congress attach cuts to other legislation he’ll veto it.
• Reagan deregulated banks, airlines, utilities, trucking and other businesses, which led to financial crises in the late 1980s and the 1990-91 recession; Trump has championed repeal of the even token 2010 Dodd-Frank bank regulation act, and has deregulated by executive order even more than Reagan or Nixon.
• Stock market, junk bond market, and housing markets crashed in the wake of Reagan’s financial deregulation initiatives; the so-called ‘Trump Trade’ since the election have escalated stock and junk bond valuations to bubble heights.
• Reagan bragged of his working class Republican supporters, and busted unions like the Air Traffic Controllers, while encouraging legal attacks on union and worker rights; Trump has his ‘forgotten man’, and courts union leaders in the White House while encouraging states to push ‘right to work’ laws that prohibited requiring workers to join unions or pay dues.
• Reagan replaced his chair of the Federal Reserve Bank, Paul Volcker, when he wouldn’t go along with Reagan-James Baker (Treasury Secretary) plans on reducing interest rates; Trump will replace current chair, Janet Yellen, when her term as chair expires next year.
Then there are the emerging political parallels between Reagan and Trump as well:
• Even before the 1980 national election was even held, Reagan’s future staff members met secretly with foreign government of Iran to request they not release the 300 American hostages there before the 1980 election; Trump staff (i.e. General Flynn), apparently after the election, met with Russian representatives to discuss relations before confirmed by Congress. Reagan’s boys got off; Flynn didn’t. Events are similar, though outcomes different.
• Reagan attacked the liberal media. Much less aggressively perhaps than Trump today, but nevertheless the once liberal-progressive Public Broadcasting Company was chastised, under threat by the government of budget cuts or outright privatization. It responded by inviting fewer left of center guest opinions to the show. So too thereafter did mainstream television Sunday talk shows (‘Meet the Press’, etc.); Trump’s attack on the media is more aggressive, aiming not to tame the media but de-legitimize it. He has proposed to privatize the Public Broadcasting Corporation.
• Reagan staff directly violated Congressional laws by arranging drug money seizures from Latin America by the CIA to pay for Iranian arms bought for the US by Israel, that were then distributed to the ‘contras’ in Nicaragua to launch a civil war against their duly elected left government. Nixon had his ‘Watergate’, Reagan his ‘Irangate’. Next ‘gate’ will be Trump’s.
• Reagan’s offensive against the environment was notorious, including appointments of cabinet members who declared publicly their intent to dismantle the department and gutting the EPA budget; Trump’s appointments and budget slashing now follow the same path.
• If Nixon’s policy was court China-challenge Russia, Reagan’s was court Russia-isolate China; Trump’s policy is to return to a Nixonian court Russia-confront China.
The corporate-radical right alliance continued after Reagan, re-emerging once again in the 1994 so-called ‘Contract With America’, as Clinton’s Democrats lost 54 seats in the US House of Representatives to the Republican right after backtracking on notable Democrat campaign promises made in the 1992 elections. The landslide was a harbinger of things to come in a later Obama administration in 2010.
The Contract for America proposed a program that shares similar policies with the Trump administration. It was basically a plagiarism of a Reagan 1985 speech. But it provided program continuity through the 1990s, re-emerging in a more aggressive grass roots form in the Teaparty movement in 2008.
TRUMP’s ‘Breitbartification’ of NIXON-REAGAN
Trump is more than just Nixon-Reagan on steroids. Trump is taking the content and the tone of the conservative-radical right to a more aggressive level. The aggressiveness and new elements added to the radical right conservative perspective in the case of Trump are the consequence of adding a Breitbart-Steve Bannon strategic (and even tactical) overlay to the basic Nixon-Reagan programmatic foundation.
The influence of Bannon on Trump strategy, programs, policy and even tactics cannot be underestimated. This is the new key element, missing with Nixon, Reagan, and the Contract with America. The Breitbart strategy is to introduce a major dose of ‘economic nationalism’, heretofore missing in the radical right. This is designed to expand the radical right’s appeal to the traditional working class–a key step on the road to establishing a true Fascist grass roots populist movement in the future.
The appearance of opposition to free trade, protectionism, reshoring of jobs, cuts in foreign aid, direct publicity attacks on Mexico, China, Germany and even Australia are all expressions of Trump’s new element of economic nationalism.
Another element of Bannonism is to identify as ‘the enemy’ the neoliberal institutions—the media and mainstream press, the elites two parties, and even the Judiciary whenever it stands up to Trump policies.
Added to the ‘enemy’ is the ‘danger within’, which is the foreigner, the immigrant, both inside and outside the country. The immigrant is the potential ‘new jew’ in the Trump regime. This too comes from Breitbart-Bannon.
Another strategic element brought by Bannon to the Trump table is the expanded hiring and tightening of ties to various police organizations nationwide and the glorification of the police while denigrating anyone who stands up to them. No more investigations of police brutality by the federal government under Trump.
Still another Breitbart strategic element is to attack the character of democracy itself, raising issues of fraud in voting, and undermining popular understanding of what constitutes the right to assembly and free speech. That is all a prelude to legitimizing further state level limitations and restrictions on voting rights, already gaining momentum before Trump.
Even the military is not exempt from the Bannon-Breitbart strategy: high level military and defense establishment figures who haven’t wholeheartedly come over to the Trump regime are replaced with non-conformist and opportunist generals from the military establishment.
Bannon-Breitbart is the conduit to the various grass roots right wing radical elements, that will be organized and mobilized if necessary, should the old elites, media and their supporters choose to challenge Trump directly with impeachment or other ‘nuclear’ options.
Nixon and Reagan both restructured the political and economic US capitalist system. But they did so within the rules of the game within that system. Trump differs by attacking the rules of the game, and the established elites and their institutions, while offering those same elites the opportunity for great economic personal gain if they go along. Some are, and some still aren’t. The ‘showdown’ is yet to come, and not until 2018 at the earliest.
Trump should be viewed as a continuation of the corporate-radical right alliance that has been growing in the US since the 1970s. The difference today is that that alliance is firmly entrenched at all levels and in all institutions now, unlike in the past, and inside as well as outside the government.
And the opposition to it today is far weaker than in the 1970s, 80s, or 90s: the Democratic Party has virtually collapsed outside Washington DC as it continues myopically on its neoliberal path with its recent selection of Perez as national chair by the Clinton-Obama-Big Donor wing (i.e. the former Democratic leadership Conference faction that captured the party back in 1992) still firmly in control of that party; the unions are but a shadow of their past selves and split, with some actually supporting Trump; the so-called liberal press has been thoroughly corporatized and shows it has no idea how to confront the challenge, feeding the Trump movement instead of weakening it; grass root minority, ethnic, and progressive movements are fragmented and isolated from each other like never before, locked into their mutually isolated identity politics protests; and what was once the ‘far left’ of socialists have virtually disappeared organizationally, condemning the growing millions of youth who express a favorable view of socialism to have to learn the lessons of political organizing from scratch all over again.
But they will learn. Trump and friends will teach them.
Jack Rasmus is author of the 2016 books, ’Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, and ‘Systemic Fragility in the Global Economy’, Clarity Press. His forthcoming book, this June 2017, is ‘Central Bankers At The End of Their Rope’, also by Clarity Press.
“Reflections on Opportunity Lost
Greece and the Syriza Experience
A Review of ‘Looting Greece: A New Financial Imperialism Emerges
By: Jack Rasmus
Clarity Press, 2016, 315 pp., $24.95.
Stylistically, Looting Greece departs sharply from the memoir-like quality of Helena Sheehan’s book. Yet in writing such an analytically clear, historical account of the European and Greek debt crises, Jack Rasmus also has made a valuable contribution.
The book is divided into ten chapters, the first five of which deal with the evolution of the debt crisis prior to the coming to power of the Syriza government in January 2015. Chapters six through nine offer a blow-by-blow account of the failed strategy of Syriza in its dance with the creditors. The last chapter provides a broader overview and comparative analysis of how and why the Troika prevailed. Finally, in an extended conclusion, Rasmus puts forward an argument for financial imperialism as a new and growing form of imperialism.
For Europe, the creation of the European Monetary Union (EMU) and European Central Bank (ECB) in 1999, and the Lisbon Strategy, mark the origin of the current debt crisis. The ECB embarked on a devaluation of the EMU that led to external devaluation, which boosted trade. Simultaneously, internal devaluation occurred through labor market flexibility, that is, reducing labor security, wages, and benefit costs. Germany was the first to engage in neoliberal policies, with internal labor market changes known as Hartz reforms undertaken by a Social Democratic government; these kept German wages stagnant for nearly a decade and created a base for the production of cheap exports. With the German Bundesbank essentially dictating policy to the ECB, and cheap money and cheap goods flowing into the European periphery, the structures of the European economies were transformed. And so long as the money flowed back to the European central economies, primarily Germany, it was a virtuous circle for European capital. However, with onset of the 2008 economic crisis, this dynamic changed:
In addition to bank-provided money capital, German private foreign direct investment into Greece also rose from 1.4 billion euros in 2005 to more than 10 billion by 2008. As the money and capital to Greece was recycled back to Germany and the northern core economies in the form of exports, Germany got business profits, economic growth, and its money capital returned to it. In addition, as financial intermediaries in the recycling of money capital, both core and Greek banks got interest payments from the Greek loans and Greek bonds, Greeks got German and core export goods for a few years, but loaded up on credit and debt in the process for what appears will remain an interminable period of debt repayments well into the future (63-64).
When the banking and financial systems froze up in the aftermath of 2008, the cycle and flow of credit and money stopped between the European core and periphery. And when the peripheral (Spanish, Portuguese, Greek, and other) economies started to slow down, German exports and investment began to shift overseas. This further slowed the flow of credit. As Greece had been running an internal trade deficit with Germany, the initial impact of the credit crunch in Greece was that private banks became loaded with debt, monies that had been borrowed to facilitate imports from Germany.
Rasmus does a good job of showing that this trade deficit was caused neither by higher wages to the Greek working class nor by escalation in Greek consumer spending. Rather the debt was driven up by European Union and ECB policy, in the interest of European capital.
Looting Greece then takes the reader, in exacting if painful detail, through the distinct though compounding circumstances that led to each of the three austerity memoranda.
The first memorandum provided that a total of 110 billion euros was “lent” to the Greek government, 91 percent of which went to bailing out the banks that had been left with bad loans following the 2008 crash. The initial austerity measures demanded by the Troika were premised on unrealistic economic projections of growth but caused very real cuts in wages, pensions, and social security. And the result was a shifting of the massive debt load, mainly from the private banks onto the Greek government.
Then the second memorandum, argues Rasmus, “was primarily to refinance, pay off, and reduce Greek debt held by … private investors” (99), many of whom had already taken advantage of the bond markets to ramp up interest rates paid on Greek debt. Looting Greece does a great job in explaining the ways in which both the rules adopted by the ECB and the neoliberal ideology of “the German Hypothesis” (91), which drove their adoption, played a role in the cycle of debt and austerity that led to a humanitarian catastrophe in Greece.
Chapters five through nine offer an account of the rise of Syriza and a blow-by-blow telling of their approach to the problem of debt and austerity and the process of negotiations once the party came to power in January 2015. Rasmus’ account of the “institutional taming” of the Syriza government is painful to relive, but offers strong support for his argument that in the run up to the third Greek debt restructuring deal of 2015, Syriza and Tsipras would discover there was no option to return to social democracy and social democratic policies without austerity. The choice was either to leave the euro and the neoliberal regime, or remain caretakers for that regime on the system’s periphery, condemned to some degree of perpetual indebtedness, austerity, and long-run negative economic growth (118).
The last chapter provides an explicit assessment of the relative strategies of Syriza and the Troika and the structural/institutional straitjacket within which Syriza was attempting to negotiate. It also unequivocally answers yes to the likelihood of a fourth memorandum, given the logic of indebtedness and austerity and the current strategic course of the Greek government:
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 achieve these goals (228-29).
An extended conclusion to Looting Greece is entitled “A New Financial Imperialism Emerges.” In part, Rasmus argues that the views found in Lenin, Bukharin, and Hilferding, that finance capital is subordinate to industrial capital, need to be revised. The space devoted to this argument, however, is limited. While he argues that Greece has become a state dominated by the supra-national imperialist state of the Troika, given the degree to which sections of the Greek left have historically argued for Greece as a neo-colony, or one for which national oppression is primary, the full implications are not untangled by Rasmus.
To read and listen to the US press and media one would think Trump is against free trade and for protectionism. The media—like some of the American left and progressives—remains obsessively fixed on what Trump says and not what he does. They continually fall into a critique of Trump’s personality traits, at the expense of trying to understand the strategy behind Trump and the billionaire-led new aggressive capitalist forces allied with him and the policies they together are beginning to implement.
The misunderstanding of where Trump is going is especially notable in the media’s coverage of Trump’s emerging trade policies. They interpret Trump’s rejection of the TPP and attacks on Mexico-NAFTA represent Trump as anti-free trade. But nothing could be further from the truth.
Less than a week after assuming office, President Donald Trump signed an Executive Order abandoning the 12 nation Trans-Pacific Partnership (TPP) free trade agreement negotiated by former president, Barack Obama, but not yet ratified by the US Congress. He then quickly attacked Mexico—abruptly cut short a phone conversation with Mexico’s president, Pena Nieto, canceled a meeting with Pena Nieto after demanding Mexico pay for a wall on the US border, and threatened to impose a 20% border tax on goods exported to the United States based on the North American Free Trade Agreement, NAFTA.
Trump’s trade representative, Peter Navarro, then dropped another trade policy bomb by publicly declaring Germany was manipulating the Euro currency unfairly to its advantage, stealing US exports, while similarly exploiting the rest of the Eurozone economy as well.
Trump meanwhile continued to declare that China and Japan were also currency manipulators who were taking advantage of US businesses and increasing their exports at the expense of the US. Their currencies declined by 8% and 15%, respectively, in recent months. The Mexican peso fell by 16% after the US election and the Euro and British pound each by around 20% in 2016.
Trump’s flurry of Executive Orders canceling trade deals, his phone calls to country leaders, his appointed representatives public statements, and his constant ‘tweets’ on social media suggest to some, including the US mainstream media, that Trump is anti-Free Trade, that Trump is ushering in a new trade protectionism, and that his attacks on free trade agreements, like TPP and NAFTA, will precipitate a global trade war. It is this writer’s view, however, that none of this is likely.
Trump is a dedicated free trader. He just rejects multilateral, multi-country free trade deals like TPP and NAFTA. He wants even stronger, pro-US business free trade deals and intends to renegotiate the existing multilateral treaties—to the benefit of US multinational corporations and at the expense of the US trading partners. Trump’s threats of protectionist measures, like the 20% border tax and previous election promises of imposing a 45% import tax on China goods, are primarily tactical aimed at conditioning US trading partners to make major concessions once US renegotiation of past deals and agreements begin. And as for a trade war, the answer is also a very likely ‘no’. The big ‘four’ targeted trading partners—China, Japan, Germany, and Mexico—currently exchange goods and services with the huge US economy amounting between $1 to $2 trillion a year. China-US two-way trade amounts to nearly $500 billion a year, Mexico about as large, and Japan and Germany also account for hundreds of billions of dollars of trade with the US per year. These are the countries with which the US has the largest trade deficits: China’s about $360 billion and the largest, Japan’s close to $100 billion, Mexico and Germany around $60-$70 billion. Given the large volume of lucrative trade with the US, these countries will eventually agree to renegotiate existing free trade treaties and trade arrangements with the US.
What Trump trade policies represent is a major shift by US economic elites and Trump toward bilateral free trade, country to country. Trump believes he and the US have stronger negotiating leverage ‘one on one’ with these countries, and that prior US policies of multilateral free trade only weakened US positions and gains. But free trade is free trade, whether multi or bilateral. Workers, consumers, and the environment pay for the profits of corporations on both sides of the trade deals, regardless how the profits are re-distributed between the companies benefiting from free trade.
Trump’s shift to bilateral trade represents the intent of US economic elites to increase their share of trade profits and benefits at the expense of their capitalist trading cousins. And this is not the first time the US has set out to ‘shake up’ trade relations to its advantage.
In 1971 Richard Nixon introduced his ‘New Economic Program’(NEP), at the center of which was eliminating the post-war Bretton-Woods international monetary system which pegged the US dollar to gold at $35 an ounce. That meant the dollar would devalue, giving US exporters a cost advantage over their rivals in Europe and Japan, which were growing increasingly competitive with US capitalists. The NEP also provided historic new corporate tax cuts and corporate subsidies. The NEP was thus a major assault on US offshore capitalist competition. It also attacked unions and collective bargaining by freezing wages and then reducing the prior two years of union wage increases to no more than 5.5%. The average wage gains of 1970-71, produced by the second largest strike wave in US history those years, garnered union workers gains of 20%-25% in the new contracts. So Nixon was the pioneer of Neoliberalism, which has its major hallmarks both an attack on foreign capitalist competitors as well as on workers wages and social benefits.
Ronald Reagan institutionalized neoliberal policies coming to office in 1980. He too attacked wages and workers’ benefits across a number of policy fronts, and proposed even deeper corporate-investor tax cuts: $750 billion, on a US GDP of $4 trillion at the time. Reagan also launched an assault on US foreign capitalist competitors via new trade initiatives. In 1985-86, when the US under Reagan was losing out exports to Europe and Japan, the US forced Japan to the bargaining table and negotiated the ‘Plaza Accords’ in which Japan was forced to make major concessions to the US. This was immediately followed up by the ‘Louvre Agreements’ with Europe, with the same results.
The Reagan team, led by James Baker of the US Treasury, decided to abandon multi-lateral trade negotiations through the then global ‘General Agreements on Tariffs and Trade’ or GATT. GATT was an attempt to negotiate trade on a global scale involving scores of countries. The US could not get the deal it wanted from GATT trade negotiations, so it turned its fire on its biggest capitalist trading partners—Europe and Japan—and forced the Plaza and Louvre Agreements on them. The results were great for US business, especially multinational corporations. But the agreements play a large part in leading to banking crashes in the early 1990s in Europe and in Japan. Japan thereafter went into chronic recession for the rest of the decade and Germany in the 1990s ended up being described as the ‘poor man’ of Europe.
Similarly today, Trump’s nixing of the TPP and his attacks on Mexico-NAFTA, Germany, and Japan reflect a strategic shift from multilateral free trade strategies and a US policy turn to bilateral approaches to free trade where the US can extract even more concessions from competitors in the critical decade ahead.
One reason for this strategic shift is that global trade volumes have been slowing rapidly in recent years. The global trade pie is shrinking, especially since 2010, when global trade grew at a 20% rate; but this past year the growth will be less than 2%. Capitalist elites are thus increasingly fighting over a smaller share of trade. For the first time, in the past year, the growth of global trade is slower than the growth of global Gross Domestic Product (GDP), even as GDP itself is slowing globally.
Another explanation for the Trump shift is that the US dollar and interest rates are expected to continue to rise. That will result in an increase in inflation in the US. The rising dollar and US prices will mean US multinational corporations’ profits from trade will take a hit. They already are. The Trump shift to bilateral trade is therefore in anticipation of having competitors make up the expected losses of US businesses from trade due to the rising US dollar and US price inflation.
The consequences of the Trump trade shift for the ‘big four’ trade deficit trading partners are mostly negative. 80% of all Mexico exports now go to the US and 30% of Mexico’s GDP is from US trade. Mexico’s peso will continue to fall, import inflation rise and undermine standards of living. Mexico’s central bank will raise interest rates to try to slow capital flight and that will cause more unemployment in addition to import inflation and a slowing economy.
For Europe, the US turn from multilateral free trade will add impetus to Britain’s ‘Brexit’ from the European Union, as well as further legitimize other countries in the EU exiting the Eurozone. France could be next, should the pro-Trump French National Front party there win the upcoming elections this spring, which the polls show it is in the lead.
Japan appears to want to be the first major US trading partner to cut a bilateral deal with Trump. Japan prime minister, Shinzo Abe, continues to shuttle back and forth to Washington to meet with Trump. The first to strike a Trump bilateral deal may get the best terms. Britain’s Teresa May is not far behind, however, equally desperate to cut a bilateral deal to enable the UK to ‘Brexit’ sooner than later.
Where the US clearly loses from the trade policy shift is with China. The end of the TPP means that China will likely expand its own free trade zone, the ‘Regional Comprehensive Economic Partnership’ negotiated now with South Korea, Australis, India and also Japan. The TPP was the US economic cornerstone for its so-called ‘pivot’ to Asia (China) politically and militarily. That has now been set back. The expansion of China’s regional trade zone will also further solidify its currency, the Yuan, as a global trading currency, as well as strengthen its recent Industrial Bank and ‘One Belt-One Road’ initiatives.
The biggest negative impact of the Trump shift on free trade will be the global economy itself. The shift will take time, produce a lot of uncertainty, as well as reactions and counter-measures. That will only serve to slow global trade volumes even further. All emerging market economies will consequently pay a price in lower exports sales for Trump’s strategic trade shift, the ultimate aim of which is to restore US economic hegemony in trade relations over trading partners—a hegemony that has been weakening in recent years. But this is not 1985 or 1971. And a safe bet is that restoration will not prevail.
Jack Rasmus in author of the recently published books, ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, October 2016, and ‘Systemic Fragility in the Global Economy’, Clarity, January 2016. His forthcoming book, ‘Central Bankers At the End of Their Rope: Monetary Policy and the Next Depression’, Clarity, will be available May 2017. Jack blogs at jackrasmus.com.
President Barack Obama’s farewell address to the nation last night was a strange and disappointing attempt that failed to replicate the hope, energy, and optimism of his first 2008 address to the nation.
Instead of celebrating the unity of all those who joined to put him in office, the mood was downbeat, with Obama warning listeners that the country had become more divided than ever during his intervening years in office, that democracy was threatened on many fronts – cultural, legal, and economic – and that the people to whom he was speaking, and throughout the United States, now had the task to take up the fight to protect what’s left and restore it, for clearly, he had not been able to do so.
At times the fire of hope, dominant in his 2008 victory speech, briefly returned. Obama declared, referring to 2008 and 2012, that “maybe you still can’t believe we pulled this whole thing off.” But what exactly was pulled off? What was accomplished that was so great is hard to know. But he apparently thinks something was.
During the speech he listed a series of accomplishments that represent, in his view, the high marks of his presidency: As he put it, he “reversed the Great Recession, rebooted the auto industry, generated the longest job creation period in U.S. economic history, got 20 million people health insurance coverage, halved U.S. dependency on foreign oil, negotiated the Iran nuclear proliferation deal, killed Osama Bin Laden, prevented foreign terrorist attacks on the U.S. homeland, ended torture, passed laws to protect citizens from surveillance, and worked to close GITMO.”
Sounds good, unless one considers the facts behind the “hurrah for me” claims.
The auto industry was rescued, true, but auto workers wages and benefits are less today than in 2008 and jobs in the industry are still below 2008 levels. So, too, are higher paid construction jobs. Half of the jobs created since 2008 include those lost in 2008-2010, and the rest of the net gains in new jobs since 2010 have been low-paid, no benefits, part-time, temp/"gig” service jobs that leave no fewer than 40 percent of young workers under 30 today forced to live at home with parents. More people are working two and three part-time jobs than ever before. Five million have left the workforce altogether, which doesn’t get counted in the official employment and unemployment rate figures. If one counts part-time workers, temps and those who’ve left the labor force or not entered altogether, the jobless rate is not today’s official 4.9 percent but 10 percent of the workforce. That’s 15 million or more still, and after eight years. Meanwhile, those who do have jobs are victims of the great “job churn,” from high to lower wage, from a few, if any, benefits to none at all.
As for ending the Great Recession, the question raised is for whom it ended and what constitutes an end- The U.S. economy grew after 2009, but at the slowest rate of growth historically, post-recession, since the 1930s.
But he did end the great recession for the wealthy and their corporations. Corporations have distributed more than US$5 trillion in stock buybacks and dividends to their shareholders since 2010, as corporate profits more than doubled, as stock and bond markets tripled in value, and as more than US$6 trillion in new tax cuts for corporations and investors (beyond the US$3.5 trillion George W. Bush provided) were passed on Obama’s watch. Not to be outdone by Obama and the Democrats, Trump and the Republican Congress are now about to pass another US$6.2 trillion for investors and businesses, to be paid for in large part by tax hikes for the rest of us and the slashing of education spending, Medicare, Medicaid, health care, housing, and what’s left of the U.S. social safety net.
In his farewell address, Obama also cited how the country “halved its dependency on foreign oil.” True enough, at the cost of environmental disasters from Texas to the Dakotas to Pennsylvania, as oil fracking replaced Saudi sources, in the process generating irreversible water and air contamination in the U.S. In foreign policy, he noted he signed the Iran deal, but left out mentioning that during his administration the U.S. set the entire Middle East aflame with failed policy responses to the Arab Spring, with Hillary’s coup in Libya, to support of various terrorist groups (including al-Qaida) in Syria and to the arming of the Saudis to attack Yemen.
Looking farther east, Obama’s foreign policy outcomes are no better. The U.S. is still fighting in Afghanistan 16 years later – the longest war in U.S. history – as the Afghan government now collapses again in a cesspool of corruption and graft. And the U.S. is still engaged in Iraq. A related consequence of the failed U.S. Middle East policy has been the destabilization of Europe with mass refugee migrations that have been only temporarily suspended by equally massive payoffs to Turkey’s proto-fascist Erdogan government (which also blames the U.S. for the recent failed coup there, by the way).
Other failures on the Obama foreign policy front must include the U.S. militarization of the Baltic states and Eastern Europe following Obama’s inability to rein in Hillary’s U.S. State Department neocons in 2013-14, who made a mess out of their U.S.-financed coup in the Ukraine in 2014. That debacle has driven the U.S. and Russia further toward confrontation, which perhaps Hillary and the neocons may have wanted in the first place (along with a U.S. land invasion of Syria at the time which, in this case, Obama to his credit resisted).
And what about Obama’s much-heralded “pivot to China?” On his watch, China’s currency achieved global reserve status, that country launched a major trade expansion, and a government-established pan-Asian investment bank. The collapse of the U.S.-sponsored Trans-Pacific Partnership will also mean a China-Southeast Asia TPP-style trade agreement, which was already well underway.
On the domestic front, Obama’s legacies must include the most massive deportation of Latinos in U.S. history on his watch, nothing but words spoken from the comfort of the White House about police and gun violence and Black lives murdered on the streets of the U.S. and the rollback of voting rights across the country. And let’s not forget about Barack the great promoter of free trade, signing bilateral deals from the very beginning of his administration, and then the TPP – all of which gave Trump one of his biggest weapons during the recent election.
The media and press incessantly refer to the 2010 Obamacare Act and the 2010 bank regulating Dodd-Frank Act as two of his prime achievements. But Obamacare is about to implode because it failed to control health care costs, which now amount to more than US$3 trillion of the U.S. total GDP of US$19 trillion – the highest in the developed world at nearly 18 percent of GDP (compared to Europe and elsewhere, which spend on average 10 percent of their GDP on health care). The 8 percent difference, more than a trillion per year, goes to the pockets of middle-men and paper pushers like insurance companies, who provide not one iota of health care services.
In his address, Obama touted the fact that on his watch, 20 of the 50 million uninsured got health insurance coverage, half of them covered by Medicaid which provides well less than even “bare bones,” provided one can even find a doctor willing to provide medical services. The rest covered by Obamacare mostly got high deductible insurance, often at an out-of-pocket cost of US$2,000-$4,000 per year. Thus, ten million got minimal coverage while the health insurance industry got US$900 billion a year, which is what the program costs. No wonder the health insurance companies did not oppose such a windfall. Obamacare is best described therefore as a “health insurance industry subsidy act,” not a health care reform act.
Obama will be remembered for scuttling his own program in 2010 by unilaterally caving in to the insurance companies and withdrawing the “public option” while his party refused to even allow a discussion about expanding Medicare to all – the only solution to the continuing U.S. health care crisis. In the wake of Obamacare’s passage, big pharmaceutical companies have also been allowed to price gouge at will, driving up not only private health insurance premiums but Medicare costs as well, and softening up the latter program for coming Republican-Trump attacks.
As for Dodd-Frank, that’s been known as a joke for some time, providing no real controls on greedy bankers and investors who were given five years after its passage in 2010 to lobby and pick it apart, which they’ve done. The one provision in Dodd-Frank worth anything – the Consumer Protection Agency – is about to disappear under Trump. And for the first time in U.S. economic history, no banker or investor responsible for the 2008 crash went to jail on Obama’s watch.
So much for Obamacare and banking reform as his most notable “legacies.”
The true legacies that will be remembered long term will be the accelerating rate of income inequality, the real basis for the growing divisions in America, and the near collapse of the Democratic Party itself.
Under Obama, the wealthiest 1 percent accrued no less than 97 percent of all the net national income gains since 2008, as stock markets tripled, bond markets and corporate profits doubled, and US$5 trillion was passed through to investors as US$6 trillion more in their taxes were cut. Under George Bush, the wealthiest 1 percent of households accrued 65 percent of net national gains. Under Clinton 48 percent. So the rate accelerated rapidly during Obama’s term. Apart from talking about it, Obama did nothing during the last 8 years to abate, let alone reverse, the trend.
The other true legacy will be the virtual implosion of the Democratic Party itself during his administration. As the leader of a party, one would think ensuring its success in the future would be a priority. But it wasn’t. On his watch, nearly two-thirds of all state legislatures and governorships – and countless court positions – have been captured by the Republicans. To be fair, the Democratic Party has been in decline for decades. It has won at the presidential level only when the Republicans split their vote, as in 1992 when Ross Perot challenged George H.W. Bush, and when George W. crashed the entire U.S., and much of the global, economy in 2008.
Obama and the Democrats had a historic opportunity to turn the country in a progressive direction for a decade or more, as Roosevelt did in 1932 and then 1934 by bailing out Main St. with another New Deal. But Obama chose to double down in 2010 on bailing out Wall Street and the big corporations with another US$800 billion tax cut, leaving Main Street behind. Unlike FDR in 1934, who swept the midterm elections that year, gaining a Congress that would pass the New Deal in 1935, Obama doubled down on more for investors, corporations and the 1 percent. He paid dearly for that in 2010, losing control of Congress. U.S. voters gave him one more chance in 2012, but he again failed to deliver. The result is a Democratic Party “debacle 2.0″ in 2016, leaving a Democratic Party in shambles. That, too, will be remembered as his longer-term legacy.
Returning to his farewell address, the affair was a poorly rehearsed caricature of his 2008 inaugural, during which so many had so much hope for change, but ended up with so little in the end. Like a touring theater troupe putting on its last performance blandly, eager to change into street clothes and get out of town. True, the Republicans played hardball and blocked many of his initiatives, but Obama did little to fight back in kind. If he was a community organizer, he was from the most timid in that genre. He kept extending a hand to the Republican dog that kept biting it at every overture. He wanted everyone to unite and pull together. But in politics, winning is not achieved by reasoning with the better nature of one’s opponents. That’s considered weakness, and the biting thereafter is ever more vicious.
But perhaps Obama’s greater political error was he never went to the American people to mobilize support, instead sitting comfortably within the Oval Office of the White House and enjoying the elite circus that is “inside the beltway” Washington. He never put anything personal or physical on the line. And that does not an organizer make. He repeatedly talked the talk, but never walked it. The results were predictable, as the Republican ‘hardballers’ – McConnell, Ryan and crew – threw him ‘beanballs’ every time he came up to bat. He struck out, time and again, calmly walking back to his White House dugout every time.
So farewell, Barack. Your speech was a nostalgic call to your hometown fans in Chicago to go out and organize for U.S. democracy because it’s now in deep “doo-doo.” Take up where I left off, your message? Fair enough. Do what I failed to accomplish, you say? OK. See you at the country club, buddy, after your lunch with Penny Pritzker, the Chicago Hilton Hotels billionairess, who put you in office back in 2008.
And now the United States changes one real estate wheeler-dealer for another, this time one who takes the direct reins of government. And he’s Obama’s legacy as well.
THE FOLLOWING ARE SELECTIONS FROM MY RECENTLY PUBLISHED BOOK, “LOOTING GREECE: A NEW FINANCIAL IMPERIALISM EMERGES". WHAT IS “FINANCIAL IMPERIALISM? HOW IS IT FUNCTIONING IN GREECE TODAY? AND IS IT A GROWING CHARACTERISTIC OF 21st CENTURY GLOBAL CAPITALIST ECONOMY? ARE TOPICS ADDRESSED. (See the Concluding Chapter in the book for the complete analysis)
The recurring Greek debt crises represent a new emerging form of Financial Imperialism. What, then, is imperialism, and especially what, when described is financial imperialism? How does what has been emerging in Greece under the Eurozone constitute a new form of Imperialism? How is the new Financial Imperialism emerging in Greece both similar and different from other forms of Imperialism? And how does this represent a broader development, beyond Greece, of a new 21st century form of Imperialism in development?
The Many Meanings of Imperialism
Imperialism is a term that carries both political-military as well as economic meaning. It generally refers to one State, or pre-State set of political institutions and society, conquering and subjugating another. The conquest/subjugation may occur for largely geopolitical reasons—to obtain territories that are strategically located and/or to deny one’s competitors from acquiring the same. It may result as the consequence of the nationalist fervor or domestic instability in one State then being diverted by its elites who are under domestic threat, toward the conquest of an external State as a means to avoid challenges to their rule at home. Conquest and acquisition may be undertaken as well as a means to enable population overflow, from the old to the new territory. These political reasons for Imperialism have been driving it from time immemorial. Rome attacked Carthage in the third century BCE in part to drive it from its threatening strategic positions in Sicily and Sardinia, and also to prevent it from expanding northward in the Iberian Peninsula. Domestic nationalist fervor explains much of why in post-1789 revolutionary France the French bourgeois elites turned to Napoleon who then diverted domestic discontent and redirected it toward military conquest. Imperialism as an outlet for German eastward population settlement has been argued as the rationale behind Hitler’s ‘Lebensraum’ doctrine. And US ‘Manifest Destiny’ doctrine, to populate the western continent of North America, was used in the 19th century as a justification, in part, for US imperialist wars with Mexico and native American populations at the time.
But what may appear as purely political or social motives behind Imperialist expansion—even in pre-Capitalist or early Capitalist periods—has almost always had a more fundamental economic origin. It could be argued, for example, that Rome provoked and attacked Carthage to drive it from its colonies on the western coast of Sicily and thus deny it access to grain production there; to deny it strategic ports on the eastern Iberian coast from which to trade; and eventually to acquire the lucrative silver mines in the southernmost region of the peninsula at the time. Nazi Germany’s Lebensraum doctrine, it may be argued, was but a cover for acquiring agricultural lands of southern Russia and Ukraine and as a stepping stone to the oil fields of Azerbaijan, Persia and Iraq. And US western expansion was less to achieve a population outlet than to remove foreign (Mexico, Britain) and native American impediments to securing natural resources exclusively for US use. US acquisitions still further ‘west’—i.e. of Hawaii, the Philippines and other pacific islands were even less about population overflow and more about ensuring access to western pacific trade and markets in the face of European imperialists scrambling to wrap up the remaining Asian markets and resources.
Imperialism is often associated with military action, as one State subdues and then rules the other and its peoples. But imperialist expansion is not always associated with military conquest. The dominating State may so threaten a competitor state with war or de facto acquisition that the latter simply cedes control by treaty over the new territory it itself had conquered by force—as did Spain in the case of Florida or Britain with the US Pacific Northwest territories. Or the new territory may be inherited from the rulers of that territory. Historically, much of the Roman Empire’s territory in the eastern Mediterranean was acquired this way. Or the new territory may be purchased, one state from the other—as with France and the Louisiana Purchase, Spanish Florida accession, and Russia’s sale of Alaska to the US.
In other words, imperialism does not always require open warfare as the means to acquisition but it is virtually always associated with economic objectives, even when it appears to be geo-political maneuvering or due to social (i.e. nationalist ideology, domestic crises, population diversion, etc.) causes.
Wealth Extraction as Basic Imperialist Objective
Whether via a bona-fide colony, near-colony, economic protectorate, or dependency the basic economic purpose of imperialism is to extract wealth from the dominated state and society, to enrich the Imperialist state and its economic elites. But some forms of Imperialism and colonial arrangements are more ‘profitable’ than others. Imperialism extracts wealth via many forms—natural resources ‘harvesting’ and relocation back to the Imperial economy, favorable and exploitive terms of trade for exports/imports to and from the dominated state, low cost-low wage production of commodities and semi-finished goods, exclusive control of markets in the dominion country, and other ways of obtaining goods at lower than market price for resale at a higher market price.
Wealth extraction by such measures is exploitive—meaning the Imperial economy removes a greater share of the value of the wealth than it allows the dominated state and economy to retain. There are least five historical ways that classic forms of imperialism thus extract wealth. They include:
Natural Resource Exploitation
This is where the imperial economy simply takes the natural resources from the land and sends them back to its economy. The resource can be minerals, precious metals, scarce or highly demanded agricultural products, or even human beings—such as occurred with the slave trade.
Instead of relocating the resources and production in the home market at a higher cost, the production of the goods is arranged in the colony, and then shipped back to the host imperial country for resale domestically or abroad. The semi-finished or finished goods are more profitable due to the lower cost of production throughout the supply chain.
Landed Property Exploitation
The imperialist elites claim ownership of the land, then rent it out to the local population that once owned it to produce on it. In exchange, the imperialist elites extract a ‘rent’ for the use of the land.
Here the imperialist elites of the home country, in the form of merchants, ship owners, and bankers, arrange to trade and transport goods both to and from the dominated economy on terms favorable to their costs. By controlling the source of money, either as currency, credit, or precious metals, they are able to dictate the arrangements and terms of trade finance.
Direct Taxation Exploitation
More typical in former times, this is simple theft of a share of production and trade by the administration of the imperialist elite. The classic case, once again, was Imperial Rome and its economic relations with its provinces. It left the production and initial extraction of wealth up to the local population, while its imperial bureaucracy, imposed locally, was simply concerned with ensuring it received a majority percentage of goods produced or traded—either in money form or ‘in kind’ that it then shipped back to its home economy Italy for resale. A vestige of this in modern colonial times was the imposition of taxation on the local populace, to pay for the costs of the Imperial bureaucracy and especially the cost of the imperial military apparatus stationed in the dominated state to protect the bureaucracy and the wealth extraction.
The preceding five basic forms of exploitation and wealth extraction have been the subject of critical analyses of imperialism and colonialism for more than a century. What all the above share is a focus on the production and trade of real goods and on land as the source of the wealth transfer. However, the five classical types of exploitation and extraction disregard independent financial forms of wealth extraction. Both capitalist critics and anti-capitalist critics of imperialism, including Marxists, have based their analysis of imperialism on the production of real goods. This theoretical bias has resulted in a disregard of the forms of financial exploitation and imperialism, which have been growing as finance capital itself has been assuming a growing role relative to 21st century global capitalism.
Classical 19th century British Imperialism extracted wealth by means of production exploitation, commercial-trade, and all the five basic means noted above. It imposed political structures to ensure the continuation of the wealth extraction, including crown colonies, lesser colonies, protectorates, other dependency relationships, and even annexation in the case of Ireland and before that Scotland. The British organized low wage cost production of goods exported back to Britain and resold at higher prices there or re-exported. It manipulated its currency and terms of trade to ensure profit from goods imported to the colony as well. Its banks and currency became the institutions of the colony. Access to other currencies and banks was not allowed. Monopoly of credit sources allowed British banks to extract rentier profits from in-country investment lending and trade credits. They obtained direct ownership of the prime agricultural and mining lands of the colony. They preferred and promoted highly intensive and low cost labor production. Production and trade was structured to allow only those goods that allowed Britain investors the greatest profits, and prohibited production and trade that might compete with Britain’s home production. But the colonial system was inefficient, in the sense that was costly to administer. The cost of administration was imposed on the local country in part, but also on the British taxpayer.
Twentieth century US Imperialism proved a more efficient system. It avoided direct, and even indirect, political control. State legislatures, governments, and bureaucracies were locally elected or selected by local elites. There were few direct costs of administration. The local elites were given a bigger share of the exploitation pie, as joint production and investment partnerships in production and trade were established with local capitalists as ‘passive’ minority partners who enjoyed the economic returns without the management role. Only when their populace rebelled did the US provide military assistance, covertly or overtly, either from afar or from within as the US set up hundreds of military bases globally throughout its sphere of economic interests. The US and local militaries were tightly integrated, as the US trained local officer ranks, and even local police. Security intelligence was provided by the US at no cost. The offspring of the local elites were allowed to enter private US higher education establishments and thereby favorably socialized toward US interests and cooperation. Foreign aid from the US ended up in the hands of local elites as a form of windfall payment for cooperation. US sales and provision of military hardware to the local elites provided built-in ‘kickback’ payment schemes to the leading politicians and senior military ranks of the local elites. Local military forces became mere appendages of the US military, willing to engage in coups d’etat when necessary to tame local elites that might stray from the economic arrangements favoring more local economic independence beyond that permitted by US interests.
US multinational corporations were the primary institution of economic dominance. They provided critical tax revenues to the local government, employment to a share of the local workforce, and financial credits from US globally banking interests. The US also controlled the dominated states’ economies through a series of new international institutions established in the post-1945 period. These included the International Monetary Fund, established to address local management of currency and export-import flows when they became unbalanced; the World Bank, which provided funding for infrastructure project development; and the World Trade Organization and free trade agreements—bilateral or regional—which enabled selective access to US markets in exchange for unrestricted US corporate foreign direct investment into dominated state economies, financed by US financial interests. These investment and trade arrangements were tied together by the primacy of the US currency, the dollar, as the only acceptable trade currency in financial and goods exchanges between the US and the local economy.
This new ‘form’ of economic imperialism—a system of political dominance sometimes referred to as ‘neo-colonialism—was a far more efficient and profitable (for US capitalists and local capitalist elites as well) system of exploitation and wealth extraction than the 19th century British system of more direct imperial and colonial rule. And within it were the seeds of yet a new form of imperialism based on financial exploitation. As the US economy evolved toward a more financialized system after 1980, the system of imperial dominance associated with it began to evolve as well. Imperialism began to rely increasingly on forms of financial exploitation, while not completely abandoning the more traditional production and commerce forms of wealth extraction.
The question is: What are the new forms of imperialist financial exploitation developed in recent decades? Are new ways of extracting wealth on a national scale emerging in the 21st century? Are the new forms sufficiently widespread, and have they become sufficiently dominant as the primary method of exploitation and wealth extraction, to enable the argument that a new form of financial imperialism has been emerging? If so, what are the methods of finance-based wealth extraction, and the associated political structures enabling it? If what is occurring is not colonialization in the sense of a ‘crown colony’ or even dependent ‘neo-colony’, and if not a political protectorate or outright annexation, what is it, then?
These queries raise the point directly relevant to our current analysis: to what extent does Greece and its continuing debt crises represent a case example of a new financial imperialism emerging?
Greece as a Case Example of Financial Imperialism
There are five basic ways financial imperialism exploits an economy—i.e. functions to extract wealth from the exploited economy—in this case Greece.
• Private sector interest charges for financing private production or commerce
• State to State debt aggregation and ‘interest on interest’ wealth extraction
• Privatization and sale of public assets at fire sale prices plus subsequent income stream diversion from the private acquisition of the public assets
• Foreign investor speculative manipulation of government bonds
• Foreign investor speculation on stock, derivatives, and other financial securities’ as a result of price volatility precipitated by the debt crisis
The first example represents financial exploitation related to financing of private production and trade. It is associated with traditional enterprise-to-enterprise, private sector economic relations where interest is charged on credit extended for production or trade. This occurs under general economic conditions, however, unrelated to debt crises. The remaining four ways represent financial exploitation enable by State to State economic relations and unrelated to financing private production or trading of goods.
One such form of financial exploitation involves state-to-state institutions, public sector economic relations where interest is charged on government (sovereign) debt and compounded as additional debt is added to make payments on initial debt.
Another involves financial exploitation via the privatization and sale of public assets—i.e. ports, utilities, public transport systems, etc.—of the dominated State, often at firesale’ or below market prices. Privatization is mandated as part of austerity measures dictated by the imperialist state.as a precondition for refinancing government debt. This too involves State to State economic relations.
Yet a third example of financial exploitation also involving States occurs with private sector investor speculation on sovereign (Greek government) bonds that experience price volatility during debt crises. State involvement involvement occurs in the form of government bonds as the vehicle of financial speculation.
Even more indirect case, but nonetheless still involving State-State relations indirectly, is private investor speculation in private financial asset markets like stocks, futures and options on commodities, derivatives based on sovereign bonds, and so on, associated with the dominated State. This still involves State to State relations, in that the investor speculation is a consequence of the economic instability caused by the State-State debt negotiations.
Finance capitalists ‘capitalize’ on the debt crises that create price volatility of financial securities, making speculative bets on the financial securities’ volatility (and in the process contributing to that volatility) in order to reap a financial gain from changes in financial asset prices. And they do this not just with sovereign bonds, but with stocks, futures options, commodities, and other financial securities.
All the examples—i.e. interest on government debt, returns from firesale prices of public assets, investor speculative gains on sovereign bonds, as well as from financial securities’ price volatility caused by the crisis—represent pure financial wealth extraction. That is, financial exploitation separate from wealth extraction from financing private production. All represents ‘money made from money’, in contrast to money made from financing the production or trading of real assets.
During the pre-2008 boom cycle years, credit flowed to Greece and the periphery to enable the purchase of core exports of goods. When the core stopped the flow of credit after 2008, what was left was debt. But interest on debt was as lucrative to the core banker interests as was purchase of export goods. Repayment of loans and other credit extended by the Troika to Greece’s government and central bank were recycled back to Eurozone core private interests—95% of same, to be exact. Without true economic recovery after 2009 for the periphery, each time more debt had to be extended in order to repay old debt, and interest payments were added to interest payments and compounded. Financial imperialism increasingly assumed the form of state-to-state debt and interest flows, accruing eventually in the northern core banks and financial institutions. New means for financial exploitation were spun off and added in the process—financial gains from privatization and financial gains from government bonds and financial securities speculation. Greece was sucked into the debt machine where the fix itself became the cause of ongoing and ever worsening entanglement, with no release in sight.
For Eurozone bankers, it was just too good a ‘deal’ to terminate: perpetual debt interest money flows back to them, guaranteed by credit extended by the Troika institutions. Overlay on top of that, cycles of opportunity for financial speculation on bonds, stocks, derivatives, and other financial securities. It was even better than Greeks buying German and northern core exports of real goods to Greece. Exports might decline with economic conditions and competition. But debt repayments were guaranteed to continue—for as long as Greece remained in the Euro system at least. Financial imperialism may just prove more profitable than older forms of imperialism based on production and commerce of goods.
This shift to financial exploitation and therefore financial imperialism is a harbinger of things to come for smaller economies and states that allow themselves to be integrated into 21st century capitalism’s drive to concentrate and integrate economies into broader customs (goods trade) unions, currency unions, and banking unions in which the larger, more economically powerful states and economies will naturally dominate and exploit financially their weaker members. A new form of integrated financial imperialism is thus in the making. Greece is likely to be but the forerunner.
The Greek debt crisis of 2010—and the subsequent second and third crises of 2012 and 2015 respectively—are all ultimately rooted in the 1999 creation of the European Monetary Union (EMU). That historic event established the Eurozone and its single currency, the Euro, as well as activated the European Central Bank (ECB) as the central bank for the region. It also introduced a set of related monetary and fiscal policies that, together with the single currency and central bank, have led directly over time to the excessive buildup of debt in Greece (and throughout the periphery of the Euro region) and that country’s periodic debt crises since 2010.
The 1999 creation of the EMU set in motion a monetary policy driven, export-centric economic strategy that has been the hallmark economic policy ever since. The newly created central bank, the ECB, was now able to inject increasing amounts of the new currency, the Euro, thereby increasing the money supply and in turn devaluing the new currency. Devaluation by means of central bank money injection meant lower costs for Euro exports—the aim of which was to enable Euro region business to gain a larger share of external global trade. At the same time, expanding the supply of the new currency also resulted in a significant increase of available credit for investment internally, within the Euro region. That boosted internal exports-imports flow within and between the Eurozone states as well. Stimulating both ‘external’ and ‘internal’ Euro exports was clearly one of the primary strategic objectives behind creating the EMU.
Complementing this central bank, exports-driven economic strategy was a Euro fiscal policy based on austerity. Austerity policy is designed to reduce government social benefits spending, cap or cut government jobs and wages, and to privatize and sell off public works. But austerity policy also includes programs to contain and compress wage costs in the private sector by means of what is referred to as ‘labor market reform’. Fiscal austerity reduced government workers wages and benefits, as well as compensation benefits costs (pensions, paid leave, etc.) to the private sector working class. Often overlooked, however, is that fiscal austerity also includes labor market reform measures targeting the private sector workforce as well—also designed to reduce business wage and benefits costs. Lower unit labor costs translates into more competitive ‘external’ exports—i.e. exports sales from the Eurozone to the rest of the world. Thus ‘external devaluation’ by means of central bank currency and monetary policy is complemented by ‘internal devaluation’ by means of labor market restructuring and wage compression.
Both forms of devaluation that aimed to boost exports were key objectives behind the creation of the EMU 1999. The former—external devaluation—was to be achieved by the creation of the single currency and the new central bank; the latter—internal devaluation—to be achieved in what was called the ‘Lisbon Strategy’ at the time.
Whichever country could successfully control the policies of the new central bank, the European Central Bank, could benefit most from the monetary policy and the single currency. And which country within the EuZ carried out labor market reform-labor cost compression first and most aggressively would also capture a lion’s share of intra-Eurozone trade at the expense of its Eurozone country partners.
In other words, the Eurozone’s monetary and fiscal austerity policies were complementary; both targeted reducing the cost and price of Eurozone exports—the one by means of monetary driven currency devaluation; the other by means of fiscal driven wage compression under the cover of ‘labor market reforms’.
From its very inception, therefore, the creation of the Eurozone was a neoliberal class-based, incomes redistribution project—i.e. the ECB-Euro and monetary policy designed to boost corporate profits through expanding exports; the fiscal austerity and labor market reform policies designed to contain and compress wage and benefits incomes.
The ECB monetary policy had the added income inequality effect of providing excess liquidity that was also designed to stimulate financial asset prices (stocks, bonds, etc.) and consequently buttress and expand capital gains incomes; whereas Eurozone austerity fiscal policy contributed to income inequality by containing, and even lowering, working incomes by reducing government employment, cutting public sector wages and benefits, and reducing national pensions costs, subsidies, and other social benefit forms of compensation involving the general working populace.
The Lisbon Strategy and ‘Internal Devaluation’
The labor market reform and labor cost compression elements behind the creation of the Eurozone in 1999 were initially represented in what was called the ‘Lisbon Strategy’, which was launched soon after 1999.
Beyond the grandiose sounding cover phrases about creating a 21st century European capitalism, in its essence the Lisbon Strategy 2000 called for ‘flexible labor markets’. Translating that into real terms meant the new Eurozone economic elite would restructure their labor markets and reduce wage and benefits costs by hiring more contingent labor—i.e. part time, temp, and contract workers—in lieu of traditional full time labor which would be reduced by attrition and other means and replaced with contingent labor. The vast majority of new hires would be contingent. The workforce would grow increasingly by means of contingent labor. That was not all. Greater ‘flexibility’ in labor markets, as it was called, also meant stretching out the workweek to raise productivity, which in turn meant rolling back the gains of the shorter workweek achieved in some economies like France and elsewhere. That required weakening the role of unions and bargaining—also a strategic goal of the Lisbon Strategy—and reducing state support for unemployment and other social benefits. Reversing the trend toward early pensions and retirement was another major element. So was eliminating the various legal restrictions on laying off or firing full time employed workers. Creating more labor mobility was the code word; forcing more workers to become more mobile by reducing job security was the precondition for more mobility. They called it ‘flexible’ labor markets and even coined the term, ‘flexicurity’ to represent the reduction of job security.
The Lisbon Strategy was a 10-year plan for transforming the labor markets in such way as to reduce the rate of labor compensation gains and raise productivity in order to lower total labor costs. But all of that was for the purpose of making Eurozone exports more competitive in global markets. In its essence, it was about making workers produce more at less cost in order to subsidize exports at their expense. But while this may result in boosting Eurozone exports in relation to the rest of the world economy, so far as the distribution of exports within the Eurozone was concerned, which country moved first and most aggressively to implement labor market reform (and reduce labor costs) would gain a relative advantage with regard to the share of intra-Eurozone exports and trade. ‘Internal devaluation’ thus had a secondary effect. Not only could it complement currency (euro) devaluation to boost external exports to the rest of the world. It could also boost a given Eurozone country’s share of intra-Eurozone exports and thus result in severe trade and money flow imbalances within and between Eurozone partner countries.
Now that there was one currency, the Euro, and one central bank, the ECB, no member of the Eurozone could devalue their respective currencies independently against another Eurozone member in order to boost its exports and growth in order to remain competitive within the Eurozone. That traditional ‘currency exchange rate’, an ‘external’ devaluation route was now left up to the ECB only, and whoever controlled the ECB controlled that action. And at the apex of that control of the central bank and monetary policy was Germany and its northern banker allies. Other Eurozone member countries, especially in the periphery (like Greece) could only compete with Germany and its northern friends by depressing the wages and intensifying the work of their respective labor forces. Internal devaluation by means of labor market restructuring and labor cost reduction was the only open option. The Lisbon Strategy thus marked the commencement of an internal ‘race to the bottom’ with regard to wage incomes within the Eurozone. And whichever country and economy began that race first, ran the hardest, and thus resorted to internal devaluation by means of labor market reform the most aggressively, would be the country and economy that would garner the lion’s share of intra-Eurozone exports and growth. And that country and economy would prove to be Germany.
Germany’s Lisbon Strategy Implementation
A review of the Lisbon Strategy 2000 at mid-decade showed that indeed Germany had begun implementing restructuring and labor market reforms earlier and more aggressively than its EuZ counterparts. Between 2003 and 2005 Germany embarked on a major labor market restructuring, called in German the ‘Hartz Reforms’, for the director of personnel for Volkswagen, Peter Hartz, who was tasked with developing the formal proposals.
The German labor market reforms aimed at reducing German workers wages by converting many full time workers into part time, or what were called ‘mini-jobs’, and cutting hourly wages. Mini jobs were limited to 16 hours work a week. The reforms were successfully imposed because of the high unemployment afflicting German workers at the time, who were unable to resist. Assisting the implementation was the complicity and support for the reforms by the Social Democratic Party, who were ‘rewarded’ with a junior seat in the new neoliberal government and regime.
German unemployment remained chronically high throughout the 1990s, in the 9%-10% range, rising to 10%-10.5% during the EMU transition years of 1999-2003. It was often referred to as the ‘sick man of Europe’ in the latter half of the 1990s and early 2000s. In the 2003-2005 ‘Hartz’ labor market reform phase, German unemployment rose still higher, average 11%-12% as late as 2005-2006. Unemployment was necessary to tame the German working class and get it to accede to labor market reforms.
German worker labor costs did not rise at all in the first half of the decade as labor reforms were implemented. And once they were fully implemented, labor costs began to decline from 2005 on. German unit labor costs were essentially flat for the entire period from 2000 to 2008, as a consequence. That kept German export costs low and even declining. Stuck with the Euro, the rest of the Eurozone economies could not compete by lowering their own currency exchange rates, as before 1999. They could only cut wages or raise productivity by reducing employment. And they were well behind the German curve by 2005-2006. The EuZ internal devaluation by labor cost reduction allowed Germany to sweep up intra-Euro exports share at the expense of many of its Eurozone partners, especially in the southern periphery economies of the Eurozone which included Greece, for whom Germany was its single largest source of Greek imports.
The successful internal devaluation effects of Germany’s labor cost reductions at mid-decade are evident in the shift in Germany’s intra-Eurozone exports to other Eurozone countries after the labor market restructuring in Germany.
In the 1990s, two thirds of German trade was with other European Union countries. Germany ran trade deficits most of that decade. In other words, it imported more than it exported until 1999. But whereas its exports significantly lagged imports before 1999, German exports after 2003 accelerated. Exports as a share of its overall GDP rose from 37% at the start of 2005 to 50% by 2008, as exports surged from 731 billion euros at the beginning of 2005 to 984 billion euros by 2008—a 34% gain.
Even more impressively, Germany’s trade surplus (exports exceeding imports) rose from 731 billion euros in 2003 to 984 billion in 2008, or more than 250 billion more annually. Its cumulative trade surplus (exports over imports) over same five year period, 2003 to 2008, totaled 853 billion Euros—or more than $1 trillion in equivalent dollars. More than half of that surplus 853 billion came at the expense of its other Eurozone and EU partner countries, representing intra-Eurozone trade. And much of that was no doubt due to the wage compression-labor cost reduction advantages Germany achieved as a result of its early and aggressive Lisbon Strategy implementation launched in the 2003-2005 period. German exporters gained a massive $853 billion Euro trade surplus; but German workers initially paid for it.
However, labor cost reduction via internal devaluation wasn’t the only means by which Germany obtained for itself a greater relative share of both external (rest of world) and internal (intra-Euz) exports sales. Germany’s domination of the early ECB and the ECB’s monetary policy also helped Germany attain that massive 853 billion trade surplus.
Germany’s Bundesbank Dominates the ECB
The ECB is a federation of national central banks. Factions have existed within it from the very beginning. The German central bank, the Bundesbank, with allies in other Euz members, has succeeded in dominating the decisions of the ECB in most cases. That was especially true during the beginning period of 2000-2003 and up to 2008, although that influence has been recently weakening.
The single currency, Euro, facilitated the expansion of credit within the EuZ. The Bundesbank’s influence insured that the ECB would enable a sufficient supply to German and other northern ‘core’ banks. Much of that supply was eventually directed to investment into the periphery economies, and much in turn was recycled back in the form of purchase of German exports by the periphery. The ECB made loans to German-core banks, which in turn loaned to private banks in the periphery or invested directly themselves in the periphery. Another channel was ECB loans to periphery economy central banks, which in turn re-loaned to private banks in their economies. The periphery private banks then made loans to local businesses, consumers, and even local governments in the periphery economies. These are the roads by which the Euro money capital flowed from the ECB into the periphery economies like Greece. Residential and commercial real estate was a particular beneficiary of money flows to the periphery, and the excess lending to the sector led to housing bubbles in a number of periphery economies. Still another channel of money flows to the periphery was non-bank German and core business providing what is called ‘foreign direct investment’ (FDI). Core northern EuZ companies expanded into the periphery by acquisitions, by buying majority stakes in companies there, providing capital for partnerships with periphery businesses, or by establishing wholly-owned subsidiaries in the periphery economies, especially after 2005.
Through the various channels, massive money capital flowed into the periphery economies, including Greece, from the German-core north, made possible by the ECB’s new Euro currency creation. The new Euro resulted in money creation by the ECB. And much of that headed south and into the Euro periphery economies, as real estate construction, housing, and relocated manufacturing boomed in the periphery. And much would eventually again flow back again to the German-core north—either in the form of interest payments on private loans and debt, repatriation of profits by subsidiaries and operations of northern businesses that relocated to the periphery, and, not least, in the form of rising purchases of German-core exports by businesses, households, and governments in the periphery economies that experienced significant economic growth and income gains in the period leading up to the 2008 global crash.
Money capital was being recycled, as the EMU 1999 project intended. However, while that recycling was producing rising profits and income in the German-core north it was leaving a massive residue and overhang of debt in its wake in the periphery economies.
So long as new money capital was provided by the ECB to German-core banks and businesses, and so long as the latter continued to extend credit and expand in the periphery, the recycling would continue to work. But the cycle broke with the banking-financial crash of 2008-09. Credit to the periphery reduced from a flow to a trickle, from both private and ECB sources. And with money capital and credit inflows to the periphery evaporating, periphery purchases of German-core exports plummeted in turn.
Germany would address the break by abandoning its key role of ensuring that the ECB continued the flow of credit to the periphery. Without a continuing flow, the ‘twin deficits’ mechanism of credit provided to the periphery in order to purchase northern EuZ exports would break down. Which it did.
Levels of ECB credit flows to the periphery were reduced and blocked by German domination of ECB policy. The de facto ‘German rule’ established when the ECB was created was that the ECB could not provide credit to governments or private businesses, only to Eurozone member central banks. Eurozone private banks were not lending, due to the 2008-09 crash. And Eurozone member central banks were not bailing them out very well either—unlike the massive bank bailouts underway in the US and UK by their central banks at the time.
When EuZ periphery business and household demand for German-northern core exports declined sharply in 2008-09, Germany and the northern core exporters made a strategic error. Instead of ensuring money capital cycling to the periphery, Germany shifted its exports strategy. It de-emphasized intra-Eurozone exports and focused more on external exports sales abroad—especially to China and emerging markets whose economies would boom beginning in 2010.
The Eurozone periphery economies were left to figure out for themselves how to restart their economies after 2008-09, without sufficient credit, without German-core FDI, and with their own domestic banking system having collapsed. What they were ‘left with’, however, was a residue of massive debt overhang from the pre-2009 period. No economy in the Eurozone periphery was more exposed to this post-2008 dilemma than was Greece.
Greek Debt as Private Bank-Investor Debt
Greek government debt over the 2005 though 2008 period rose only modestly. Most of the pre-2008 debt buildup was on the private side, not public, during this period. Private Greek banks, as well as northern core banks doing business directly in Greece, may have been accumulating private debt. But, according to Eurostat statistics, Greek government debt rose only 13% from 2005 through 2008.
In contrast, Greek imports of German goods over the period rose by 70%. Germany was Greece’s biggest trading partner. Greece’s cumulative trade deficit with Germany alone—i.e. imports of German goods minus Greek exports to Germany—rose between 2005 and 2008 by 201 billion Euros. That 70% and 201 billion required money capital from somewhere. That somewhere was borrowing either from Greek banks, who borrowed from the Greek central bank who in turn obtained the Euros from the ECB; or private Greek borrowing from other Eurozone banks who ultimately got their money from the ECB; or else credit extended by German-Core businesses directly to Greek households and businesses. The Greek private banking system had become bloated with debt, not the Greek government. At least, not yet. That would come, as the essence of the first Greek bailout of 2010 was to reduce the debt for private investors and banks, in effect transferring that debt to the Greek government. With an only 13% rise in government debt over the period, 2005 to 2008, a sovereign or government debt crisis was not a problem as late as 2008. It was private debt that was accumulating.
That private debt, moreover, was owed primarily to German-northern core banks. According to a Bank of International Settlements report in early 2010, Greek debt owed to foreign banks was $303 billion. Of that, $43 billion was owed to German banks and $75 billion to French banks, as of third quarter 2009. And that did not count credit default swap debt held by the eight large German ‘Landesbanks’, the total of which was not reported.
The first Greek debt bailout that occurred in May 2010 was therefore not really about bailing out Greece’s government. It was about ensuring that German banks would not have to be bailed out if Greek banks and the Greek government failed to make required payments on their debt held by German and other northern core banks. It was about bailing out the banks.
As a former finance minister for Greece, Yanis Varoufakis, summed up the 2010 Troika imposed debt deal “more than 91 percent went to make whole the French and German bankers, by buying back from them at 100% euros bonds whose market value had declined to less than 20 euros”.
The Myth of Greek Wages as Cause of Debt
German-core apologists and economists—both then and today—like to argue that escalating Greek purchases of German-core exports was the consequence of rapidly escalating Greek wages, excessively generous increases in Greek pensions, excessive public employment hiring, rising Greek public workers’ wage, and overly-generous Greek government subsidies spending which freed up real wages to purchase the exports. It was true that Greek workers’ wages were 25% higher than German workers by 2008. But the differential was more due to German workers’ real wage compression relative to the Greeks’, than it was excessive Greek workers nominal wage hikes.
For example, average annual wages in Greece rose, but moderately, in the first half of the decade, until 2005. Thereafter, annual wages were stagnant from 2005 through 2008. The average annual wage for a Greek worker was at around 22k euros per year in 2005. Wages thereafter rose by only 238 euros from 2005 to 2008. That’s about 1%. After 2010 wages then declined sharply, due to the global crisis of 2008-09, falling annually to 21.8k euros annually in 2010. Wages would plummet after 2010, as austerity policies and a long economic depression became the norm in Greece.
What the record does show is that, while Greek purchases of German exports amounted to 289 billion euros in the four years from 2005 through 2008, Greek wages were stagnating and then declining. Greek purchases of German-Core exports could therefore not have been caused by rising Greek wages; it could only have been enabled by escalating credit and debt, a good part of which was eventually recycled back to Germany and others in the form of Greek household purchases of German exports.
Yet another way to deflate the myth that the Greek wages and consumer spending was the cause of the debt buildup is to consider household debt as a percent of GDP. According to Eurostat figures, in 2008 German household debt as a percent of German GDP was 55%. France was also 55% and Spain 80%. But Greek household debt as a percent of GDP was still lower—at 50%.
Private Debt was only the beginning, however. The flow of credit from German-Core north to Greece and the south, in order to buy exports from the German-Core north, was not the only cause of the total Greek debt build up. Sovereign or government debt would soon be added to total overall Greek debt.
From Private to Government Debt
Afflicting not only Greece but the entire global economy, the 2008-09 crash led to growing budget deficits in Greece as it did elsewhere globally. As in all deep economic contractions, Greek tax revenues fell sharply and government spending on essential ‘safety net’ programs rose. Private sector banks and businesses also required more government subsidies, more business tax cuts, and thereafter bail outs beginning 2008. All that meant more government borrowing and thus rising government debt as well. So the deep contraction of the Greek economy in 2008-09 represents a second major cause of the rise of Greek total (private plus government) debt.
Greek sovereign debt as a percent of GDP rose by only 13%–to 113% of GDP—over the four years from 2005 to 2008. But, as the 2008-09 recession hit hard, Greek debt in 2009 alone accelerated 17%, to 130% of GDP. Clearly the harsh recession and rising deficits caused by falling tax revenues and rising social spending was largely responsible for the 17% jump in government debt.
But government debt rises not solely as a result of a slowing economy that creates deficits and a rising volume of borrowing. It can expand as well as a consequence of rising interest rates on that accumulating debt. As Greek sovereign debt grew in the course of the 2008-10 crisis, global financial ‘vulture’ speculators—i.e. shadow bankers like hedge funds, asset managers, fund managers, investment banks, etc.— flocked in and drove up the cost of Greek government bonds. That increased Greece’s debt financing costs, driving up sovereign debt levels even further.
Debt from government bond speculation thus piled upon government debt incurred from deficits due to the economic crash of 2008-09, which piled upon debt from imbalances in exports and money (credit) flows to Greece. Debt is insidious. It develops multiple ways and begets itself.
The ECB could provide more credit (debt) to the Greek central bank, to lend in turn to Greek banks and businesses requiring bailout. But the ECB could not directly lend to governments to refinance their government debt. German rules set up in 1999 and soon after prohibited this, and German and its majority faction on the ECB’s governing board of represented Eurozone central banks enforced the practice. So what EuZ institutions apart from the ECB could extend credit to the Greek government—i.e. provide credit to make payments on its previous Greek government debt?
The International Monetary Fund was one possible source. But the IMF’s long standing policy is not to provide funding alone. Other institutions would have to participate in any government ‘bail out’ loan package. So too would the economy in question have to ‘put some skin in the game’, so to speak, before any IMF lending agreement. That is, Greece would have to cut spending, raise taxes, sell off public assets, or whatever in order to generate a surplus budget to ensure debt repayments on the loan package would be ensured. The ECB could not bail out Greece’s government debt. The IMF would not alone and only in part. Where would the rest of the lending come from then? From the third member of what would be called the ‘Troika’, in this case the European Commission, the pan-Eurozone fiscal governing body.
When the Greek government’s debt load continued to grow due to the deep 2008-09 crash and lack of robust recovery 2009, plus rising interest on the growing debt due to speculation in government bonds, Greece had to obtain further credit somewhere. Eurozone fiscal (German) rules also set up in 1999 did not allow a Eurozone member government to run budget deficits more than 3% of annual GDP. Just as Eurozone member states could not exercise any independent monetary policy to boost exports, they could not engage either in fiscal deficit spending beyond a very narrow range up to 3% of GDP.
Government debt also rose as a consequence of Troika debt restructuring. In exchange for a new, restructured debt and loan, a member government had to make a clear commitment as to how it would repay the new (plus old) loans and debt. And in an environment of slow or no growth, with a 3% deficit cap, that meant debt repayment at the expense of government spending reductions and tax hikes and public works and public asset sales—i.e. from fiscal austerity. Yet fiscal austerity leads to still further slowing of growth and the need for still more debt borrowed in order to service prior debt.
This was still not the entire picture with regard to causes of government debt escalation. As the Greek debt crisis ‘matured’ from late 2009 on, and concern over government debt and potential default spread to Spain, Portugal, Italy and other periphery economies, the value of the Euro currency in declined. This meant, for Greece, that it would have to borrow more—i.e. increase Greece’s government debt—because the Euro would now buy less given its decline. Greece would have to issue more Greek government bonds—i.e. raise debt even further—to obtain the same amount of money from bond sales.
And there was yet another related debt issue. With the Eurozone and global economy not recovering much from the 2008-09 global crash, Greece was earning far less from exports sales than before. That meant it had less income with which to make its payments on interest and principal on prior debt. Debt crises are the result of not only excess debt but of insufficient liquid income available necessary to ‘service’ (i.e. pay principal and interest) that debt; also, the terms and conditions under which debt servicing is arranged.
Greece’s government debt crisis, which erupted in late 2009-early 2010, did so due not only to the rising debt levels caused by the recession of 2008-09 and the intensification of speculation on Greek government bonds, but also due to the fall in the euro’s value and the lack of Greek export income and flow of funds into Greece from northern banks and investors that occurred with the banking crash of 2008.
In short, in addition to private debt, there were multiple causes behind rising government debt after 2008: in addition to private debt from money capital inflows there was
• government debt due to the 2008-09 global economic and banking crash and lack of normal economic recovery in the aftermath;
• there was government debt increase due to global financial speculators driving up the cost of Greek bonds in 2009-10;
• there was government debt rise as a consequence of fiscal austerity measures imposed on Greece by Eurozone ‘Troika’ members as part of the debt restructuring of spring 2010;
• and there was additional debt caused by the decline in the euro currency itself at the time.
The German Origins of the Greek Debt
Greek private debt escalation is tightly correlated with the arrangements described above, by which massive credit from German and northern core banks (enabled by the ECB) flowed into Greece to finance German export purchases by Greece. German origins of Greek government debt was more opaque. It originates in German insistence in early 2010 that Greece solve its own debt problems, which was an invitation for global speculators to drive up Greek bond rates and therefore debt. It also originates in the dictating by German and allied core bankers of the severe austerity terms imposed on Greece in the eventual May 2010 first debt deal.
Data shows that the escalation of Greek private sector debt occurs only after 2004. Private debt to purchase German-northern core exports escalates beginning 2005. Greece’s trade deficit with Germany and Greek private sector debt is thus highly correlated with the structural reforms implemented by Germany circa 2005. Greek government, or sovereign, debt thereafter only begins to escalate 2008-09, correlated with the global economic crash and the government bond speculators that followed.
Between 2005 and 2008 German exports to Greece almost doubled, from roughly 54 billion to 92 billion and amounted to more than $250 billion by the time of the first Greek debt crisis in 2010. During the same period, Greek exports to Germany rose from only $17 billion to $20 billion, for a total of $112 billion. Greeks were buying far more German goods and boosting German GDP than vice-versa. Greece therefore had to ‘borrow’ $138 billion from somewhere to pay for the difference. That borrowing, and thus debt, flowed directly from German and northern Europe banks, from Greek banks ultimately owned or provided capital from German and other northern Banks, or from Greek banks that borrowed from northern banks. Germany and the ‘core’ got export-driven growth; Greece got German imports and in turn also got an ever-rising pile of debt.
Greek private debt is thus a phenomenon of the post-2004 period, a point which corresponds to Germany’s ascendance to a position of intra-Eurozone trade dominance, and a period of German and allies’ dominance of the ECB, culminating with Germany’s blocking and/or limiting ECB money capital loans to the Greek government after 2008 needed to service its debt.
Stuck with the Euro single currency, Greece could not compete with the German-northern core export juggernaut after 2005, by lowering their own currency exchange rates to devalue their own currency. The euro was now the currency and Germany controlled its fate through its faction on the ECB. Greece had only one vote in 17 in the ECB. Greece was further hamstrung with regard to fiscal policy, prevented by additional rules that required a Eurozone member country to run deficits of no more than 3% of GDP. Nor did Greece, or the other periphery economies, launch their own ‘internal devaluation’ via labor market reforms to compress wages and the cost of their own exports. That would be embedded later, in the austerity packages of debt restructuring imposed upon them.
In short, Greece—like the other periphery economy members—in effect gave up any sovereignty with regard to monetary policy, and for all but a narrow scope of action concerning fiscal policy, when it accepted the Euro as single currency, the ECB as its central bank, and the 3% deficit rule. Germany and its northern allies now indirectly controlled decisions concerning those parameters—as well as the ability to impose penalties on those periphery states like Greece attempting to break ranks.
Both Greek economic growth and Greek government debt during the decade 1995 to 2005 was no more excessive or unstable than other Eurozone economies at the time. Greek GDP in 1995 was equivalent to 110 billion euros and had doubled to 200 billion euros by 2005. After growing by nearly $100 billion in the 1995-2005 decade, Greek GDP rose only by $25 billion in the five year period 2005-2010. Greece’s sovereign debt to GDP ratio in 1995 was 97%; by 2007 it had risen to only 107%. But by 2009—in the wake of the 2008-09 crash—government debt rose to 130% of GDP and a year later, in 2010, to 148%. The surge in government debt was thus clearly a consequence of the 2008-09 global banking crash and deep recession, the speculation on Greek government bonds by ‘vulture’ shadow bankers and investors, and the debt terms imposed on Greece by the Troika itself.
What happened around 2005 on the private side, and then after 2008 on the public side, and immediately after thus provides the true explanation for Greece’s debt acceleration and the debt crises that began to erupt in 2010. What happened was German and ‘core’ banks plowed credit and money capital into Greek banks and businesses. In addition to bank provided money capital, German private foreign direct investment (FDI) into Greece also rose from 1.4 billion euros in 2005 to more than 10 billion by 2008. As the money and capital to Greece was recycled back to Germany and the northern core economies in the form of exports, Germany got business profits, economic growth and its money capital returned to it. In addition, as financial intermediaries in the recycling of money capital, both core and Greek banks got interest payments from the Greek loans and Greek bonds. Greeks got German and ‘core’ export goods for a few years, but loaded up on credit and debt in the process for what appears will remain an interminable period of debt repayments well into the future.
German-Core provided money capital, credit and debt-fueled export binge after 2005 hobbled Greece’s real economy, to put it lightly. The problems were covered up so long as credit flows from the northern core continued and economic growth in Greece up to 2008 continued. But once the credit flows, and income from economic growth, collapsed in Greece the growing mountain of private debt could not be ‘serviced’—i.e. paid. Greek banks, and northern banks operating in Greece, then experienced massive losses requiring bailout. The first casualty of the excess private debt run-up were the banks. The 2010 debt restructuring would be all about bailing out those banks and northern core Eurozone investors, institutional and individual, as well as non-Eurozone global speculators. In bailing out the banks and investors, their private debt would in effect be ‘transferred’ into Greek government debt. The Greek debt crisis thus may have originated ultimately in the German-northern core, but it would be dumped on the Greek banking system at first, to be eventually dumped thereafter to Greek taxpayers and especially Greek workers who would be required to ‘pay the bill’ through various fiscal austerity and de facto labor market reform measures imposed on Greece by the Troika. German-northern core gain thus became Greece and Greek workers’ pain.
In the weeks since the November 8 US presidential election, the dim outlines of what a Trump presidency might look like are beginning to appear. Trump continues to retreat on several fronts from his campaign ‘right populist’ positions, while doubling-down on other radical positions he previously proposed during the campaign. How to make sense of his apparent evolving policy divergence?
One the one hand, Trump appears to moving closer to traditional Republican party elite positions on big reductions of taxes on corporate-investor elites and on delivering long standing elite demands to deregulate business; at the same time he appears to be moderating his position with regard to that third top priority of the US neoliberal elite—i.e. free trade—as he back-peddles rapidly from his campaign attacks on trade and free trade agreements.
At the same time Trump appears to be doubling down on his campaign’s radical social policy issues like immigration (promising to immediately deport or jail 3 million), taking a harder line position on law and order and civil liberties (declaring those who burn the flag should lose their US citizenship or go to jail), reaffirming his intent to privatize education services (by appointing a hard liner as Education Secretary who strongly favors charter schools and school vouchers), attacking environmental programs and protestors (calling for restoration of the Keystone pipeline), while showing early signs of moving closer toward Congressional Republican elite leaders, like Paul Ryan, and Ryan’s radical proposal to replace current Medicare with a federal ‘voucher’ system that would freeze the amount Medicare would pay doctors and hospitals as health care costs continued to escalate.
Areas Still Vague: Infrastructure Spending and Foreign Policy
Less clear than Trump’s above policy bifurcation are what policy positions he will take on fiscal and monetary matters.
Trump campaign promises of more government spending on ‘infrastructure’ still remain too vague. Will that mean more oil and gas pipelines and coal mining? More tax cuts to construction companies? More direct subsidies to businesses? And how much ‘spending’ is involved? Early indications are the infrastructure program may be mostly tax credits for businesses—and in addition to his massive corporate-investor tax cuts also planned.
Trump in the past has called for $1 trillion. (Clinton had called for a $250 billion program over five years. That $50 billion was just about the amount the US now provides in subsidies to agribusiness). And so far as infrastructure spending’s impact on the US economy, $50 billion a year is insignificant. $1 trillion and $100 billion a year over ten years, Trump’s campaign proposal, might have some effect on US GDP. But GDP growth does not necessarily translate into benefits in income to all—as the last eight years has clearly shown as 97% of all GDP-income gains under Obama have gone to the wealthiest 1% households. Nor will infrastructure spending likely translate much into job creation—and could especially result in little positive impact on jobs if infrastructure spending is composed mostly of tax cuts, business subsidies, and high capital-intensive projects that may take years to realize. It is highly unlikely Trump is talking about a 1930s-like ‘public works program’. It’s more likely to be the federal government writing checks to big construction companies, pocketing nice profit margins in the process.
Trump’s influence over monetary policy in general—and interest rates in particular—will be even more minimal. The US elites will strongly oppose any Trump attempts, as promised during the election, to ‘reform’ the US central bank, the Federal Reserve. And the Federal Reserve’s interest rate hike cat is already out of the bag. Long term rates have been already rising rapidly and will continue to do so, as will the US dollar in turn, as the two—rates and the dollar—are highly correlated. And the Federal Reserve is clearly on track to raise short term rates soon.
The question is whether the rise in interest rates—short and long term–will discourage investment, thus hiring and job creation, in those industries not directly affected by infrastructure spending? Will the negative effect of rate rises on investment and job creation be greater than the positive effect of infrastructure spending? Will those negative effects emerge sooner than the positive from infrastructure investment? And will the rising dollar associated with the rate hikes further reduce manufacturing exports and jobs in that sector? The dollar rise has already stagnated manufacturing output and employment. Further increases will almost certainly result in a contraction of manufacturing exports and jobs.
‘Yes’ is probably the answer to all the above, which means Trump job creation net effects during his first two years in office may not materialize. Moderate at best job creation from delayed infrastructure spending could be more than offset by job loss from rising rates and the US dollar.
The other major Trump policy area that still remains vague is foreign policy. It is not clear as yet what Trump’s true positions will be on NATO and China. But the US elite are intent on bringing him around to their positions and will exert extreme pressure on Trump in order to do so. They have already begun to do so. They will not let up on the pressure.
Trump’s intent is to become more militarily aggressive against ISIS in the middle east, and possibly ‘partnering’ with Russia to do so. That latter possibility is currently causing fits with US elites behind the scene. Backing off from NATO military deployment provocations in eastern Europe, the US-NATO current policy, while looking favorably on Europe’s backing off of economic sanctions against Russia, may also become Trump policy.
Trump’s Big Three Cabinet Appointments
Whether that foreign policy redirection occurs under Trump is now playing out in backroom maneuverings within the Trump administration with regard to key Trump cabinet appointments involving departments of State, Defense, and remaining national security positions. The elite want Romney. Populist right forces in the Trump camp do not. And behind the appointment issue is whether a Secretary of State position under Trump becomes a mere figurehead to Trump foreign policy decided in the White House by Trump and his close aides like General Flynn and others.
The US elite want Romney and they want their Secretary of State to have independence. Should Romney get the appointment here, it will signal they have prevailed. The result will be a bifurcation on foreign policy directions in the Trump administration which will ultimately break down at some point.
Obama’s recent ‘tour’ of NATO countries should be viewed as an effort by US elites to try to ensure NATO allies that Trump’s campaign proposals targeting NATO will not be the final position of the Trump regime. The Obama tour was in part at least to hold NATO allies’ hands and ask them to be patient—i.e. the elite will bring Trump around to reality. Be patient. We will eventually ‘tame’ Trump is no doubt the message. After Europe, Obama scurried back to Asia, attending the APEC economic summit, and providing no doubt similar assurances to US allies there that Trump would ‘come to his senses’ as cooler elite heads advised him.
Trump appears to have just appointed General (nicknamed ‘mad dog’) Mattis. Petraeus, a more establishment figure under consideration is out; or maybe Petraeus decided himself that hitching a ride on a Trump administration was not the greatest career restoration move. But the Mattis appointment still leaves the direction of a Trump administration’s policies on NATO, Russia, or Asia up in the air.
The third key cabinet appointment is Secretary of the Treasury. Here Trump’s transition team initially appeared to favor the CEO of the biggest US bank, Chase’s Jaime Dimon. Treasury secretaries in recent decades, under US Neoliberalism since Reagan, have always been heads of some big financial institution. And in recent decades, the Treasury Secretaries have repeatedly been alumni of the big investment bank, Goldman Sachs. And so too is Mnuchin, continuing the trend of the wheeling-dealing ‘shadow banking’ sector still dominating the Treasury.
Together with Wilbur Ross, appointed to Commerce Secretary, also a ‘shadow banker’ and former Private Equity Firm owner, the Mnuchin-Ross team will determine banking and economic policy in the Trump administration. Their initial target will no doubt be dismantling what’s left of the skeleton of the Dodd-Frank banking regulation bill.
Trump ‘Free Trade’ Policy
Trade as a policy has both foreign policy and economic dimensions. The US elite is now facing a major challenge, having temporarily lost the TPP and with the Europe TTIP in trouble, given a year of intense political instability on the horizon in Europe. They will focus on just keeping the prospects alive temporarily. In the meantime, the thrust is to prevent the deterioration of NAFTA, CAFTA, and other bilateral free trade deals signed under Bush and Obama. The objective will be to stop Trump from making any changes in NAFTA in the short term, and ensuring whatever changes after is cosmetic and token in the longer term.
Taming Trump may prove more difficult with regard to Free Trade, however, compared to getting Trump to implement US elite objectives on matters of tax cuts and deregulation. Trump’s positions during the election were strongly anti-Trade. It played a key role in his election victory, and clearly in the key states of Pennsylvania, Michigan and Wisconsin. It will be more difficult for him to renege and about-face on the trade issue. Taming Trump will prove more difficult.
But here’s how it nonetheless may develop:
Reversing the worst effects of NAFTA cannot be done in the short term. The elites have many ways to slow and block his efforts. Some token renegotiation of NAFTA will eventually take place, resulting in minor adjustments. In the meantime, however, Trump can gain publicity and placate his base on this issue by achieving ‘victories’ discouraging specific companies to abandon plans to relocate to Mexico or abroad. Recent events involving Ford Autos and the Carrier company are examples of what may be the Trump short term policy direction with regard to trade.
As for other multilateral free trade treaties, Trump has declared he would stop the TPP, Transpacific Partnership Asia-US free trade deal. But that was already dead in Congress. And the US-Europe counterpart to the TPP, the TTIP, is impossible in 2017 with the accelerating upheaval in European politics and coming unraveling of the Eurozone after next week elections in Italy and Austria, and with elections in France, Netherlands and Germany on the agenda in 2017.
What will Trump’s longer term free trade policy look like? It is important to understand that Trump is not against free trade. He opposed multilateral programs, which were at the center of US neoliberal elite objectives.
Trump’s free trade policy will be to negotiate country-by-country free trade deals. Renegotiating free trade will make it appear as if he’s dismantling it. But the process will take a longer time, certainly not in the first year or two. The US elite can probably live with that. Their task in ‘taming Trump’ is to ensure he does not take precipitative action against current free trade deals, that he puts off such action, and settles into a longer term bilateral renegotiating policy. In the meantime, it will be more highly visible personal actions like the Ford and Carrier deals, to make it appear he is doing something on the matter.
What that all means is that except for token company examples like Ford and Carrier, free trade deals will continue. The US elite will get to continue their Neoliberal policy priority of free trade, just in another form that emphasizes slow, token changes to existing agreements and bilateral new free trade agreements. But free trade bilaterally is still free trade. And job losses and wage compression, the two major consequences of free trade deals, will continue. It’s just free trade in another form.
Trump is betting that the lack of job creation, from a retreat from is promises to ‘bring back jobs’ lost to trade, will be offset by job creation from infrastructure spending. Meanwhile, he can and will claim he is saving jobs by talking down Ford, Carrier, and other companies. Alongside this, bilateral free trade deals will go forward.
Massive Tax Cuts and Business Deregulation
The other two major priorities of the US elite are big corporate-investor tax cuts and deregulation. Here Trump has signaled he is in full agreement with the elite. No need to ‘tame’ Trump here. These policies will be forthcoming almost immediately in the new Trump regime.
Trump has proposed to cut corporate taxes even more than the Ryan-Republican Party faction in Congress. From the current 35% corporate rate, Trump proposed reducing it to 15% while Ryan and friends to 20%. Both are in agreement to reduce the top income tax rate for their wealthy friends, from current 39.6% to 33%. The Capital gains tax, now 23.8%, is scheduled for a cut to 20% by Trump and 16.5% by Congress. Both Trump and Ryan plan to abolish the Estate Tax, reducing taxation on estates worth $7 million (now the threshold) altogether. Both are strong proponents of allowing big US multinational corporations in Tech, Pharma, Banking and others to ‘repatriate’ $2.5 trillion in taxes they have been hoarding in profits offshore to avoid paying the US 35% rate to a low of 10%. The 4.8% surtax on the wealthiest to help fund Obamacare will also certainly disappear. Also notable is that net taxes on the middle class will rise under both plans, and the countless loopholes for investors will continue.
It should be noted that this massive tax cut package amounts to $4.3 trillion, according to Trump. But according to the Tax Policy Center research group, it will reduce federal revenues by $6.2 trillion. The wealthiest 1% would realize a 13.5% cut in their taxes, while the rest of all households would have a 4.1 % rise in their taxes.
This $4.3 or $6.2 trillion follows a $5 trillion tax cut agreed to by Obama, Democrats and Republicans in Congress that took place in early 2013 as part of the then phony ‘fiscal cliff’ crisis. That followed a $800 billion tax cut pushed by Obama at the end of 2010, in which Obama continued the previous Bush tax cuts for another two years and then some. That followed a preceding $300 billion tax cut in Obama’s 2009 initial recovery program. And all that came after George W. Bush’s estimated $3.4 trillion in tax cuts in 2001-04, 80% of which accrued the wealthiest households and businesses. So under Bush-Obama, taxes for the rich and their corporations totaled approximately $9.5 trillion, and now Trump-Ryan propose another $4.3-$6.2 trillion minimum, running the total up to more than $15 trillion.
And corporations and their lobbyists won’t wait for the tax cut legislation. They are already pressing for a Trump reversal of Obama administration measures over the past year to slow the rampant ‘tax inversion’ scams by big multinational tech, pharma and banks, that have been avoiding taxes by shifting their company headquarters offshore on paper. Corporations have avoided paying hundreds of billions of dollars in US taxes in just the past three years by means of ‘inversion’ scams. Trump doesn’t have to wait for Congress, for him to open the floodgates allowing massive corporate tax avoidance through unlimited ‘inversions’ once again. Big business lobbying arms, like the Business Roundtable, American Bankers Association, and National Association of Manufacturers are reportedly already demanding Trump lift all restrictions on ‘inversions’.
Trump and Ryan-Congress are no less in synch on the third policy priority of US elites—deregulation. Like corporate-investor tax cutting, Trump and the US elite are on the same page when it comes to deregulation. High on this agenda will be slicing the Affordable Care Act (Obamacare). Trump will not need to repeal it and won’t. It will be given a ‘death by a thousand cuts’ and allowed to collapse. Already in big trouble as a program unable to control health insurance costs or prescription drug price gouging, ACA provisions like mandatory insurance purchases and the 4.8% surtax on the wealth to help pay for the subsidies are likely to go quickly. A similar major deregulation will be the Dodd-Frank banking regulation act, which has already had much of its provisions defanged since its passage in 2010. A main target will be the Consumer Financial Protection Agency.
To gain public awareness of his pledges to deregulate, Trump will immediately in 2017 repeal, however, as many Obama Executive Orders as possible. Receiving the brunt of this will be immigration provisions, like the Dream Act, and numerous Environmental regulations. Trump’s EPA head will no doubt immediately reverse the regulations involving the industrial plant pollution proposals not yet or just recently proposed. In Labor matters, overtime pay rules and private pension rules are targets as well. Trump will immediately in 2017 reverse all the regulations he possibly can by Executive Order. That includes the Dream Act for youth of immigrants in the first 100 days, and new Executive Orders giving new powers of detention and arrest to border and police officials. Efforts by cities and universities to provide sanctuary to undocumented immigrants will result in immediate harsh financial and other actions against those same. Recent minimal rulings by the National Labor Relations Board favoring union workers and institutions will be quickly reversed as well.
The US elite, in Congress and beyond, will tolerate much of this deregulation, as well as a significant assault on immigration, law and order, policy repression of ethnic communities, deportations, limits on civil liberties, cuts in social programs, and privatization proposals across the board involving education, Medicare, and healthcare. Their priority is passage of policy in the areas of tax cuts, deregulation, and delaying any potential actions that might endanger existing free trade agreements.
Getting Trump to back off his campaign promises—i.e. his right wing populism—in areas of foreign policy and trade redirection are also elite priority issues. Trump has never needed ‘taming’ on tax and deregulation issues. And he will be allowed to proceed with elements of his right wing populism that involve attacks on environment, law and order, civil liberties, and immigration—so long as the latter involves low paid undocumented immigration from Latin America and does not interfere with the 500,000 high paid tech jobs legally given to Chinese and Indian immigrants on H1-B and L-1/2 visas. And so long as he doesn’t proceed so fast that it precipitates excessive social unrest. Go slow, he will be told. Nothing too extreme. And ensure that taxes, deregulation, trade and foreign policy are priority and are concluded first.
The US elite will abandon Trump if he doesn’t play ball on taxes, deregulation, going slow on Trade, and if he upsets long-standing foreign policy directions too radically. They will let him run amuck on issues of immigration, civil liberties, law and order, environment, and privatizing of social programs. So how might that elite ‘tame trump’ if and when necessary? The preparations just in case are already underway. They include the following:
How To Tame Trump
There are at least six ways by which they can, and are now preparing, to control him.
1. Trump Business Conflicts
Trump has 111 businesses in 18 countries. It is not possible to even put these in a blind trust, as previous presidents have done with their business interests. The elite will gather all the incriminating evidence they can to reveal his conflicts of interests, if necessary, at some point. They will threaten Trump quietly first to reveal and proceed against him and, if he doesn’t respond in their favor on some issue or policy, start the process of undermining his reputation and credibility in the media and with public opinion. Keeping the heat on will be mainstream media like the New York Times, Washington Post, and major broadcast TV sources. It won’t be difficult to dig up the dirt.
2. Trump Foundation
Like the Clinton Foundation, as with foundations of many of the super wealthy, the Trump Foundation is a source of potential major scandal. Incriminating or even insinuating investigations will be undertaken quietly, and then publicly if necessary.
3. Nepotism Charges
Trump has already shown a preference for family member involvement in his administration. That opens him to criticism of nepotism. That becomes the nexus for alleging Trump using the presidency to enrich himself indirectly through his family connections.
4. Trump’s Tax Returns
Trump may not have released his returns during the campaign, and probably for good reason. Few in the wheeling-dealing commercial real estate sector are squeaky clean when it comes to tax avoidance and even fraud. The worse of his tax matters will be quietly passed on to the New York Times and other media. They can be revealed at the appropriate juncture, if Trump doesn’t ‘play ball’ with the elite on matter of policy the latter consider strategic.
5. Attacks on Trump Appointees and Family
Trump can be damaged and undermined by attacking his appointments and family members. Favorite targets will be radicals like Steve Bannon of Breitbart who has been brought into the Trump White House as advisor. Trump’s son-in-law may prove another favorite target. So might even be his appointed national security adviser, General Flynn. Already major feature pieces on Bannon have appeared in the Times and media. The media continues to keep alive Flynn’s alleged pro-Russia views and contacts. Meanwhile, talking heads experts continue to appear on the mainstream press TV shows like CNN, MSNBC, CBS and others continuing the press the election themes of Trump’s character limits and dangerous personal traits. The elite will keep these issues of Trump judgment and volatility before the public, until Trump comes around and adopts US elite policies, especially on foreign policy, trade, and other matters.
6. Violations of Law
Trump’s proclivity to engage in tweets may yet get him in serious legal trouble. So too may any precipitous incitement of radical elements and actions that result from his public statements. Or any premature over-reaching Executive Orders.
From ‘Faux Left’ to ‘Faux Right’ Populism
In 2008 Barack Obama ran for president based on a program that in some ways was clearly populism. Entering the president primary race late, in early 2008, Obama’s advisers vaulted him to the nomination six months later by employing a strategy that consistently was to the left of the other Democrat candidates, Hillary Clinton and John Edwards. Obama appeared the popular left candidate. Many voters were sufficiently misled. Immediately after elected, however, Obama proceeded to appoint advisers and cabinet members who were clearly representatives of the banking industry and business interests in general. Neoliberal policies were given a ‘left cover’, as Obama then ruled from the ‘center-right’ on key matters of economic policy of primary interest to the elite—i.e. bailing out the banks, rescuing big businesses from bankruptcy, ensuring the stock and bond markets boomed, pressing for free trade deals, going slow and minimalizing banking regulation, ensuring healthcare reform did not include the ‘public option’ or even consider Medicare expansion, and turning over US jobs and trade policy to figures like Jeff Immelt, CEO of General Electric. Mortgage companies were given preference over bailing out homeowners facing foreclosure and ‘negative equity’. Latinos were deported in record numbers, students allowed to accumulate more than $1 trillion in debt, job creation involved mostly low paid, contingent service work, pensions were allowed to collapse, senior citizens’ savings evaporate while investors enjoyed eight years of near zero interest rates, and progressive labor legislation was quickly shelved.
What started as a hope of a resurrected left populism quickly and progressively decayed into a comprehensive program that delivered 97% of all income gains to the wealthiest 1% households.
Voters chose a black president in 2008 because they wanted change. They didn’t care about his race. They didn’t get it. In 2016 they now voted again—for change. Those voters did not become racist in the past eight years, even though the candidate they just voted for indicated in many ways he himself was racist and misogynist, to name but a few of his apparent character faults. Those voters who in 2008 chose a ‘left populism’ that turned out to be false, chose in 2016 a ‘right populism’. But what they will get is not populism but another disappointment.
Like the Obama regime, the Trump regime will retreat to a neoliberal US elite regime. It will be a ‘Neoliberalism 2.0’. An evolved new form of Neoliberalism based on the continuation of pro-investor, pro-corporate, pro-wealthy elite economic policies—with an overlay of even more repressive social policies involving immigration, law and order, privatizations, cuts in social programs, more police repressions of ethnic communities, environmental retreat, limits on civil liberties, more insecurity and more fear. This is the new form of Neoliberalism, necessary to continue its economic dimensions by intensifying its forms of social repression and control.
We predict Trump will concede to elite neoliberal policies on Trade and Foreign Policy eventually, as he already is about to do with regard to elite policy preferences on taxation and deregulation. If he does not, elite interests are waiting in the wings, gathering the evidence and ammunition to attack Trump more directly if necessary, should he not comply. So long as he plays ball with them, they’ll just hold their ammunition at the ready. They will lock and load, and cock the hammer, taking aim and give a warning.
Trump will respond. He will come around to their demands. After all, he has more personally to even lose than did Obama. Faux left is replaced by faux right in American politics.
Jack Rasmus is the author of Systemic Fragility in the Global Economy, by Clarity Press, 2016, ‘Looting Greece: An Emerging New Financial Imperialism’, by Clarity Press, October 2016, and the forthcoming ‘Central Bankers at the End of Their Ropes’, Clarity Press, March 2017. He blogs at jackrasmus.com. His website is jackrasmusproductions.com. His twitter handle is @drjackrasmus.
US real estate billionaire, Donald Trump, is president-elect. In an age when 97% of all GDP-national income gains since 2010 have accrued to the wealthiest 1%–of which Trump is one—how could American voters come to elect Trump? How could they vote for a candidate that they simultaneously were giving a ‘negative rating’ of 60% to 80%? That fundamental question will ever haunt this election.
What the election shows is that American voters in electing Trump wanted ‘anything but the above’ Obama policies of the previous eight years, policies which were just extensions of the neoliberal regime established in the 1980s in the US since Reagan. And voters didn’t care about the political warts, past or present, of Trump. They just wanted something different. They wanted to ‘stick their thumb in the eye’ of the ruling political elites (of both parties).
The voters’ message was: ‘you, the political elite, have hurt and harmed us these past eight years. You have ignored us and left us behind while ensuring your wealthy friends recovered quickly and well from the 2009 crash. We have experienced great anxiety and insecurity. Now have a taste of that yourself!’
Trump’s campaign gaffs, his personal character, his missteps and outrageous ‘off the cuff’ statements, his lack of any government experience, only enhanced the view that he was not just another elite politician. His lack of TV ad spending, absence of a so-called ‘ground game’ organization to turn out the vote, his having lost all three TV debates according to pundits and the press, his lack of ‘field organization’ and a poorly run Republican Party convention—all that was irrelevant. What his win, in spite of all that conventional political wisdom of what it takes to win an election, reflects is that the equation of politics is changing in the US as the people, the ‘masses’ to use jargon of prior times, are entering the political arena as a political force.
And that fact is not just revealed in Trump’s election. It was evident in Britain’s recent ‘Brexit’ referendum to leave the European Union. It will next be reflected in Italy’s vote this coming December, in which political elite proposals for political reform to give them more power will also be rejected. It will reflect thereafter in the increasingly likely election of the far right ‘national front’ in French elections next year. And could further reflect in German elections thereafter, in which that country’s long standing and presumably untouchable political leader, Angela Merkel, may also be over-turned.
Obama’s Vanished Coalition
Trump’s election can be traced to the shift in key groups of voters who had supported Obama in 2008 and who gave Obama his ‘one more chance’ to do something in 2012, and who were deeply disappointed when he failed to do so since 2012. At the forefront of these groups was the white non-college educated working class, especially those concentrated in the great lakes industrial states in that geographic ‘arc’ from Pennsylvania to Wisconsin. This group not only turned from Democrats but turned to Trump—as they had in 1980 as the so-called ‘Reagan Democrats’—in response to another economic crisis of the 1970s during which they were also abandoned by the Democratic Party. Clinton 2016 thus lost key swing states of Pennsylvania, Wisconsin, Ohio, Iowa, and Michigan that helped put Obama ‘over the top’ a second time in those states.
Another important voter group that delivered for Obama in 2012 and did not for Clinton in 2016 in similar percentages were Latinos. They voted by a margin of 44% for Obama 2012, but only 36% for Clinton. Apparently, Trump insults of Latinos were less important than Obama deportation policies in recent years. Women voters were supposed to vote overwhelmingly for Clinton, but white women aged 45 and over did not. And 75 million ‘millennials, 34 and under, were driven away by Clinton and the Democratic Party’s treatment of the Sanders campaign during the primaries and by offering no solution to the hopeless scenario of insecure, low pay service jobs in exchange for record student debt. In short, white non-college educated workers abandoned the Democrats, while other groups simply ‘stayed home’ and did not vote in the numbers they previously had in 2012.
Somehow over recent years the Democrats, once a party purporting to represent workers, abandoned them to free trade, to low paid insecure service jobs, and to the wholesale privatization of retirement and healthcare systems in America. What was begun under Bill Clinton, expanded under George W. Bush, was allowed to accelerate under Obama. Democrat leaders instead came to envision themselves as the ‘corporate light’ party, agreeing to extending and expanding George Bush tax cuts for the rich and their corporations, free money interest rates, and focusing instead on educated suburbanites as their prime voter base.
The Origins of Trump’s Victory—Or, It’s Still the Economy Stupid!
The root of the Trump victory lies in the history of the past eight years and the deep failure of the Democratic Party—and its now lameduck president, Barack Obama—to ensure that Main St. America recovered from the economic crisis of 2007-09 and not just the wealthiest 1% and their corporations.
Hillary Clinton was not defeated so much by Trump, but by the failed performance of the Obama administration the past eight years, and her obvious inability to separate herself clearly from policies associated with the past eight years and to offer an alternative more radically different—as Trump clearly did.
We hear today from pundits and talking heads, who just yesterday were declaring that Hillary Clinton was a ‘shoe-in’, that the election has been a reaction of the ‘have nots’—i.e. those left behind. That’s true. The Trump victory is clearly another expression of the global wave of working class and non-elite reaction against the political elite, their parties, and the so-called neoliberal policy ‘Establishment’. But ‘left behind’ what?
The data show clearly that US corporate profits more than doubled after 2009. The US Dow stock market tripled in value. Bond market prices accelerated to record levels. And returns from derivatives and other forms of financial speculation, conveniently kept opaque from public scrutiny, no doubt surged to record levels as well.
The record US corporate profits alone were generously distributed to stock and bond shareholders—the 5% and especially 1% of wealthiest US households: since 2010 more than $5 trillion has been distributed in stock dividend payouts and stock buybacks alone in the US and in the past two years at a rate of more than $1 trillion a year. And to ensure that the corporations and wealthiest 1% got to keep most of that distributed income, corporate and investor taxes under Obama since 2009 were cut by more than $6 trillion—extending the Bush tax cuts and then some. And all that’s not counting other forms of capital incomes earned by the wealthiest 1%.
Augmenting this historic massive profits gains and income redistribution favoring the 1% and corporate America, US businesses have had access to trillions of dollars more in virtually free money, made possible by the US central bank’s policies of quantitative easing and zero bound interest rates. In each of the last three years corporations ‘borrowed’ $2 trillion a year by issuing corporate bonds. They then hoarded the cash instead of investing and creating jobs. The zero rates also accelerated real estate property prices benefitting the wealthiest. Since 2009, commercial real estate property has boomed in price, as has high end residential housing.
And what did the ‘have nots’ get since 2009? Stagnant wage gains. Low paid service jobs—often part time, temp, contract, and ‘gig’—in exchange for the higher paid jobs they lost. And tens of millions of young millennials with little hope of anything better for decades to come. The near zero rates for eight years engineered by the Federal Reserve, in turn meant 50 million retirees—grandpa and grandma— earned no interest income whatsoever for the past eight years and still don’t. Meanwhile, more pensions collapsed and medical costs rose. The ‘have nots’ got to deal instead with 13 million home foreclosures and trillions of dollars of home values ‘under water’ as they say, where the home value is less than the mortgage. And millions of homeowners still struggle with that. Mortgage companies and banks were quickly ‘bailed out’ by the Obama administration by 2010, but millions of small homeowners were ‘left behind’ and still are.
During the last eight years no bankers went to jail for their actions after 2009 and have steadily chipped away at any remnants of financial regulation. Big tech companies continued to hoard trillions of dollars of their cash overseas in subsidiaries to avoid paying taxes, while bringing hundreds of thousands of skilled tech workers every year into the US (legal immigration) on H1-B and L-1 visas to take prime jobs that should have gone to US workers. Big Pharmaceutical companies continued to price gouge, causing thousands to die as a consequence of unaffordable prescription drugs. Millions of college students accrued more than a trillion dollars in debt. Latino minorities were deported in record numbers, breaking up thousands of families; police militarization and violence repressed African-Americans in the inner cities; unchecked fracking poisoned water supplies and air; and the country’s infrastructure continued to rot from the inside out at an accelerating rate.
After previous administrations failed to privatize health care in the US, Obama succeeded with the Affordable Care Act—aka ‘Obamacare’. At a cost of nearly $1 trillion a year, covering less than 15 million of the former 50 million uninsured, Obamacare redistributed income to provide subsidies to those covered. In exchange the subsidized who bought Obamacare policies got super-high deductible, low coverage, health insurance. Health insurance companies in turn got tens of millions new customers guaranteed and paid for by taxpayers, and then continued to game the system for more profits. Obamacare became less a health care system reform act than a health insurance company subsidy act. It was the logical consequence of Obama’s withdrawal of the ‘public option’ and Democrats’ refusal to even allow debate on extending Medicare for all. It will be repealed very shortly.
Not least, the Obama administration championed an acceleration of free trade deals that promised to send even more jobs offshore, after having pledged to oppose free trade when he was first elected. Bilateral trade deals were signed by him, TPP and TTIP (Europe) pushed, and the worst effects of NAFTA and CAFTA were ignored. Obama not only became the greatest deporter of immigrants in US history, as H1-B legal immigration was expanded by several hundreds of thousands.
In foreign policy, the US continued its constant wars in the middle east that were never won or ended, as Obama promised. Hillary herself was the prime instigator of the Libyan fiasco, a proponent of more direct military intervention in Syria, and probably supported the coup in Ukraine behind the scenes. All that did not win her votes, especially among millennials. American voters have become sick and tired of the incessant war policies of the administration.
By not fundamentally breaking from this destructive economic and political legacy—the legacy of Obama and neoliberalism itself since 1980—Clinton all but ensured her fate and abandoned the field to Trump on the real issues. Trump didn’t even have to offer specifics of what he’d do different; just the impression that he somehow would reverse the policies quickly and in some way.
What’s Next: The Immediate Consequences of Trump’s Election
*Contrary to predictions of financial collapse, the Trump victory has already meant a big gain in stock markets, as corporations and investors prepare for what they believe will be further big tax cuts quickly. After more than $10 trillion in business-investor tax cuts since George W. Bush in 2003 to the present, trillions more are coming, and fast.
*The fate of the TPP is also now questionable—unless of course some way is arranged to push it through Congress rapidly in a lame duck session before Trump is sworn in as president in January, and providing he turns a blind eye to that (which is likely).
*The US Supreme Court will now become even more conservative and for decades to come, as Trump delivers on appointing ‘two, three’ Antonin Scalia-like nominees to the court. It is unlikely Democrats in the Senate can successfully oppose that until 2018.
*Racist elements at the grass roots will be greatly heartened by the Trump victory. As will militarized police forces. More clashes with immigrant and minority citizens on these issues will almost certainly grow in the period ahead.
*Obamacare will be repealed in toto in early 2017. Tens of millions will be left back where they were in 2008. Health care premiums and drug prices will surge still further.
*Dodd-Frank financial reform will also disappear, as weak as it was. Bankers will escalate their policies of financial speculation creating more financial instability. Consumer financial protections will be rolled back.
*Environmental policies will be rolled back. The EPA will be gutted and reduced to a token, largely underfunded function in the government. Recent global climate deal in Paris will now unravel.
*Infrastructure spending by government will be on the table, passed by a Republican Congress in exchange for further massive corporate tax cuts. Infrastructure spending will be insufficient and will not significantly boost US growth and jobs.
*An immigration bill will pass, but will prove harsh and harmful for immigrants from Latin America. H1-B and L-1 visas will expand, bringing more skilled foreign workers to the US to take high paying US jobs.
*In foreign policy areas, NATO policies of the US will shift. Europe will reconsider Russian sanctions. The recent Iran deal will get a ‘new look’. A US-Russia deal on Syria will be explored. More Asian countries, like the Philippines, will consider closer ties to China as US influence wanes in Asia.
Of course, all the above shifts and changes are based on the assumption that Trump’s campaign positions and promises will actually translate into domestic and foreign policy changes. That may not happen. It may have been all campaign rhetoric. Time will tell. Watch whether the US political and economic elites in the immediate weeks again can successfully maneuver Trump into appointing their kind to the key policy implementation roles in a Trump administration—as they did with Obama and other neoliberal presidents before. My guess is that they will, for the real power in US politics lies with the elites behind the political parties and their formal political institutions.
Trump made his billions by simply providing his name to properties and assets that he himself doesn’t not even own. We may soon see a political form of this celebrity economic strategy.
US Neoliberal policy may not change fundamentally in a Trump regime; just its appearance. Neoliberalism formed under Reagan-Clinton-Bush imploded in 2007-09. Obama has not been able to fundamentally restore it in its original form. A new form of Neoliberalism will now be attempted—a form even more harsh than before.
US voters may come to realize that their ‘rebellion against the political elite’ cannot be achieved through either wings of the single party of that elite—whether Republicans or Democrats. The rebellion will have to move outside the neoliberal political party structure. That may be the next major political lesson to be learned.
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.
THE FOLLOWING IS THE TRANSCRIPT OF AN INTERVIEW by MINTPRESS NEWS of Dr. Jack Rasmus on the Eurozone, Euro Debt, and Rasmus’s two latest books, LOOTING GREECE and SYSTEMIC FRAGILITY IN THE GLOBAL ECONOMY.
ATHENS — This has been another eventful year in Greece. Almost one year after it turned its back on the July 2015 referendum result which rejected further austerity, the Syriza-led government has pushed forward a program of even harsher austerity, spending cuts, and privatizations.
Following the British vote to proceed with “Brexit,” or a departure from the European Union, fears that Greece might follow suit led Greece’s lenders to demand even more austerity measures from a country already mired in an economic depression.
In this interview, Dr. Jack Rasmus, a professor of economics and politics at St. Mary’s College of California, analyzes these issues and the many challenges facing the Greek and European economies today.
The author of such books as “Looting Greece” and “Systemic Fragility in the Global Economy,” Dr. Rasmus shares his insights into the consequences of austerity for Greece and other peripheral European economies, and presents his proposed solutions for an end to the crisis and austerity.
MintPress News (MPN):
In September, Greek Prime Minister Alexis Tsipras gave his annual “state of the nation” address, where he boasted that the Greek economy has turned the corner, that unemployment is going down, that salaries will be increased, and that the country is returning to growth. Is this what Greece’s economic indicators actually show?
Protesters march to the Greek Parliament in Athens on Tuesday Nov. 6, 2012. Greece’s unions are holding their third general strike in six weeks to press dissenters in the country’s troubled coalition government not to back a major new austerity program that will doom Greeks to further hardship in a sixth year of recession. Two days of demonstrations are planned to start Tuesday, continuing until lawmakers vote late Wednesday on the bill to slash euro13.5 billion ($17.3 billion) from budget spending over two years.
Dr. Jack Rasmus (JR):
No, not quite. Greece’s debt is still the same as it was in 2011, roughly 180 percent of GDP. Unemployment has come down by only 3 to 4 percent, so instead of 27 percent, it’s about 23 to 24 percent. That’s depression-level unemployment. All the other indicators in the economy are flat or declining, so I don’t see anywhere that Greece is really “recovering,” and neither, really, is the entire eurozone economy. It’s been bouncing along the bottom.
As I said in my book “Systemic Fragility,” it’s a case of chronic stagnation. [The eurozone] might grow a little, 0.5 percent or 1 percent above GDP, mostly as a result of Germany’s growth, then it flattens out or goes below. Most of the periphery economies in Europe are stagnant or in a recession, as they have been for quite some time.
As far as raising wages, Greece cannot raise, at least in the public sector, any wages without the approval of the troika [Greece’s three major lenders: the European Commission, European Central Bank, and the International Monetary Fund]. It’s a real stretch to say that Greece is recovering. It’s kind of moving sideways, in the condition of still chronic economic depression.
One of the perceptions that has been prevalent in global public opinion with regard to the economic crisis in Greece is that the country has been “bailed out” with billions upon billions of euros in free money. Is this really the case, and where has the so-called “bailout” money to Greece actually gone?
Countries don’t get bailed out. Governments, banks, businesses, and sometimes, though not so frequently, households get bailed out. So the question is, who got bailed out here, in the debt restructuring deals of 2010, 2012, 2015, and this past spring? The banks got bailed out several times. Foreign investors and speculators in Greek bonds and other securities clearly got bailed out in 2012. If you look at where the money has gone, there’s $400 billion in debt in Greece still, that they have to pay off, with an economy that is less than half that size, so it’s impossible.
Where has all this money gone? Recent studies by the European School of Management and Technology documenting the 2010 and 2012 bailouts indicate that 95 percent of all the loans to “bail out” the Greek government, which then bailed out the Greek banks — 95 percent of that went back to Northern Europe, mostly to the German and Northern European banks that had loaned so much money to Greece. [Bailout funds also went] to the troika, particularly the European Commission, that then distributed it to the banking system and investors in turn. The EC is the big player here, and to some extent the European Central Bank, and to a minor extent now the International Monetary Fund. So, 95 percent of all the money loaned to Greece went right back to [Europe] and less than 5 percent of that went back into the Greek economy. Greece has been subsidizing the financial system elsewhere in Europe.
What do you believe needs to be done about the Greek debt?
You might ask what needs to be done about debt throughout the eurozone, because it’s not just Greece. Greece is perhaps the most serious case, but other places in the periphery of Europe are still heavily indebted. You cannot sustain, with austerity measures designed to pay the interest and principal on debt, a $400-plus billion debt based on an economy that’s less than $200 billion. Even the IMF has come to that conclusion and is maneuvering with the other troika members on that particular point.
Is [the debt] legitimate? Well, you have to understand the origins of this debt. It was originally private sector debt that was created as a result of the formation of the eurozone in 1999, the ECB as part of that creation, and other elements of the eurozone agreements, particularly the Lisbon Strategy that Germany adopted. Germany and other Northern European businesses and bankers pumped money and capital into the periphery, including Greece, from 2005 onward. Germany had a strong competitive advantage in exports, so a lot of the money and capital was pumped into the periphery, including Greece, in order to purchase German and other exports. So the money went in and circulated around, leaving a pile of private sector debt in Greece, Italy, and other places.
Then we had the crash of 2008-2009 and the debt could not be repaid, and the troika stepped in to [offer] the governments of Greece and other countries money in order to continue to bail out the private sector and enable the repayment of the private debt. So it starts out as private debt, because of this great imbalance in exports within the eurozone, and then that gets converted to government debt, and then the big crash of 2008-2009 adds even more debt, and then you have the recession of 2011-2013 in the eurozone and the 2012 bailout, which piled on more debt in order to pay the old debt, and then in 2015 the same thing. So the troika’s piling more debt on Greece in order for Greece to pay the previous debt, and that’s totally unsustainable. They’re going to have to expunge some of that debt.
Of course, the Germans, Wolfgang Schauble [the German finance minister] and the coalition in the north, does not want to allow that. And they don’t really want to change the eurozone, because the eurozone, while very imbalanced for the periphery, has benefited Germany significantly. [The Germans] dominate the finance ministers’ council in the EC and they dominate the ECB, and they’re just keeping the situation the way it is because it’s profitable for them.
MPN: Why must Greek banks be nationalized, in your view?
Look at the debt negotiations of 2010, 2012, and 2015. What happened was the ECB, which pretty much controls the Greek central bank — the ECB is just a council of central banks dominated by the Bundesbank [the German central bank] and its allies, so they have control — and what you saw in the negotiations is that in 2015, the ECB put the screws to the Greek economy, and Syriza collapsed and agreed each time the screws were tightened, bringing the economy to a halt. They couldn’t deal with the squeeze on the economy by the ECB. This brought the economy to a halt, squeezing it and of course not releasing loans that [the troika] had agreed to provide Greece under previous agreements. There was an economic squeeze that Syriza did not have a strategy to deal with, and eventually it capitulated.
You’ve got to nationalize, make the Greek central bank and the banking systems independent of the ECB. Gain control over your economy once again, and that is one of several key steps to prevent the squeeze every time you attempt to renegotiate the debt or restructure the debt. Without an independent, Greek, people-controlled banking system, the eurozone and the troika will squeeze and bring Greece to its knees every time. We’ve seen that three times. You’ve got to nationalize the banking system, including the central bank, or if you want to just leave the central bank as part of the ECB structure, go ahead, but create an independent central bank authority elsewhere in the Greek government.
In the U.S. during the Great Depression, the U.S. central bank had screwed up badly, and [President Franklin Delano] Roosevelt took over and had his Treasury Department take over and run the economy. Greece would have to set up a parallel central bank in its finance sector, and isolate and bypass the influence of the ECB through the Greek central bank. You would have to create a parallel currency as part of this and impose serious controls on bank withdrawals and capital flows outside the country, which Syriza did not really do, because the ECB and the troika opposed it. When you have all the capital, bank withdrawals and capital flight is another way of squeezing the country economically.
The current government in Greece has been continuing a policy of massive privatizations of Greek public assets, with profitable airports and harbors having been privatized in the past year, in addition to the recent selloff of the Greek national railroad for a total of €45 million ($49 million). What are the short- and long-term impacts of the privatization of such public assets?
The short-term is that when you privatize them, under the aegis of the troika, if you sell below market prices, which a lot of these assets are being sold at, that’s profit on the sale for the investors who are buying up these assets. But once the assets are in private hands, where does the revenue go? Does it go back into Greece or does it go back into the pockets of the investors and the corporations and the banks outside Greece that are buying it up? Well, it goes out. It’s a form of capital flight. Money that is needed in Greece flows out of Greece.
This is a new form of financial imperialism, wealth extraction in other words, that is being structured and managed on a state-to-state basis. It’s not 19th century British imperialism where they set up a factory in India, paid them low wages, and brought the textiles back to London to re-sell at a higher price. It’s not that kind of production imperialism. This is financial imperialism imposed on Greece, and it’s a new form that’s emerging everywhere, where you indebt the country and then you force the country to engage in austerity in order to pay the principal and interest on the debt, and you extract the income from the country. Privatizations are another form of that.
You privatize public goods, you get them at fire-sale prices, and then the income flows from those assets flow back to the coffers of the private companies or the banks, outside of Greece.
The other consequence is when you privatize, they come in and they cut costs, which means they lay off people in mass numbers, they put a hold on wages, they get rid of benefits, and they do everything else to maximize their revenue.
Finally, longer term, it means that Greece has less control over its own economy if it can’t control its infrastructure and everything is owned by foreigners. Then you can’t influence it as much, and if you’re part of the eurozone, you’re legally prohibited from what you can do to make sure that these foreign-owned infrastructure companies are behaving in terms of the benefit for the public sector, for the rest of Greece.
You have argued in your book, “Systemic Fragility in the Global Economy,” that there are nine major trends which account for the economic troubles that are seen on a global scale. What are some of these trends?
Everywhere, and particularly since 2008, we see central banks and monetary policy to be ascendant, and that means creating money, pumping it into the economy to bail out the financial systems, the financial institutions, the banks and the shadow banks, meaning speculators, hedge funds, private equity firms, asset management companies, and so forth. We’ve seen bailouts of tens of trillions of dollars since 2008. All of that liquidity injection into the economy has driven interest rates down to zero or even, in Europe and Japan and elsewhere, negative rates, and that fuels debt. With rates that cheap, corporations and businesses float new corporate bonds, and they use the money not to invest necessarily, they use it to buy back the stock and drive up the stock prices and pay out dividends, or they sit on it, they hoard it, or they send it to emerging markets. That’s a problem everywhere, and that’s the result of massive liquidity injections, which have really been escalating since the 1980s, when controls on international capital flows were eliminated everywhere.
After the 1970s, when the Bretton Woods system collapsed and central banks took over, the combination of those has led to the financialization of the global economy in the 21st century, where profits are far greater for investing and speculating in financial securities than they are in investing in real assets and real things that create real jobs and real income and real consumption. We’re becoming dependent on debt more and more. The economy is increasingly credit- and debt-driven, and that’s the result of this massive liquidity injection, and it also leads to a shift from real asset investment — investing in real things that create jobs that people need — toward financial asset investment. That means that real investment collapses over time and productivity collapses over time as well, and we see that happening everywhere.
That’s a major point that I argued about in my book, “Systemic Fragility,” this financialization of the global economy based on liquidity and debt and squeezing out. It’s diverting money and capital from real investment into financial speculation. What’s going on in Greece is a concrete expression of this, the reliance on financial means and financial manipulation. The periphery in the eurozone is at a great disadvantage to Germany and others, and they’re being manipulated financially. All the payments on interest and the debt flow back to the north. This is all flowing through the EC to the private sector, and it’s a nice constant money capital flow from interest payments and privatization and speculation on government bonds and securities and stocks in these countries as the volatility occurs.
It’s a reflection, in Greece, of what’s happening on a broader scale elsewhere in the global economy, and that’s why we haven’t seen much of a recovery in the global economy. Global trade is stagnant and real investment everywhere is drifting toward zero, productivity is negative almost everywhere, even in the U.S., and we’re seeing growth rates of barely 1 percent, 1.5 percent, at best, when it should be double that. We see these growing, non-performing bank loans, almost $2 trillion in Europe, the worst in Italy with about $400 billion. We see the same thing in Japan and in China. We’re becoming more systemically fragile financially because of this shift to financial speculation.
What is your outlook for the eurozone economy and the difficulties that it is currently facing?
The European banking system has never fully recovered from the 2008-2009 crash. The ECB is pumping money into the banking system in various ways, long-term refinancing options and all the bailout funds and qualitative easing and negative interest rates and so forth. They’re desperately pumping money into the banking system, but the banks aren’t really lending, at least to those businesses that would reinvest in real assets to create jobs. It’s far more profitable to make money now. Investors make more money from financial speculation than they do from investing long-term and expecting to get a return over 10 to 20 years for investment in a real company that creates real things.
We can see the strains now with the non-performing loans, in particular in Italy. Of course, we know the situation with the non-performing bank loans in Greece. Portugal is in bad shape as well in terms of non-performing loans, and now we see even institutions like [Germany’s] Deutsche Bank and others beginning to feel this strain, and the further impact on the European banking system of the “Brexit” [the departure of Great Britain from the European Union].
The problem is that the private banks are either hoarding the cash, they won’t invest in real growth, or they’re sending their money offshore to emerging markets, or they’re using it, as in the U.S., to buy back stock and pay out dividends and loaning money to companies to do just that. The global economy has changed dramatically in ways that make it much more fragile than ever before. A lot of debt has been building up everywhere: Over $50 trillion in additional debt has occurred since 2009, and when the next recession comes, how are they going to pay that debt?
When times are stable or growing, you can add debt without a great crisis emerging, but when you have a recession or a downturn that’s significant, where are you going to get the money capital to pay the principal and interest on the debt? Then you start seeing defaults and you start seeing financial asset price collapses going on, and now you’re back in 2008-2009. That’s the picture of the global economy.
What would be the steps for Greece to follow, in your view, in order to escape the spiral of economic depression and austerity?
Syriza made it clear, when it came into power, that it was not in favor of “Grexit” [a Greek departure from the eurozone], and it has always maintained that position. An unprepared, “we’re leaving the eurozone and the euro” kind of decision would cause a collapse of values, particularly among those who have investments in some savings in Greece. To some extent, Syriza was caught between a rock and a hard place here. They couldn’t or didn’t want to advocate an exit, and at least those who had investments didn’t want it because of the potential effect on their investments. The broader Greek populace thinks, still, that to be European you have to be in the eurozone. That’s a big mistake.
I think what Greece and Syriza should have done is to create a parallel currency and to take over its banking system. In other words, make the banking system truly independent, including the Greek central bank, and if that was not possible, bypass the Greek central bank and set up a central banking function in the finance ministry, as the U.S. has done at different times. Create a parallel currency, and policies and programs to get people to convert their euros into the parallel currency. Maybe declare that henceforth all taxes to the Greek government will be paid with the parallel currency, and that means that people would then trade in their euros for the parallel currency to pay their taxes.
Then tell the troika [the EC, the ECB, and the IMF — collectively, Greece’s lenders] that we’re going to pay you in your euros, but if we run out of euros here as a result of the conversion, well, tough luck, we don’t have a way of paying you, let’s negotiate a final deal where you expunge some of it and we pay you off and we go our separate ways. Of course, you would have to create significant capital flow controls, which has always been a problem every time there’s been a crisis; the money flows out of Greece. Take the economy out of the control of the troika without a formal exit.
That could have been done, but for some reason Syriza and its finance advisers either didn’t want to do that or didn’t know how to do that.
Arguments that have been heard against a parallel currency include the claim that the existence of two currencies would create a situation where there would be “haves” and “have nots” — between those who would hold a stronger, hard currency, compared to those holding a weaker, devalued currency. How do you respond to this?
There are policies and approaches you can take that entice and require people to convert their euros into the new currency. That would raise the demand and therefore the value, the price of the new currency. If you just had the currency and you didn’t have this forced trade-in, then of course you would have “haves” and “have nots,” the new currency would collapse, and pretty soon no one would want to use it. But, for example, saying that taxes could only be paid with the new currency, would force people who had corporations and businesses and so forth to purchase the new currency with the euro. It would undermine the value of the euro in Greece and it would raise the value of the new currency in Greece as well. That might set off a parallel elsewhere in the eurozone with other countries thinking the same thing, which would undermine the value of the euro and put the squeeze on the troika for once. Greece never put the squeeze on the troika, it was just the opposite in all of these negotiations that occurred, they never really hurt the troika in negotiations, and that’s the only way you prevail in negotiations. You’ve got to make it unpleasant for the opposition. Syriza never did that, they played along and made concession after concession.
Syriza thought that their example would strike a spark elsewhere in Europe of other social democratic forces and governments. They thought that they would get the rest of the social democracies behind them and together they would reform the eurozone. That was a fiction, a fantasy thought on the part of Alexis Tsipras and others, but that was the core of their whole strategy. European social democracy is a dying force, and that’s why you see the growth on the fringes, both to the right and the left.
Tsipras and [former Greek finance minister] Yanis Varoufakis’ problem was that they thought they could get all these elements behind them and that together they would have enough weight to force Schauble and other finance ministers to make concessions. Well, Schauble and the other ministers, the “German faction,” as I call it, within the finance ministers’ council in the EC, remained dominant. At every step along the way, whenever Syriza and its few allies tried to make a compromise where some concessions were made to them, the German faction squelched it. We saw that, for example, at the very end, when [Greece held] the referendum in July 2015. Greece held the vote, and the vote said “go back and negotiate a better deal for us,” and what did Tsipras do? He totally caved in to the Schauble faction, and then the Schauble faction said, “The offer we made last week is now off the table, you’re going to have to accept an even worse one.” So they put the screws to Syriza, and Syriza looked to its allies in the EC, and they totally caved in as well. Things just got worse and worse until you had the final [austerity] agreement on August 20, 2015.
It was a step-by-step retreat from [Syriza’s election in] January 2015, because Syriza had the wrong strategy and was not engaged in certain necessary tactics. Of course, the troika itself had a lot of cards to play. It would have been an uphill fight for Syriza. The time where they might have been able to strike some concessions from the troika was 2012, but New Democracy [the center-right party in power at the time in Greece] was totally in the pocket of the troika, so that was impossible.
[This past spring], the IMF and the troika were worried about “Brexit” and what impact that might have on renewing “Grexit.” So they put the screws to Greece again, raised the debt even more, austerity even more, and I think another round of that is coming, because the IMF wants out of the troika deal. We’ll see what happens at the IMF meeting, but they haven’t endorsed even the 2015 agreement because they know it’s unsustainable. I think the IMF is maneuvering to have the EC to buy its portion of the debt, and once that happens, the EC will demand even more austerity from Greece.
In the event that a parallel currency is implemented and steps are taken to maintain or strengthen its value, could that be a prelude to a switch to a national, domestic currency?
Yes. At some point, one currency will become dominant. You can’t have two equal currencies like that. Another advantage of the new currency is that it will start out at less value than the euro, and that will be used as the trading currency. That will stimulate Greek exports to elsewhere, outside the eurozone.
Part of the problem is that the periphery in Europe is so dependent on exports and imports to Germany and the north, that it can’t really engage in its own independent export strategy without cutting wages. Throughout Europe, you have what’s called “internal devaluation,” when you are stuck with a currency and someone else’s central bank, the ECB and the euro. You can’t really engage in independent monetary policy to stimulate your economy and you can’t engage in lowering your currency in order to gain some advantage in exports. You’re stuck, and only the most powerful country that’s most efficient and has the lowest costs is able to take advantage of global exports, and that’s Germany. The weaker economies of the periphery will always be at a disadvantage to Germany when it comes to trying to push their exports anywhere else outside the eurozone.
That’s the lesson. The lesson is that you’ve got a 1999 agreement in which you have this quasi-central bank, the ECB, and you have [the euro], and that arrangement significantly benefits the most efficient, low-cost producer, which is Germany, at the expense of the periphery. Until you have a true central bank and fiscal union to some extent, that will pump the money into the periphery to help it grow when it doesn’t, you will always have the situation you have in Europe right now.
Compare that to the U.S., where there’s a fiscal union, so that if certain states have economic problems … the federal government can pump money into those specific locations. If you don’t have a true federal government and fiscal union, you can’t do that, and if your central bank is dominated by the largest economy — Germany — even the monetary policy has no effect. And if it’s a single currency, it’s to the advantage of the stronger economy at the disadvantage of the weaker.
The eurozone economy is structured to emphasize the growth of the strongest economies at the expense of the weaker, and that’s not going to change. It’s built into the eurozone. You cannot create a currency union and a customs union without a true banking union and fiscal union. More and more countries in the eurozone are beginning to come to that conclusion, but it was foreordained. Economists knew this from the beginning, and that’s the tragedy. Greece has tied its tail to the eurozone, dominated by Germany, and it can never get out of this situation as long as Germany dominates the institutions, which it does, because the whole arrangement is great for Germany.
Tell us about your most recent book, “Looting Greece.”
It’s really a case study of the consequences of financialization and globalization and integration. I argue that there is this phenomenon of the smaller economies being tied into the larger economies through free trade agreements, which lead to currency unions, which lead to banking unions, and then you’ve got a situation like Greece and the euro periphery and the problems associated with that.
The book also takes a historical look at the origins of the Greek debt, that starts in 1999 with the [creation of the] eurozone, the adoption of the euro by Greece in 2002 and the consequences of that, how the debt developed, first in the private sector because of German export domination and then conversion of the private debt in 2008-2009 to the public debt, and then the collapse of 2008-2009, which added to the government debt. Then you had the 2012 agreement where the private sector was bailed out, and that added more debt, and then 2015 and so forth. All this is described in detail in the early chapters, and then most of the book is a step-by-step look at the negotiations between Syriza and the troika, from [Syriza’s January 2015 election] through the spring of 2016, and what were the strategic and tactical errors of Syriza and the strategic and tactical moves by the troika which enabled it to prevail.
At the end, [the book discusses] how this is a form of a new emerging financial and wealth extraction from smaller economies by the larger economies, because of the globalization and integration arrangement that exists, the emergence of financial extraction and financial exploitation, and how central banks are feeding that all. This will lead to my next book, which is about global central banks and the problems they’ve created as we move to another crisis, which I think is coming in the next five years.
The 3rd US presidential debate held October 19, 2016 between Donald Trump and Hillary Clinton was perhaps the most critically important of the three presidential debates—not so much for what was said, or even how it was said, but for what it portends for US policy in the post-election period regardless which candidate is elected in November.
The 3rd debate began with a reasonably rational discussion covering topics of Supreme Court appointments, 2nd amendment gun rights, abortion and then immigration—each subject revealing the deep differences in positions between the candidates. But then, as in the 1st and 2nd debates, it quickly exploded.
As the debate addressed the topic of immigration, Trump noted that Barack Obama was the biggest deporter of undocumented Latinos in US history—a fact which Clinton has consistently avoided, he charged. Trump then referred to the recent Wikileaks revelations, where Clinton declared she was in favor of ‘open borders’ throughout the western hemisphere and Trump suggested her ‘open borders’ remark referred not only to more free trade but also more cross border labor immigration as well.
The Wikileaks revelations have been a consistent hot ‘third rail’ in the US election and the debates. The revelations have served as a multi-edged sword against Clinton. By revealing her ‘open borders’ remark they contradict Clinton claims that she opposes the Trans Pacific Partnership trade treaty or free trade, while simultaneously suggesting she would accept more immigration to the US as part of a broad hemisphere free trade deal. Wikileaks further touches another Clinton political ‘raw nerve’: her emails cover-up. And they also reveal Clinton’s cynical ‘dual communications strategy’, in which she consciously says one thing to bankers and big business and another to the US public. The Wikileaks revelations are thus a kind of strategic lynchpin for the Trump campaign in the election, raising multiple issues on which Clinton is vulnerable.
It was not surprising therefore that, almost on cue when Wikileaks was first raised by Trump in the 3rd debate, Clinton angrily went on the offensive and diverted the discussion from the revelations. Her offense-defense was to redirect the debate to an attack on Wikileaks itself. From Wikileaks suggesting free trade, open immigration, email cover ups, and double talking to bankers and voters discussion was diverted to Wikileaks as Russian hacking of senior Democrat party leaders, Wikileaks as Russian vehicle to disrupt US elections, and from there to Russian aggression in Syria, demonizing Putin as war criminal, and then demonizing Trump by association as a friend of Putin.
In redefining the Wikileaks debate, Clinton’s words and her visual countenance response revealed a deep anger. How dare any country interfere with US elections. How ironic, given the US long and consistent interference in other countries’ elections. Clinton’s comments reflected the US elite’s growing frustration with Russia’s recent military offensive and gains in Syria. Clinton’s counter-attack on Wikileaks then set up the segway to Putin as the cause of continuing war in Syria, Putin as Saddam Hussein incarnate, Putin as the source of subversion of US democracy, and, then in turn, to Trump as the buddy of Putin and therefore, by association, all the above as well.
Wikileaks was clearly the nexus point of the 3rd debate. Clinton declared Wikileaks “the most important issue tonight”, charging Trump with “willing to spout the Putin line”, declaring “you continue to get help from him” (Putin) and that “you are his favorite in this race”. Trump countered with the charge Putin has outsmarted her and Obama at every foreign policy turn and that’s why she, Clinton, is trying to attack him by a desperate attempt to associate him with Putin.
The even more disturbing quote from Clinton in the exchange, however, was her repeated call, first raised in the 2nd debate, to establish ‘no fly zones’ in Syria. When the debate moderator noted that US generals have said such zones would likely lead to war with Russia, Clinton suggested ‘no fly’ would correspond to ‘safe zones’ on the ground. But ‘no fly’ was necessary to confront Putin and Russia in Syria. “We have to up our game” there, she concluded.
The debates reveal that, if elected, Clinton and the US war faction are likely to engage in new military adventures in the middle east, in particular in Syria. Or perhaps try to counter Russia with a more assertive military challenge in the Baltics, Eastern Europe or the Ukraine as a bargaining chip with Russia in Syria. The 2nd and 3rd presidential debates indirectly reveal something is afoot in that regard, no matter what the outcome of the election in November, but especially if Clinton is elected.
The debates also reveal a new offensive is brewing, indeed already underway, to shut down Wikileaks and to further restrict free speech and civil liberties. Already, Wikileaks’ internet connection at the Ecuadoran embassy in London has been cut. Concurrently, in recent days British banks have indicated they will no longer service the accounts Russia TV in the UK. This is a ‘shot across the bow’ to Russia media as well. A similar move is likely in the US for Russia TV soon after the elections. US government and US banks have initiated similar financial disruption tactics against Latin American progressive media, as the US renewed neoliberal offensive in Latin American continues to deepen. And should Trump lose the US election, it is likely his voice too will be muffled, if not ‘silenced’, in US media.
That muffling is especially true should Trump refuse to abide by the election outcome in the US. Another Trump ‘verbal bombshell’ in the 3rd debate was his refusal to say whether he would accept the outcome of the US election if he were defeated. Before the debate, Trump also continually raised the charge the election was being ‘rigged’.
That view of media bias and election manipulation resonates with much of the US voting electorate, especially his base of at least 40% of hard core pro-Trump voters. The charge of ‘rigging’ and potential to refuse to accept the election results may prove a ‘game changer’ in US elections. It reflects the deep distrust by broad segments of the US populace of the political elites in the US and their two parties. That distrust is not going away after the election, but will take new forms of protest in 2017 and beyond.
For there is clearly a rebellion underway against the ‘political class’ in the US. That rebellion is not yet reflected in independent political organization and opposition. It is still being expressed through and within the two wings of the Corporate Party of America—Republicans and Democrats. But that may break down, should Trump lose and the US economy continue to falter in 2017. What the debates reflect is growing disenchantment with the two parties’ organizational cocoon. A ‘rebellion within’ those two wings could evolve post-November easily and quickly to a challenge ‘from outside’.
Should he lose, Trump will almost certainly launch a new political party. A Trump new party initiative could also stimulate something similar on the left in the US. Bernie Sanders’ millennials are still clearly not in the Clinton corner, despite their erstwhile leader having thrown in with Clinton. The election may come down to whether, in the 8-9 swing states, Trump can turn out more non-college educated white workers than Clinton can turn out educated urban professionals, women, suburbanites, and Latino-African Americans.
Neither candidate has the millennial vote, now the largest population segment. Millennials may in the end vote for ‘none of the above’. Clinton is trailing well behind Obama for the millennials. Trump too is losing their support, at least among the better educated. Polls show only 54% of the under-35 years old group is currently at all interested in the election. And that will not soon change.
Third party candidates, Jill Stein of the Green Party and Gary Johnson of the Libertarians, are polling 22% of likely voters aged 18 to 29. According to a Harvard University survey this past summer, a third of Americans aged 18-29 support Socialism, while not even half back Capitalism. For them, the economy is the main issue and that is going to get worse in 2017 and beyond, not better, regardless who wins in November.
In summary, apart from all the personal mudslinging and the occasional, tangential references to real issues in the debates, what the 3rd—and indeed all three debates—reveal beneath the surface is in 2017 and beyond what’s in store is more military adventures, more limits on civil liberties, a growing loss of legitimacy by the US political elite and their parties in broad segments of the US population, deeper splits and more internecine conflict within the political class and each of their two parties, a growing potential for new forms of independent politics, and more instability within the US political system in general.
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.
The two most disliked candidates in modern U.S. election history did not disappoint U.S. voters’ low expectations of their performance in the second presidential debate held October 9 in St. Louis.
Both candidates spent most of their time attacking each other as either ‘morally unfit’ to be president, chronically prone to ‘bad judgement’, and habitual liars. Issues of real importance to voters were again, as in the first debate, altogether absent or, at best, were briefly and superficially addressed.
The continued mudslinging was fueled by the release of videos this past week, taken a decade or more ago, showing Trump bragging about his ability to sexually dominate women and making other generally extreme misogynist comments.
The videos set off a firestorm among the Republican elite over the week. Some began calling for Trump to drop from the race. Others talked of ‘pulling the plug’ on Republican Party financial assistance to Trump’s campaign. How Trump performed in this second debate would no doubt determine whether such talk translated into action, as the Republican camp showed signs of splitting down the middle even further and the party’s elite abandoning their candidate.
This potential ‘hard split’ among Republicans in the United States, the party elite vs. a majority of its members, is not unlike similar party developments in Europe, where the British Labour party elites have been attacking their public leader, Jeremy Corbin, for abandoning their neoliberal policy regime; or in Spain where the Socialist Party leader was recently dumped; or in France where presidential Holland will soon be. The economic recovery since 2009 that has benefited only the economic elites—in the United States 95 percent of all the net income gains since 2009 have accrued to the wealthiest 1 percent households—has been translating into a grass roots disaffection from political parties. As one of the press commentators put it after the second U.S. debate, “This election is about the American people vs. the Political Class.” But it’s not just an American phenomenon. The trend is becoming generalized across many of the advanced economies.
Trump fielded the damning video evidence of his misogynist bragging by saying it was only ‘locker room’ talk. Only words. He then went on the offensive against Hillary Clinton, saying that while his were only ‘words’, Hillary’s husband, past president Bill Clinton, engaged in actual sexual abuse and was impeached for it. The Trump camp had brought three women to the debate who were involved in Bill Clinton’s impeachment charges or were subjects of Clinton’s sexual misconduct. Trump further accused Hillary of laughing when, as a prosecuting attorney, she got her client saved from jail time in a rape case involving a 12 year old. Both candidates thus showed they would go to whatever lengths to dredge up decades old evidence to prove their opponent as ‘morally unfit’.
An interesting, related detail to the ‘morality telenovela in real time’ that has become the U.S. presidential election, is that the videos of Trump were released more or less simultaneous with the Wikileaks’ release last week showing Clinton’s plans to run her campaign with one set of proposals and promises communicated to private big banker-corporate donors, while planning to say the opposite to voters. When challenged by Trump to explain the leak and her implied ‘two-faced’ approach to U.S. voters, Hillary hid behind the example of Abraham Lincoln, saying he did the same and the practice was therefore legitimate.
This ascerbic exchange was preceded by Hillary’s reference to Russia and its president, Vladimir Putin, accusing them of hacking the Democratic Party and the U.S. election in order to aid Trump. The U.S. media in recent weeks has picked up this idea, for which there is no evidence to date, and has been promoting it widely. It is yet another dimension of the growing shift in U.S. elite toward confronting Russia. Hillary’s implicit suggestion in the debate was the Wikileaks release reflects Putin-Russian interference in the US election to aid Trump. The timing of the release of the Trump videos and the Wikileaks material raises the question whether in coming weeks voters can expect more of the same—i.e. more damaging Trump videos being released, perhaps not coincidentally, as more promised Wikileaks releases appear damning Clinton.
The second debate revealed yet another, even more ominous anti-Russia theme worth noting. In a reply to a question about what would the candidates do about Syria and Aleppo, Hillary declared the Russian air force in Syria is determined to destroy Aleppo. Russia has ‘gone all in’ in terms of ambition and aggressiveness in Syria, she added. Russia’s war crimes should therefore be investigated. Furthermore, a ‘no fly zone’ should be imposed in Syria. What she didn’t explain is if Russian planes ignored the U.S. ‘no fly zone’, would the United States try to shoot them down? And what if U.S. planes were shot down, as Russians retaliated? Clinton’s exchange revealed the U.S. ‘war hawk’ faction’s increasingly desperation concerning the Syria conflict, in which the United States has been increasingly sidelined and Russia has become more influential.
The debate moderator, Martha Radditz, then asked Trump what he would do in Syria, since Trump’s vice-presidential running mate, Pence, had just days before declared, agreeing with Clinton, “the U.S. should be prepared to strike military targets of the Assad regime”, presumably including airfields with Russian planes. Trump replied “I disagree”, and that the focus should be on dealing with ISIS. Trump’s disassociating from his VP, Hillary, and the war hawk faction created some stir and commentary in the post-debate discussion by pundits and talking heads.
Another notable exchange during the debate occurred when Trump attacked Clinton for deleting her emails after receiving a subpoena, when Secretary of State. He then dropped yet another debate bombshell by saying when he’s president he would appoint a special prosecutor to investigate Hillary’s action. When she rejected the notion as an example of Trump’s ‘imperial presidency’ view, Trump retorted it didn’t matter “because you’ll be in jail”.
Hillary clearly scored points in the debate, however, when the discussion turned, on occasion briefly, to actual policy. Trump noted costs of Obamacare had risen 68 percent, and that voters were drowning under rising costs of premiums, deductibles and copays. He advocated repeal and a total restart. Clinton, however, argued to fix it, and keep the good elements, whereas Trump would return health care to insurance and pharmaceutical companies’ price gouging and coverage denial, as in the past.
Clinton scored points in the exchange on taxes as well, noting that Trump’s plan to reduce taxes from 35 percent to 15 percent would benefit the rich twice as much as had George W. Bush’s tax cuts. She proposed no tax hikes on anyone earning less than US$250,000 a year, with taxation raised only on the wealthy.
The second presidential debate changed little in terms of voter preference, according to post debate polls. The unfavorability ratings for both candidates were virtually unchanged: Clinton with 45 percent unfavorable rating before the debate and 44 percent after; Trump with 64 percent unfavorable both before and after. In national polls Clinton enjoyed a wide margin of support among women before the debate, which has grown further after events of the past week. This margin may prove significant in the election outcome, providing it carries over to the 8 or 9 swing states where the election will be determined by voter turnout–perhaps even before November since 30 percent vote by mail before and that voting has already begun.
In the second debate, Trump’s strategy was clearly to shore up his conservative base by returning to the extreme anti-Hillary rhetoric that got him the nomination. Themes of Clinton as ‘liar’, ‘devil’, and ‘put her in jail’, were resurrected. He may have restored his base after the events of the past week, and by performing relatively better in the second debate (a very low bar), but that may not prove sufficient to win in November. Clinton has used the events of the past week and the debate to deepen her support among women voters. However, an expected ‘knock out’ debate, where Trump was decisively defeated, did not happen.
But debates and national polls are almost irrelevant at this stage. The outcome will be determined in the eight to nine swing states. With 87 percent of voters decided and neither candidate able to ‘move the needle’ in debates, it’s about whether Trump turns out more of his base in the swings states and whether Hillary can change the minds of millennials, Latinos, and others to turn out to support her after they have felt betrayed by Obama’s second term and its failure to deliver on promises made in 2012.
In the meantime, audiences can just ‘enjoy’ (and weep) the morality telenovela that is the current U.S. presidential election.
Jack Rasmus is the author of the just-released book, “Looting Greece: A New Financial Imperialism Emerges,” and the previous, “Systemic Fragility in the Global Economy.", both published by Clarity Press, 2016. He blogs at jackrasmus.com.
ARTICLE #1: ‘HILLARY’S GHOSTS’ (September 26)
On the eve of the first presidential debate, concern is growing among Democratic candidate Hillary Clinton supporters that her previous lead in the polls is narrowing and Republican rival Donald Trump is nearly “neck and neck” in voter support in key “swing states.”
In what are two of the three ‘bellweather’ states—Ohio and Florida (the other is Pennsylvania)—Trump appears ahead going into the first televised debate on Sept. 26. As of last week’s mid-September polling, he leads in Florida by 43.7 percent to 42.8 percent for Clinton. Other polls show him with a similar modest lead in Ohio. Should Trump win Florida and Ohio, it is highly likely he’d get the 270 electoral college votes necessary to win; and should he take Pennsylvania as well, it’s virtually assured he would.
U.S. presidential elections are not determined by the popular vote. They never have been. In the archaic and basically undemocratic U.S. electoral system—dominated by the highly conservative institution called the electoral college—all that matters this year is who wins the electoral college votes in the 8 or 9 “swing states.”
The remaining states are safely in either the Clinton or the Trump camp. The swing states, sometimes called the “battleground” states, are: Ohio, Florida, Pennsylvania, Michigan, Iowa, Wisconsin, Virginia, Colorado, and maybe North Carolina this year. The largest in terms of potential electoral college votes are Florida and Ohio. Pennsylvania is also significant. Whoever wins Florida, Ohio and Pennsylvania—the bellwether states—will almost assuredly carry the other five as well; and whoever wins most of the swing states, wins the election.
The outcome in the swing states will be determined in turn by which candidate can mobilize its constituencies and get out the vote. And that’s where “Clinton’s Ghosts” will play an important role, that is, reducing her ability to “turn out her vote” more than Trump is able to mobilize his.
Trump’s key constituencies are middle-aged and older whites in general, high school or less-educated white workers, religious conservatives, wealthy business types and investors, and the Tea party, radical and religious right. The Democrats’ constituencies are African Americans, Latinos, immigrants, the college-educated, urban women, trade unions in public employment and what’s left of the industrial working class, students and millennial youth under 30. This is the “Obama Coalition” created in 2008 that was barely held together in 2012, and is now in the process of fragmenting in 2016. The consequences of that break up may be determinative in the coming election.
The Ghost of Free Trade
The first ghost haunting Clinton is her historic, long-term advocacy of free trade deals from NAFTA to the current Trans-Pacific Partnership. Clinton has said she does not agree with the TPP, but only in its present form. She promises to “take a look” at it if elected. But that’s waffling that won’t fool union and white working class voters in the Ohio-Pennsylvania-Michigan-Wisconsin swing states that have seen their good jobs offshored and sent to other countries as a direct result of free trade deals from Bill Clinton’s NAFTA to Barack Obama’s TPP.
Nor will this former Democrat constituency forget how Obama in 2008 pledged, similar to Hillary, to take a look at changing NAFTA, but then went on to become the biggest advocate of free trade ever—cutting deals with Panama, Colombia, bilaterally with other countries and is now pushing hard for TPP and a similar deal with Europe.
Union workers in the Great Lakes area of Ohio-Pennsylvania-Michigan played a major role in carrying those swing states for Obama in 2008. The majority have likely already gone over to Trump, who’s position on free trade deals is more directly opposed than Hillary’s carefully worded ambivalence. If they turn out to vote, it will be for Trump.
The War Hawk Ghost
Another ghost haunting Clinton is her repeated and consistent war-hawk positions assumed while in the senate and then as secretary of state. Hillary voted for the wars in Iraq and Afghanistan, was at the center of initiating war in Libya, and favored more direct U.S. military action in Syria.
As secretary of state, she also allowed—unchecked—her neocon-ridden state department, led by Undersecretary Virginia Nuland, to actively help provoke a coup in the Ukraine in 2014. No matter how hard she tries at the eleventh hour, Clinton cannot shed the war-hawk image she nurtured for more than a decade. This will cost her votes with millennials, who already deserted her for Sanders for her pro-war history
The Ghost of Abandoned Millennials
College educated millennial youth are also abandoning Clinton as a result of the Obama administration’s failure to do something about their more than $1.2 trillion college debt and the long-term underemployed in part-time and temporary jobs with no benefits and little prospects for the future. The Obama administration may brag of the jobs it has created since the last recession, but most millennials languish in low pay, no benefit service employment, with more than a third living at home with parents and unable to start families or independent lives.
They may not like Trump but their resentment will likely translate into not voting for Clinton. Attempts to lure millennials back with promises of free college tuition are too late for those already indebted; and a few weeks of paid maternity leave for new parents appears as a token alternative for more generous childcare tax cuts proposed by Trump.
The Ghost of the Hispanic Vote
The constituencies of union labor, youth, and people of color were the voters that gave Obama his second chance in 2012 and returned him to the White House. He rewarded trade unions with the TPP and millennials with debt and underemployment.
Obama carried key swing states like Florida, Virginia, Colorado, Iowa and others largely as a result of the Hispanic vote as well. He promised them, in exchange for their vote in 2012, immigration reform, the Dream Act, and direct executive action. What they got was the largest mass deportations in modern U.S. history and broken families. Trump may insult Mexican-American voters with stupid off-the-cuff remarks and silly promises to build walls. But the deportations have had a far more devastating effect on Latino families and voters in key states in the Midwest, southwest and Florida.
Florida is a must-win swing state. Whoever loses Florida would have to win virtually all the remaining swing states. Obama carried more than two-thirds of the Latino vote Florida in 2012. Clinton has barely 50 percent support of that constituency today. In addition, a majority of the youth vote now favor Trump, not her. The ghost of past mistreated Latinos under Obama thus hangs heavy over Clinton in the present in that state—just as free trade and job loss do in the other key swing state of Ohio. Losing both means virtual defeat.
These ghosts hang heavy over the Clinton campaign in the swing states. Trump will have trouble with establishment Republicans and some Tea party types will certainly go to the Libertarian candidate, Gary Johnson. But Clinton may have even bigger problems with mobilizing white union workers, youth, and Hispanics—the very voter constituencies that made the big difference in giving Obama one more chance in 2012.
How the two candidates perform in the upcoming presidential debates will also weigh heavily on the election outcome. Can Clinton offset her voter turnout disadvantage by clearly prevailing in the upcoming debates? The election may be scheduled for November, but it may be all but over by October if she clearly doesn’t.
Jack Rasmus is the author of the just-released book, “Looting Greece: A New Financial Imperialism Emerges,” and the previous, “Systemic Fragility in the Global Economy.", both published by Clarity Press, 2016. He blogs at jackrasmus.com.
ARTICLE #2: THE FIRST PRESIDENTIAL DEBATE AND AFTERMATH (October 3, 2016)
A week ago, on Monday, September 26, the 1st Presidential debate was held. 84 million watched the two most disliked candidates in perhaps more than a century square off and debate.
The one, Donald Trump, a self-proclaimed billionaire wheeler-dealer real estate developer backed by billionaire economic advisers and campaign contributors like sleazy Casino magnate Sheldon Adelson, hedge fund vultures Robert Mercer and John Paulson, private equity king Stephen Feinberg and at least a dozen other billionaires that constitute Trump’s current ‘economic team’; the other, Hillary Clinton, a mere multimillionaire worth a paltry $200 million (not counting her foundations valued at around $400 million), who has accumulated her wealth in just the past decade by means of her (and her husband Bill’s) close connections to investment bankers like Goldman Sachs CEO, Lloyd Blankfein, billionaire hedge fund managers like George Soros and James Simons, multinational tech company CEOs, and billionaire corporate media families like the Sabans, Katzenbergs, and Coxes.
The major economic issues raised in the debates included jobs, trade, taxes and the $20 trillion US government debt. On domestic policy, the focus was racism and gun violence. On foreign policy—Isis, Iraq, NATO, China, first use of nuclear weapons, and Russia.
Taxes and Jobs
Trump proclaimed his plan would cut taxes by $12.5 trillion. He proposed to pay for the cuts by repatriating $5 trillion of cash US corporations continue to hoard offshore. The incentive to repatriate the $5 trillion would be to reduce the corporate tax rate to 5% to 7%, instead of the current 35. But Trump conveniently ignored pointing out this repatriation trick was already played in 2005-06 under George W. Bush. US corporations had accumulated $2 trillion offshore, were given by Congress a ‘pass’ and a lower rate of 5.25% to repatriate so long as they created US investment and jobs with remainder of the repatriated funds. They brought it back, all right, but did not create jobs and instead used the excess profits they realized to buy up companies and pay out dividends to shareholders.
But Clinton carefully did not pick up this issue and use it against Trump in the debate. Why? Because Democrats in Congress are currently proposing the same tax repatriation scam as Trump and Clinton admitted she too supported ‘repatriation’ business tax cuts.
While talking in generalities about ‘taxing the wealthy’, Clinton carefully avoided mentioning that tax cuts for business under Obama have been even more generous than they were under George W. Bush. Bush tax cuts from 2001-2008 amounted to approximately $3.7 trillion—of which it is estimated 80% accrued to businesses and wealthiest households. Obama extended the Bush tax cuts for two years from 2008 to 2010, at a cost of another $450 million, then provided another $300 million in his 2009 bailout package, and then struck a deal with Congress to cut taxes another $4 trillion in January 2013 by again extending Bush’s tax cuts another decade through 2022.
And conspicuously missing in the debate was that neither candidate commented on whether they supported the further major tax cuts for corporations being planned to passage right after the November elections. That’s because both no doubt will support it when it comes up for voting in Congress soon following the election.
Both candidates avoided responding directly to the moderator’s question: ‘Would you support raising taxes or reducing taxes on the wealthy”. Instead of substance, the debate on taxes focused on whether Trump personally paid taxes and why he refuses to release his tax returns. Clinton kept pressing the subject, scoring points repeatedly as Trump fumbled the issue of his personal taxes. He finally responded to why he hasn’t paid taxes or released his tax records with “I guess that makes me smart”—a remark that will no doubt cost him significant votes.
In the debate, both candidates supported the myth that tax cuts create jobs. The only difference between them is which cuts. Trump meant corporate tax cuts. Clinton meant a mix of business and non-business. But the historical record shows clearly there is no relation between tax cuts in general, and business tax cuts, and job creation in the 21st century. US manufacturing employed 18 million workers in 2000. After nearly $10 trillion in tax cuts, it now employs 12 million. Construction employment has similarly declined. While service jobs have increased since 2000, so too have the ranks of the part time, temporary, and those employed in the underground economy. Together with these ranks of partially employed, more than 6 million more have left the labor force in the US—a net poor return in jobs for the nearly $10 trillion in tax cuts.
NAFTA, TPP and Trade
Trump’s business constituency of real estate and financial interests is less concerned with trade deals than Clinton’s. Trump is also targeting small businesses, which typically don’t export but are harmed by imports, as well as white working class in the Midwest whose incomes have been devastated by free trade deals like NAFTA. However, unlike before the debate, he didn’t declare he would discontinue the existing trade deals. He promised first to stop the further offshoring of US jobs —without explaining how he would do this—and also left unexplained how he proposed to get the millions of jobs previously offshore back to the US. Clinton too provided no details how to get the jobs back or what she would do to stop future bloodletting of US jobs offshore.
While declaring NAFTA as ‘defective’, Trump simply added “we need to renegotiate trade”—a position little different from Clinton’s that we “need to take a new look at trade”. The debate thus talked in generalities that leave the door open after the election for either to support the TPP and undertake token reforms at best regarding NAFTA. More revealing of Clinton’s true intentions perhaps was her off the cuff comment that she’d vote again for CAFTA (Central American Free Trade Agreement) if given the opportunity.
Debt and Defense Spending
Trump several times during the debates referred to the nearly $20 trillion in US national debt. But what he failed to mention is that studies show about 60% of that debt is due to tax cuts and declining US tax revenues. Another $3 trillion at least is due to US war spending since 2003. Yet in the debate Trump called for accelerated war spending, while Clinton said nothing about whether she would increase war spending or reduce it. Her silence spoke volumes on that topic, however, as did her repeated references to the need to confront Russia and China. While Trump directly indicated he would not use nuclear weapons first, Hillary avoided answering the moderator’s question, implying perhaps she would, which has been the US official position to date.
The Silly Subjects
Much of the time of the debate was also consumed by extensive discussion of such silly issues as whether Obama was born in the US, whether Hillary had the ‘stamina’ to be President or Trump the ‘temperament’, Trump’s personal bankruptcies, and whether each would accept the outcome of the vote.
The Missing Debate
More important perhaps than what was said was what was ignored and not discussed by the candidates during the debate—like the stagnating and declining incomes of tens of millions of working and middle class Americans since 2000, the simultaneous approximate 10 trillions of dollars in capital gains, dividends and interest income obtained by the wealthy 1% over the same period, the collapsing pension and retirement systems today in the US, the increasingly unaffordable rents and healthcare insurance costs, US drug companies’ price gouging and unraveling of Obamacare, the US central bank’s policy of low interest rates destabilizing the economy, the consistent violation of regulations by bankers, the new US military adventures now being prepared for Russia’s east Europe border and China’s coast, the militarization of US police forces, what to do about racism and gun violence besides meaningless calls to ‘improve community-police relations’. Nothing was said about global climate crisis by either candidate; nor about the opaque manipulations, by both candidates, of their personal foundations for political use.
In the days immediately following the debate, the general consensus was that Trump’s rambling and unfocused responses to Clinton meant he had clearly performed poorly and had lost the debate. Clinton recovered in the polls, pulling even or just a few points ahead in national polling and assuming a slight lead in several of the ‘swing states’. But with 87% of voters having already decided, national poll results are largely irrelevant, and the margin of error in the polling in the swing states still remains so narrow, post-debate, that it is insignificant in most of the swing states.
How is it that Trump could have performed so poorly in the TV debate and the race still remain so close? What the past week does show is that despite Trump doing all he can to put his foot in his mouth, and help Clinton with outrageous sexist and racist statements, there still remains a large, widespread and hardened discontent with Clinton. The first debate should have clearly ‘put Trump away’, and locked in an eventual November victory for Clinton, but it hasn’t. Which candidate turns out its traditional base to vote in November in the swing states still remains the key element for who wins the election.
Given that strategic reality, it’s not surprising that Clinton in the past week has intensified efforts toward trying to convince millennials to turn out to vote for her. A Democrat Party ‘full court press’ has been launched targeting the under-35 voters, many of whom had defected to Sanders in the primaries as well as to the Libertarian candidate, Johnson, and Green Party candidate, Jill Stein.
In synch with this effort, this past week the anti-Trump mainstream corporate media has stepped up its critique and efforts to marginalize both Johnson and Stein, pressing the old theme that ‘a vote for a third party is a vote for Trump’. The past week Clinton campaign thus began mobilizing Sanders and liberal darling, Elizabeth Warren, having them tour college campuses pitching the theme to millennials to ‘get out and vote’. Simultaneously, Clinton herself has begun to prioritize themes of college tuition and child care more in her speaking engagements and in her media advertising. In the remaining weeks before the election, watch for the Clinton camp to launch new initiatives as well to shore up her weak base among white working class voters in the Midwest swing states, and among Latinos there and in Florida, Virginia-Carolinas, Colorado-New Mexico-Nevada.
The Clinton campaign has clearly not yet turned out the defections of the youth, under-30 vote, lost during the primaries. Nor has it been able to excite Hispanics and Latinos as did Obama in 2008 and 2012 with false promises of Dream Acts and Immigration justice. And the white, non-college educated working class in key Midwest states remains all but lost to Trump for good.
The continuing hard core discontent with Clinton has its roots not only in her own political record on war, trade, and her intimate ties to the banking and corporate elite, but in the poor economic legacy left by Obama policies and programs over the past eight years. Clinton presses her point the US economy has not been as bad as Trump claims, but for many constituencies—especially youth, minorities, and non-college educated white workers—it is not believable. In fact, for many it has been a disaster. But you won’t hear that truth from the mainstream corporate media or the Clinton camp.
Behind Clinton’s troubles in this election is the ‘gray eminence’ of failed Obama economic and social policies that Democrats refuse to own up to—i.e. creation of only low pay, part-time, temp and ‘gig’ service jobs with no benefits, crushing levels of student debt, escalating rents and health insurance costs under Obamacare, declining savings for tens of millions of retirees after eight years of near zero interest rates by the Federal Reserve under Obama, continuing free trade destruction and offshoring of US manufacturing, millions of homeowners still ‘under water’ on their mortgages, chronically rising household debt, perpetual wars in the middle east, intensifying racism and police violence throughout the US, record levels of immigrant deportations, etc.—in other words, the ‘legacy of Barack Obama’, which hangs like a thick political fog over the Clinton campaign threatening key constituency voter turnout while holding up support for Trump despite his best efforts to scuttle his own campaign with his mouth.
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.
Jack Rasmus studied economics at Berkeley, took his doctorate in the University of
Toronto (1977), and worked for many years as a union organizer and labour contract
negotiator. Then, after working as an international economist for global companies
(such as Siemens) and an international strategic analyst for some Silicon Valley start-ups,
he became a full-time independent economic researcher, author, journalist, radio host,
playwright, poet, lyricist, and activist. He also established Kyklos Productions and Jack
Rasmus Productions, which use different media, including stage plays and musicals, to
explain the long run changes in the USA and its future trajectory. He is currently Federal
Reserve Bank chair of the Green Party Shadow Cabinet and economic advisor to Jill
Stein, the party’s presidential candidate. This background is important for understand-
ing the theoretical novelty, persuasive power, political passion, and programmatic signifi-
cance of this book.
Systemic Fragility in the Global Economy (2015) is the fourth in a series that Rasmus
has produced within this broad intellectual and activist project. Each work not only
provides a theoretically-informed, empirically-grounded diagnosis but also offers a
wide-ranging set of policy recommendations aimed at progressive movements. The
first work was a detailed critique of the diverse upward wealth transfer mechanisms
employed in the corporate-government class struggle against subaltern classes and
groups in the Reagan-Bush-Clinton-Bush era (Rasmus 2006). The second, based in
part on major journal articles, was Epic Recession: Prelude to Global Depression (2008).
This also provides the theoretical foundations for his analysis of systemic fragility. Its
two main claims are that, first, the North Atlantic Financial Crisis (my term) is more
comparable to the recessions followed by stagnation that occurred in the USA in 1907-
1914 and 1929-31 than it is to normal cyclical recessions (marked by a brief contrac-
tion followed by a swift return to growth) or a classic depression; and, second, that the
explanation for epic recessions can be found in the interaction of debt-default-defla-
tion dynamics across the corporate, household, and government sectors. This work
was followed by detailed critique of the current and future policy failures of the Obama
Presidency and the presentation of an alternative policy programme and reform agenda
(2012). The fifth is concerned with the Greek crisis and the rise of financial imperial-
The book reviewed here extends the analysis of epic recession dynamics, with declin-
ing growth, increasing fragility, and worsening instability, to the global economy. In
particular, Rasmus argues that the epic recession has been mutating as the financial crisis
becomes more general and directly weakens the ‘real economy’, generates secular stagna-
tion, and produces ricocheting contagion effects around the world economy exacerbat-
ing weaknesses in each economy and giving rise to distinct crisis symptoms in different
regions. Starting in the neoliberal, finance-dominated US-UK economies in 2007-2008,
in 2010-14 it affected the weak regional links in the advanced economies the Eurozone
and Japan before shaking China and emerging markets. Despite their different forms of
appearance (real estate, stocks, currency markets, government bonds), the underlying
causes remain excessive liquidity that fuel different kinds of speculative financial bubbles
and growing debt. The resulting crises cannot be tamed by fiscal or monetary means.
Indeed central bank liquidity injection and government fiscal policies exacerbate the
crises. Central bank responses have boosted liquidity, which has flowed into further asset
speculation rather than productive investment and is creating the basis for an even bigger
economic crisis. The detailed empirical analysis is backed by a sustained critique of inter-
national financial institutions, Wall Street shills and regulators, economic statistics and
statisticians, and, more importantly, mainstream economics, especially neoclassical econ-
omists and hybrid Keynesians (who seek to integrate Keynesian insights into neoclassical
economics), mechanical Marxists (who invoke the falling rate of profit to explain crises),
and the significant but now outdated contributions of Hyman Minsky to the analysis of
The theoretical novelty in this text compared with the author’s Epic Recession is a more
systematic presentation of systemic fragility. The possibility of recession, crisis, and
depression is given in the price system in general and the dynamics of financial asset
prices in particular, which differ in several ways from those of real asset prices and can
become fundamentally destabilizing under conditions of systemic fragility. For Rasmus,
this phenomenon is rooted in nine key empirical trends: slowing real investment; defla-
tion; an explosive growth in money, credit and liquidity; rising levels of global debt; a
shift to speculative financial investing; the restructuring of financial markets to reward
capital incomes; downward pressure on wages; the failure of Central Bank monetary
policies; and ineffective fiscal policies.
The case studies of the USA, Europe, Japan and China are excellent, typically contrar-
ian, and highly teachable. Many important and provocative arguments and points are
made in passing in these studies and they are strengthened by the more sustained theo-
retical analyses that follow. A major contribution is the analysis of the complexity of
shadow banking, an ill-defined term of art in most of the literature. I have found the
analysis of debt-default-deflation dynamics very helpful in my own research on crises and
the elaboration here is more detailed than in Epic Recession.
Nonetheless there are also three unresolved issues that will interest readers of
Capital & Class and are unlikely to be solved through Rasmus’s promised next iteration
of the analysis. First, perhaps reflecting his economic training and labour activism
in the USA and Canada, the critique of official dogma, orthodox economics and
Keynesianism is well-developed but the presentation and critique of Marxist theories
leads much to be desired, especially the critique of “mechanical Marxism”, and, com-
pared with his biting criticisms of other theorists, his grasp of Marx’s method and
arguments is disappointing. Second, relatedly, while the analysis of financial asset
price formation and debt-default-deflation dynamics is innovative, the articulation of
this analysis with the contradictions and crisis-tendencies in the circuits of productive
capital is weak. This matters insofar as the crisis of Atlantic Fordism in the 1970s and
1980s has a strong bearing on the rise of financialization and finance-dominated
accumulation in the USA and UK. And, third, the institutional mediation of crisis
dynamics in the political system, the influence of neoliberalism broadly considered,
and the specificities of political and ideological struggles that have shaped the rise of
finance-dominated accumulation, all deserve far more attention than they receive in
this text. The analysis seems at times to move uneasily between detailed empirical
description of crisis symptoms and dynamics, a general middle range theory of debt,
liquidity, and financial asset price formation, and a potentially class-reductionist
account of the social forces behind the rise of financialized capitalism. Paradoxically
this makes this book an excellent and cathartic text for teaching and activism but
leaves much unfinished business for those who want to relate this analysis to broader
questions of international political economy and political strategies that look beyond
the labour and green movements.
Bob Jessop, Distinguished Professor of Sociology, Lancaster University, UK
from ‘Capital & Class’, June 2016
Rasmus J (1977) The Political Economy of Wage-Price Controls in the U.S., 1971–74. Ph.D. thesis,
University of Toronto.
Rasmus J (2006) The War At Home: The Corporate Offensive from Ronald Reagan to George W.
Bush. San Ramon, CA: Kyklos Productions.
Rasmus J (2010) Epic Recession: Prelude to Global Depression. London: Pluto.
Rasmus J (2012) Obama’s Economy: A Recovery for the Few’. London: Pluto.
Rasmus J (2012) An Alternative Program for Economic Recovery. San Ramon, CA: Kyklos Productions.
Rasmus J (2016) Systemic Fragility in the Global Economy. Atlanta, GA: Clarity Press.
Rasmus J (2016) Looting Greece: a New Financial Imperialism Emerges. Atlanta, GA: Clarity Press.
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 crisis has
been sluggish as well, with growth around 2% in the US (2.2% in 2017, according to IMF
estimates), 0.6% in the EU (2016), 0.7% in Japan (2016). An ordinary period headline is, ‘U.S. in
weakest recovery since ‘49’ (Morath 2016).
Emerging economies and developing countries (EMDC) 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)—noted, but why? Or, uncertainty—
which is odd because policies haven’t changed for years. Or, corporate hoarding—corporations,
particularly in the US, 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,
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 healthcare, education, personal care) where it is hard to raise
If we consider policies, the picture gets worse because a) implemented year after year,
they clearly don’t work, b) indications are 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 US,
UK, EU and Japan. Other standard policies are, in the EU, austerity—which may cut deficits but
obviously doesn’t generate growth (and by depressing tax revenues over time worsens
deficits)—and structural reform. Besides privatization, the major component of reform is labor
market flexibilization, in other words depressing wages and incomes. This has been
implemented in the US since the 1970s and 80s, in the UK in the 90s, in Germany in the 00s, and
is now on the scaffolds in Japan and France (and possibly Spain and Italy). The objective is to
boost international competitiveness by depressing wages and benefits, which a) ceases to have
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, c) 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.
o 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.
o 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 (408).
o 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’ (212).
o 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’
(220). Low interest rates and zero interest rate policies (ZIRP) benefit governments (it
lowers their debt and interest payments) and banks (affords easy money) while they
lower household income (lower return on savings and lower value of pensions), so in
effect households subsidize banks (471).
o Quantitative easing (QE) policies, massive injections of money capital by the US ($4tr),
UK ($1tr), EU ($1.4tr) and Japan ($1.7tr) since 2008, or ‘about $9 trillion in just five
years’ (185, 262). Add China ($1-4tr) and add government bank bailouts over time and,
according to Rasmus, the total global liquidity injected by states and central banks is in
the order of $25 trillion (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 isn’t determined by liquidity but by
expectations of profit.
b Funds that are invested in the goods economy leak overseas via MNCs investing
in 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 (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’ (473).
The post-crisis attempts at bank regulation overlook the shadow banks, even though the
2007-2008 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, etc.; a typology is on 224.) The integration of commercial and shadow
banks is another variable. Shadow banks control in 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 (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 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’ (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 aren’t new. Note work on
austerity (Blyth 2013) and finance (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, bank bailouts) and provide stability are destabilizing, act as a break on growth and
aggravate the problem. According to Karl Kraus, psychoanalysis is a symptom of the disease that
it claims to be the remedy of, and the same principle holds for the central bank policies of
financial crisis management.
This doesn’t mean 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 isn’t 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%. 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. They have been less dependent on
western finance than Latin America and Africa and having learned from the Asian crisis of 1997,
they have built buffer funds against financial turbulence and tend to ring-fence their economies
from Wall Street operations. But, 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 over-investment, but which has next led to major
initiatives of externalizing investment-led growth in new Silk Road projects in Asia and beyond
(One Belt One Road, Maritime Silk Road, Asian Infrastructure Investment Bank, Silk Road Fund,
etc.). Meanwhile, Rasmus has made a signal contribution to contemporary economics and
provided a vitally important X-ray of the political economy of stagnation.
Jan Nederveen Pieterse, University of California Santa Barbara
in ‘Perspectives Libres’, Paris, 2016
Blyth, Mark 2013 Austerity: the history of a dangerous idea. New York, Oxford University Press
Cowen, Tyler 2011 The Great Stagnation. New York, Dutton
El-Erian, Mohamed A. 2016 The only game in town: central banks, instability, and avoiding the
next collapse. New York, Random House
Galbraith, James K. 2012 The end of normal. New York, Simon and Schuster
Goetzmann, William N. 2016 Money changes everything. Princeton University Press
Gordon, Robert J. 2016 The rise and fall of American growth. Princeton University Press
Morath, E., U.S. in weakest recovery since ’49, Wall Street Journal 7/30-31/2016: A1-2
Rodrik, Dani 2015 Premature Deindustrialization, NBER Working Paper No. 20935,
Sender, H., Short-term relief for hedge funds belies tough search for yield, Financial Times
Summers, Lawrence, Why stagnation might prove to be the new normal, Financial Times
Wolf, Martin, An end to facile optimism about the future, Financial Times 7/13/2016: 9.
This week marks the first anniversary of the 2015 Greek debt crisis, the third in that country’s recent history since 2010. Last August 20-21, 2015, the ‘Troika’—i.e. the pan-European institutions of the European Commission (EC), the European Central Bank (ECB), plus the IMF—imposed a third debt deal on Greece. Greece was given $98 billion in loans from the Troika. A previous 2012 Troika imposed debt deal had added nearly $200 billion to an initial 2010 debt deal of $140 billion.
That’s approximately $440 billion in Troika loans over a five year period, 2010-2015. The question is: who is benefitting from the $440 billion? It’s not Greece. If not the Greek economy and its people, then who? And have we seen the last of Greek debt crises?
One might think that $440 billion in loans would have helped Greece recover from the global recession of 2008-09, the second European recession of 2011-13 that followed, and the Europe-wide chronic, stagnant economic growth ever since. But no, the $440 billion in debt the Troika piled on Greece has actually impoverished Greece even further, condemning it to eight years of economic depression with no end in sight.
To pay for the $440 billion, in three successive debt agreements the Troika has required Greece to cut government spending on social services, eliminate hundreds of thousands of government jobs, lower wages for public and private sector workers, reduce the minimum wage, cut and eliminate pensions, raise the cost of workers’ health care contributions, and pay higher sales and local property taxes. As part of austerity, the Troika has also required Greece to sell off its government owned utilities, ports, and transport systems at ‘firesale’ (i.e. below) market prices.
Europe’s Bankers Got 95% of Greek Debt Payments
The $440 billion in Troika loans— and thus Greek debt— has not been employed to benefit the Greek people, or to help the Greek economy recover from its eight years of depression; it has gone to pay the principle and interest on previous Troika debt, as that debt has been piled on prior debt in order to pay for previous debt.
A recent 2016 released study has revealed conclusively where all the interest and principal payments on the $440 billion debt has gone. It has gone directly to European bankers and investors, and to the Troika institutions of the EC, ECB, and IMF, who indirectly in turn recycle it back to private bankers and investors.
According to the White Paper (WP-16-02) published by the European School of Management and Technology (ESMT) this past spring 2016, entitled “Where Did the Greek Bailout Money Go?”, more than 95% initial Troika loans to Greece went to pay principal and interest on prior Troika loans, or to bailout Greek private banks (owned by other Euro banks or indebted to them), or to pay off European private investors and speculators. Less than 10 billion euros was actually spent in Greece.
The ESMT study further estimates the most recent, 3rd Greek debt deal of last August 2015 will result in more of the same: Of the $98 billion loaned to Greece last year, the study projects that barely $8 billion will find their way to Greek households.
The Cost to Greece Eight Years Later
In exchange for the 95% paid to the Troika and banker-investor friends, the austerity measures accompanying the Troika loans has meant the following: Greece’s unemployment rate today, in 2016, after eight years is still 24%. The youth jobless rate still hovers above 50%. Wages have fallen 24% for those fortunate enough to still have work. The collapse of wages is due not just to layoffs or government and private business wage cutting, both of which have occurred since 2010, but is due also to the shifting of full time to part time work. Full time jobs have collapsed 27%, the lowest ever, while part time jobs have risen 56%, to the highest ever. The poorest and most vulnerable Greek workers and households have seen their minimum wages reduced by 22% since 2012, on orders of the Troika. And pensions for the poorest have been reduced by approximately the same. All that to squeeze Greek workers, households and small businesses in order to repay interest on debt to the Troika, to Europe’s bankers, and private investors.
None of the debt, austerity, depression, and collapse of incomes existed before the Troika intervened in Greece starting in 2010. Greece’s debt to GDP was around 100% in 2007, about where it had been every year for the entire preceding decade, 1997-2007. It was no worse than any other Eurozone economy, and better than most. Greek debt rose in 2008 to 109% due to the global recession, accelerating to 146% of GDP in 2010 with the first Troika debt deal of $140 billion. It then surged to more than 170% in 2011, where it has remained ever since as another $300 billion was added in Troika loans in 2012 and 2015.
Greece’s debt since 2010 is certainly not a result of Greek government spending, which has fallen from roughly 14 billion euros to 9.5 billion in 2015, reflecting Greece’s deep austerity cuts demanded by the Troika. Nor can it be attributed to excessive wages and too many public jobs, as both these have declined by a fourth as debt has accelerated. The debt is Troika loans forced on Greece in order for Greece to pay principal and interest on previous loans forced on Greece.
And Still No Relief 2015-16
What happened a year ago, in the third Troika debt deal of August 2015, was the same that happened in 2012 and 2010: $98 bill more debt was added to Greece’s already unsustainable $340 or so billion. In exchange, last August Greece had to implement the following even more severe austerity measures:
Generate a budget surplus of 3.5% of GDP from which to repay Troika debt—i.e. around $8 billion a year. Raise sales taxes to 24%, plus more tax hikes on “a widening tax base” (i.e. higher taxes for lower income households). Introduce what the Troika calls “holistic pension reform”—i.e. cut pensions up to 2.5% of GDP, or around $5 billion a year, and abolish minimum pensions for the lowest paid and the annual supplemental pension grants. Introduce a “wide range” of labor market reforms, including “more flexible” wage bargaining, easier mass layoffs, new limits on worker strikes, and thousands more teacher layoffs as part of “education reform”. Cut health care services and convert 52,000 more jobs to part time. And introduce what the Troika called a more “ambitious” privatization program. And this is just a short list.
And how has Greece’s economy actually performed over the past year?
Greek government spending since August 2015 has further declined by 30% as of mid-year 2016, except for military spending that has risen by $600 million. Since August 2015, quarterly Greek GDP has continued to contract on a net basis. Greek debt as a percent of GDP has risen further. There are 83,000 fewer full time jobs. (But 28,000 more part time jobs). Youth unemployment rates have risen from 48.8 to 50.3%. Consumer spending has dropped by almost 10%, as consumer confidence continues to plummet, home prices deflate, and business investment, exports, and imports all slow. In other words, the Greek economy continues to worsen despite the added $98 billion Troika debt and the more extreme austerity measures imposed a year ago.
Is Another 4th Greek Debt Crisis Inevitable?
The answer is ‘Yes’. Greece cannot generate a 3.5% surplus from which to pay the mountain of principal and interest on its debt. Debt repayments in 2016 to the Troika were relatively minimal in 2016. In 2017-18, however, greater debt repayments will come due as Greece’s inability to repay will no doubt worsen, when the next Europe-wide recession hits, which is likely in 2017-18 as well. The next Greek debt crisis may erupt even before, as a consequence of the current deterioration in Europe’s banking system in the wake of Brexit and the deepening problems in Italy’s and Portugal’s banking systems. Contagion elsewhere could quickly spill over to Greece, precipitating another 4th Greek banking and debt crisis.
An Emerging New Financial Imperialism?
By imposing austerity to pay for the debt the Troika since 2010 has forced the Greek government to extract income and wealth from its workers and small businesses—i.e. to exploit its own citizens on the Troika’s behalf—and then transfer that income to the Troika and Europe bankers and investors. That’s imperialism pure and simple—albeit a new kind, now arranged by State to State (Troika-Greece) financial transfers instead of exploitation company by company at the point of production. The magnitude of exploitation is greater and far more efficient.
What’s happened, and continues to happen in Greece, is the emergence of a new form of financial imperialism that smaller states and economies, planning to join larger free trade zones and ‘currency’ unions, or to tie their currencies to the dollar, the euro, or other need to avoid at all cost, less they too become ‘Greece-like’ and increasingly debt-dependent on more powerful capitalist states to which they decide to integrate economically.
Neoliberalism is constantly evolving and with it forms of imperialist exploitation as well. It starts as a free trade zone or ‘customs’ union. A single currency is then added, or comes to dominate, within the free trade customs union. A currency union eventually leads to the need for a single banking union within the region. Central bank monetary policy ends up determined by the dominant economy and state. The smaller economy loses control of its currency, banking, and monetary policies. Banking union leads, of necessity, to a form of fiscal union. Smaller member states now lose control not only of their currency and banking systems, but eventually tax and spending as well. They then become ‘economic protectorates’ of the dominant economy and State—such as Greece has now become.
(For a deeper analysis of Greek debt and the emerging new financial imperialism, see Dr. Jack Rasmus, ‘Looting Greece: An Emerging New Financial Imperialism’, by Clarity Press, September 2016).
With the Republican and Democrat party nominating conventions just weeks around the corner, it has now become clear that the 2016 USA presidential election is unlike preceding elections in recent decades. Large percentages of those who consider themselves members of either party do not approve of their presidential candidates, for one thing. That includes more than a third of both Republican and Democrat voters. For another, both candidates have assumed positions on issues that in previous elections would have been considered anathema to the dominant ruling economic and political elites. For example, both candidates have been highly critical of US trade and free trade policies—especially Trump.
Trump’s more vehement criticism of US trade policies in particular has US elites concerned, to put it lightly. Almost hysterical might more accurately express their emotional state when the subject of Trump and trade is raised.
US Elites Nervous About Trump & Trade
For example, the president of the biggest and most influential US business lobbying group, the Business Roundtable’s John Engler, a former governor of Michigan, in a recent interview stated “There’s a great sense of frustration here”. Trump’s views on trade are ”diametrically opposite” and a “cause for great concern” to the Roundtable, whose corporate members collectively represent more than $7 trillion in annual revenues and employ 16 million workers. “Everything has been upended”, according to Engler.
Chicago billionaire, Penny Pritzker, current US Commerce Secretary, has voiced similar concerns, as has Obama—i.e. Pritzker’s protégé since his early days in the Illinois state legislature. While Obama the candidate in 2008 promised to rewrite the NAFTA free trade treaty if elected, as soon as he was elected he morphed into the biggest presidential advocate of free trade in US history—thus coming around to the view of Pritzker’s Chicago corporate clan of free traders. Most politically well-connected economists, and media mouthpieces in and out of academia—like Paul Krugman, Thomas Friedman, and a host of others—all defend free trade and therefore have joined the growing army of pundits attacking Trump’s positions on the subject. Christine Lagarde, director of the Washington-based and US dominated International Monetary Fund, IMF, has chimed in recently as well, labeling Trump’s trade proposals “disastrous” for the world economy. The presidents of the NAFTA economies—the USA, Canada, and Mexico—recently met in their ‘three amigos’ NAFTA summit in Ottawa, Canada recently and jointly reaffirmed their elites’ view of the benefits of free trade, and the dangers of ‘Trump-like’ trade protectionism.
According to the academic theory of free trade all countries involved benefit from trade. But do they? Free trade theory says nothing of how the benefits get distributed and to whom—i.e. to corporations, investors, and shareholders or to wage earners. If corporations and investors benefit on both ends of the trade exchange, the same is not necessarily so their respective working classes. Free trade theory conveniently ignores income distribution effects. However, that doesn’t deter mainstream economists treating it like a ‘holy grail’ of neoliberal economics nonetheless.
Trade and Working Class Incomes
The record of US free trade policies for working and middle class America reveals devastation, not benefit. For example, total US employment since NAFTA and China trade the past two decades has witnessed a loss of more than 6 million US manufacturing jobs. Perhaps as many as two thirds of which have been due to free trade alone, according to studies. Additional millions of jobs have been lost in communications, professional services, and other non-manufacturing industries. For the jobs that remain, moreover, wages in US companies that export more have risen less than wages have fallen in companies harmed by the rise in imports. The net result is that both jobs and wages—and therefore median working class incomes—are both negative. And that’s due to direct export-import effects. There’s more.
Free trade is also about money and investment flows, as well as goods and services net export-import flows. Read the provisions of NAFTA. It’s as much about terms and conditions for US corporations ease of US money investing into Mexico as about goods and services. With free trade enabled money and investment outflows from the US have come US investment offshoring and consequent US job offshoring. Job offshoring is thus an indirect, and no less significant, consequence of free trade. In the past 15 years, US households’ median wages and incomes have declined by more than 10%–much of that due to the above free trade direct and indirect job and wage effects.
In the past two decades, and especially since 2009, US workers have become more informed and conscious of the negative impact of trade on their jobs, incomes, and living standards. They see the wealthiest 1% of household take 95% of all the net income gains since 2010, while their wages and incomes decline. They see high paying manufacturing jobs disappear to other countries, while more than half of the jobs that have been created in the US since 2010 have been low paying, part time, temp jobs averaging less than $36k a year. And they sense even less opportunity for their children. Recent reports project that more than 90% of new jobs created in the next decade will earn about the same $36k a year. Due to all this, they are, legitimately, pissed off.
Trump has identified and played to this discontent. That Trump is popular and leading in polls in states with a high concentration of white, middle age and up, male, non-college educated working class voters is not surprising, given his aggressive criticism of US trade policies and their devastating effects. Trump has embraced the trade issue in no uncertain terms, and his attack on US trade policies have resonated deeply with this working class segment—i.e. a voting bloc in key swing states and a group that cares little what Trump says on other non-economic issues, however outrageous, whether on race, ethnic, gender, foreign policy, or other subjects. Trump speaks to their ‘rage’ at being ignored by US political and economic elites now for decades, and especially since the 2008-09 recession, the recovery from which has mostly passed them by, as well as to their fears for future prospects for their children. The more that US economic elites, in whichever party, attack Trump the more this working class bloc is convinced he, Trump, must be for real because they’re attacking him.
Donald Trump: Populist or Panderer
The important question, however, is whether Trump is honestly serious about changing US free trade policies, or whether he is just cleverly pandering to the discontent of this bloc of working class voters. He has called for ‘tearing up’ the NAFTA treaty; imposing tariffs on imports from China and Mexico of 45% and 35% respectively; stopping China from manipulating its currency; and building a fence to stop immigration flows from central and Latin America.
But he won’t say what he means by ‘tearing up’, which therefore appears more a rhetorical appeal than a proposal. If he means it literally, treaties cannot be ‘torn up’ by Presidents in the US system. That’s potentially grounds for impeachment. Nor has any president legal authority to unilaterally raise tariffs, except temporarily for 150 days and no more than 15%, after which Congressional legislation is required, according to the 1974 trade act. Nor is Trump correct that China is a currency manipulator, since for more than a decade now China has pegged its currency, the Yuan to the dollar in a narrow trading band. Its Yuan has risen and fallen in synch with the US dollar. If any countries are currency manipulators, they are Japan and the Eurozone—both having made their currencies more competitive by 20%-30% to the dollar by monetary means in recent years in order to gain exports at US expense. But one hears nothing from Trump (or US elites) complaining about Japan or Europe currency manipulation. And Trump has said nothing about changing US tax policies that subsidize US multinational corporations offshore investing and therefore promote job offshoring. And he conveniently ignores the impact of hundreds thousands of high paying tech jobs being given every year to tech workers imported to the US on H1-B and L-1 visas, most of whom come from Asia and not Latin America. Asian tech workers take high paying jobs Americans want; Latin American immigrants mostly assume ultra-low pay service jobs that US workers generally don’t want. Does Trump maybe want to build a wall along California beaches and pacific coastline as well?
Certainly Trump and his advisers know all this. One can only conclude, therefore, that Trump is not really serious about attacking free trade. He is pandering to those with a legitimate and serious real concern who have been deeply harmed by US trade policies.
Trump is in that great US presidential candidate tradition, promising voters what they want to hear and then, if elected, doing whatever the economic elites want them to do. US presidential candidates, of either wing—Republican and Democrat—of the Corporate Party of America, are habitual liars and cannot be trusted. We had our pseudo-populist from the ‘left’, Barack Obama, elected eight years ago promising to reform free trade treaties. And he became the biggest free trade advocate in US economic history. In Trump, we have our Obama analog, a pseudo-populist this time from the ‘right’, promising the same. And who then will do the same. To paraphrase an ancient saying, US voters now considering voting for Trump based on his anti-trade views would do well to ‘Beware of Billionaires Bearing Gifts’.
(This 5700 word feature article appeared in the June-July 2016 Issue of the London-based, European Financial Review).
The conceptual toolbox of mainstream economics is no longer sufficient. In a 21st century global economy—in which financial variables and cycles have increasing effect on the non-financial economy and its stability—that toolbox lacks a number of necessary instruments. The missing instruments, or tools of analysis, are those that would explain how financial variables and financial cycles interact with real variables and cycles, both mutually determining the other.
In earlier decades, before the 1980s, financial variables were simply not that important in determining the trajectory of the real side of the economy. From the 1980s on, however, they have become increasingly central to that unstable trajectory. Today, well into the second decade of the 21st century, financial variables are more important and determinative of real growth and business cycles than ever before.
A problem with mainstream economics is that it is superficial. By that is meant it doesn’t go deep enough in analyzing financial determinants underlying economic instability. Instability in this case, in the 21st century, should not be understood as just severe swings in economic conditions. Instability today is not limited to a ‘Lehman-like’ credit crisis, as in the US banking system in 2008, or a stock market crash, as in China 2015; nor is it limited to a deep or protracted real contraction, which followed the global subprime mortgage and credit crash of 2008-2009, or Europe’s subsequent double dip in 2011-2013, or Japan’s five short and shallow recessions since 2008.
Forms of chronic stagnation are as much an indicator of instability as a banking crisis or stock market crash. Today’s global productivity collapse, the acute slowdown of global trade in recent years, and the disinflation and steady drift toward deflation in prices of real goods and services now spreading globally are also indications of growing economic instability. Mainstream economic analysis is superficial because it insists on understanding these instability trends employing a conceptual toolbox composed almost exclusively of real variables, while ignoring the influence of financial variables and conditions that ultimately underlie the instability.
The Interest Rate Fetish
Since 2008 mainstreamers’ theoretical—and central bankers’ policy—focus on interest rates as a solution to growing instability has become almost a fetish. Interest rate manipulation is viewed increasingly as the end-all solution to all the global economy’s woes. Forget fiscal stimulus. Forget income inequality. Forget unsustainable and increasingly unserviceable levels of debt. Ignore the major changes in labor markets that are crushing wage earners, or the structural changes in financial markets that are rewarding investors in financial securities with unprecedented gains in income and wealth. Just lower interest rates to zero and, if necessary, push them into negative territory. And if seven years of the same is not enough, then another seven is necessary.
Mainstream economics erroneously believes that focusing on interest rates and their money determinants represents analysis of financial variables. But interest rates are not financial variables. Moreover, interest rates are not fundamental, but intermediate variables. They are proxies for changes in more fundamental forces. These forces may reflect real variables like money, technological change, cost of physical capital, expected rates of return on investment. But interest rates may reflect financial variables as well. Nevertheless, while mainstream economists may sometimes consider various real causes determining interest rates, they continue to ignore financial determinants of those rates.
Mainstreamers’ preoccupation with real determinants of interest rates goes back at least to the early 20th century, when economists like Wicksell, Fisher and others debated what drove changes in interest rates—beyond just the previous simplistic 19th century economic notion of money supply and demand. Was it money that determined interest rates? Money demand? Money supply? Money velocity? Or did rates instead follow changes in real investment. Was it interest rates that determined real investment or real investment that determined interest rates? Whichever side of the debate taken, interest rates were viewed associated primarily with real variables—whether money, real asset investment, waves of new technologies, cost of replacement of physical capital, and so on. The same preoccupation with interest rates determined by real variables applies to mainstream economics today.
But focusing on real variables has failed to explain why interest rates have had little effect on restoring economic stability and, in fact, are contributing now to instability. As interest rates approached the zero bound after 2008, and descended into negative territory in recent years, real economic growth has continued to slow and stagnate nonetheless. No less than $10 trillion in bonds and other securities are now in negative rate territory, with more being considered or on the way. And not only has real economic growth been slowing, but global trade is stalling, productivity has nearly collapsed, real asset investment growth rates are declining, and the drift toward deflation in real goods and services long term continues. Something is wrong with the mainstream theory interpretation of interest rates—as well as the central bankers’ policies built upon the theory.
At the same time as instability in the real economy is rising, so too is instability on the financial side. Highly correlated with the collapse of interest rates, financial asset prices have escalated and repeatedly created asset bubbles globally—which suggests strongly that low rates have been servicing financial markets more and real investment less. But that evidence has been largely disregarded by mainstream economics.
To explain why the linkage between low rates, on the one hand, and real investment and economic growth has broken down, mainstreamers would have to focus their analysis at a more fundamental level and consider financial forces as well real at that level. They would have to explain how the effect of low interest rates has been distorted by financial forces that have become increasingly influential in the 21st century.
But mainstreamers have no financial tools in their box to do that kind of analysis. They pay little attention to the linkages between financial forces and interest rates because their toolbox is composed of pliers, hammer, wrenches and such, when perhaps what is missing is a software machine-learning algorithm tool that might show how financial forces today are eclipsing real forces in determining the impact of interest rates on economic stability.
Those mainstream economists who have been growing uncomfortable with the historical record contradicting the theory have attempted to explain the failure by what they call ‘secular stagnation’. But secular stagnation theory is itself an analysis based primarily on real variables as well. Like contemporary interest rate theory, it also disregards the role of financial forces and variables. Once again we get refusal to consider the financial side.
What then are possible financial forces and variables behind the failure of zero bound, and even negative, interest rates to generate real investment and restore normal economic growth rates, real investment, productivity, global trade, halt the slide of commodity prices, and reverse the drift toward deflation of real goods and services? These were addressed at length in several key chapters in this writer’s recent book, ‘Systemic Fragility in the Global Economy’.
A short explanation would be as follows: during the past decade central banks in the advanced economies have pumped tens of trillions of dollars and other forms of central bank money liquidity into the global economy. Rates plummeted to near zero and below. But instead of the liquidity being directed by low interest rates into real investment, it was redirected instead into financial asset markets. Or it was hoarded on balance sheets in expectation of future opportunities in financial assets. Or redistributed to shareholders in trillions of dollars of stock buybacks and dividend payouts. A new global financial structure was created the last quarter century to accommodate the central-bank driven liquidity explosion—itself set in motion and enabled by the collapse of the Bretton Woods international monetary system in the 1970s, the subsequent removal of controls on cross-country money capital flows in the 1980s, the advent of new digital technologies and the internet in the 1990s, and the general rise of political influence by financial investors since the 1990s.
The result was a proliferation of new financial securities and global expansion of liquid markets in which they are traded. New forms of financial institutions concurrently emerged, sometimes called shadow banks, which also penetrated and merged with commercial banks and even non-bank corporations, to provide the institutional framework for the global trading of the new securities in the new markets. Behind the institutions and markets was the rise of a new agency—i.e. a new finance capital elite that has expanded in number and even more so in available investible wealth.
It is this new financial structure—with its proliferating highly liquid markets, countless new financial securities, new financial institutions, and new agency of professional investors—that has diverted the massive, post-Bretton Woods liquidity injections by central banks into financial asset markets and investment.
The new financial structure and the diversion has rendered interest rates and their real determinates increasingly ineffective in generating real investment and growth. Given the new evolved global financial structure of institutions, markets, securities and agents, financial asset investment has proven to be simply more profitable in the short run than real investment. Both risk and uncertainty is less in financial asset investing than in real asset investing. Interest rates may lower to zero, and even negative, but the liquidity that is borrowed at those rates will still flow primarily into financial investments.
Financialization as thus defined has severely damaged the traditional interest rate to real investment relationship. But nowhere in mainstream economic analysis is the impact of these financial forces—this financialization—on the function of interest rates in determining real investment considered. Neither in academic theory nor in central banker practice. Mainstream economists and central bankers remain myopically fixated on interest rates, even as financial forces continue to negate the effect of interest rates on real investment and drive the global economy—both real and financial—steadily toward more instability.
The Productivity Conundrum
Another area where mainstream economics that has failed to account for the influence of financial forces is productivity analysis. Productivity has long remained a favorite instrument in the mainstream toolbox. But mainstreamers have little or no explanation why today productivity is stagnating globally.
A recent global business page headline read: ‘The Puzzle That Baffles the World’s Economies’. The article remarked that slowing output per hour is little understood by mainstream economists today. “There is little agreement on the cause and still less on the right response”, the article concludes. It has become a major conundrum of sorts for mainstream economic analysis.
A well-known American economist of the ‘hybrid’ wing, Robert J. Gordon, addressed the problem of stagnating productivity in great detail in his recent tour de force book on the contribution of technology evolution to US economic growth since 1860. Gordon identifies the slowdown of productivity having two causes reflecting the two primary elements of macroeconomic level productivity—hours of work per person and output per person, the latter of which he calls simply labor productivity but apparently means output change per person holding hours worked constant. Labor productivity in the US began to slow during the decade of the 1970s, per Gordon’s analysis. It was offset and obscured, however, by rising hours of work per person as women entered the labor force in the US in great numbers that decade and after. However, by 2000 this second element of hours of work began slowing as well. The fundamental trend of slowing productivity, as both its determinants weakened, has thus become increasingly evident since 2000 in the US.
As Gordon concluded, “The most recent decade, 2004-14, has been characterized by the slowest growth in productivity of any decade in American history”. The rate of productivity growth during 2004-2014 measured barely one third of the rate during 1948-1970, according to Gordon. And during the five year period, 2010-2015, productivity grew annually by a mere 0.5%. This year, 2016, it will likely turned negative for the first time in a century.
And it is a global trend as well. Supporting Gordon’s data, recent reports by the US Conference Board also shows US productivity growth barely at a few tenths of a percent annually. Europe’s OECD recently confirms the same for the Euro and G7 economies.
For Gordon, productivity is primarily driven by technological revolutions. The slowing of productivity in recent decades is due in part to the digital revolution having had less of a significant impact on productivity growth than did previous tech revolutions before 1970. The contribution of the internet was largely played out by 2005 and the wireless tech revolution that followed has had an even lesser impact on productivity than did the internet. After the 1970s, an ‘educational headwind’ to productivity emerged and reduced the historic contribution of education to productivity growth, which intensified after 2000. Hours of work per person shifted after 2000 as well, as various ‘demographic headwinds’ to productivity also began to develop. Finally, there is what Gordon refers to as ‘fiscal headwinds’ of entitlement (social security, etc.) and tax policies which add to productivity slowing as resources for real investment are redirected and reduced.
What’s notable about all this analysis is that, in classic mainstream economics fashion, the most important determinants of productivity growth are ‘real’ forces, especially technological waves; so too, the most important determinants of the slowing of productivity are also real—the soft technologies of internet and digital communications, education system failures, demographic trends, and fiscal policies. Financial restructuring of the US and global economy—which perhaps not coincidentally also began in earnest circa Gordon’s key datapoints of the1970s decade and after 2000—is nowhere part of the analysis why productivity has been slowing. But it should be.
Consider an alternative explanation, factoring in financial forces as contributing to the collapse of productivity.
Global financialization has been key to enabling real investment to move offshore from the US and advanced economies to emerging market economies, most notably China, since 2000 and even more rapidly from 2010-2013. Without financialization the shift of real investment offshore would not have been possible. As a consequence of that shift, the relative size of the manufacturing and construction sectors have shrunk, in particular in the US, Euro and Japan economies, leaving service industries constituting typically 80% or more of the economy in the US. Service sector productivity growth is typically far less than manufacturing-construction and very difficult to accurately estimate. As the service sector has grown as a percent of the total economy, productivity growth rates have slowed.
There’s also the matter of the composition of the service economy. It is developed in some sectors into a virtually all-contingent labor economy. Part time, temporary, independent contract, and ‘gig’ or sharing economy employment has exploded. That too lowers productivity growth potential and makes the estimation of productivity even more problematic. In Europe in recent years, contingent labor growth constitutes 70% or more of job creation in various countries. In the US today, perhaps as much as a third, or more than 50 million, are now contingent in some way. Many of the new, contingent-based service companies being created are also being financed by the new financial structure—hedge funds, peer to peer lending groups, online funding, angel investors, venture capital, and so on. The emerging ‘gig’ or sharing economy—the latest phase of service economy evolution—is almost a total product of the new financial structure.
Financial structure and institutions are changing rapidly, driving corresponding changes in labor markets in turn, that are resulting in the relative decline of traditional high (and easier to measure) productivity sectors like manufacturing and construction and the relative rise of low productivity (and difficult to measure) service industries. Changing labor markets and forms of employment slow productivity growth rates even further.
But because mainstream economics cannot see the connections between today’s revolution in financial structures and its direct or indirect impact on productivity, the collapse of productivity appears a conundrum. A ‘puzzle that baffles’, according to the global business press. Non-transformative technologies compared to those of the past (Gordon), or the technology ‘diffusion machine’ is just somehow broken, as other mainstreamers have concluded.
Looking deeper into the potential causes of the productivity malaise, however, focusing not just on real factors but on the contribution of financial forces’ to the collapse of productivity, may yield another conclusions other than conundrum. But mainstreamers’ refusal to look that deep, or in that direction, produces a myopia that ends in ‘bafflement’.
Money vs. Credit
Mainstreamers of the ‘Retro-classicalist’ wing fare no better with regard to financial variables and financial instability. If mainstreamers of the ‘hybrid’ wing make a fetish out of interest rates, the ‘retros’ do the same in the case of aggregate money supply. Hybrids argue interest rates are the proper focus of analysis; retros say it is the money supply, regardless of the effect money may have on the level of interest rates.
The problem with the money supply ‘retro’ view is that it fails to distinguish between money as credit, on the one hand, and the rapid growth of non-money forms of credit on the other. For Retros, the distinction between money and credit does not exist. Without money there is no credit and therefore no possibility of investment. But this is not so in today’s era of radical global financial restructuring.
Traditional banking theory describes how the central bank can provide liquidity to commercial banks and thereby incentives for the latter to make loans and increase the money supply in the greater economy. Innovations in central bank policies in recent years allow central banks to function as private banks, in the sense of directly injecting money into the economy by printing (electronically) and purchasing assets directly from non-commercial bank investors. But financial security products in particular may be purchased without access to money in the traditional sense. Credit is loaned to investors based on the collateralized value of the financial assets previously purchased. Asset price escalation may lead to more debt availability that is simply credited electronically to the borrower. This is the essence of ‘inside credit’ creation. Other forms of non-money credit creation are emerging as well. Bitcoins and forms of digital money are rapidly growing. Shadow banks are taking over the functions of commercial banks, from financial repo markets to peer to peer online lending. Technology is enabling the acceleration of money velocity and credit velocity in general—accelerating the turnover and de facto raising the supply of money and credit as a flow and not just a stock.
To continue to try to explain the role of money defined in a traditional sense has been seriously challenged by the rapid restructuring of financial institutions, markets, and products that characterizes the recent present period. Nevertheless, the retro wing of mainstream economics insists on theorizing and trying to explain today’s global economic instability by reference to traditional forms of money. But money is no longer just money. And forms of credit are separating from traditional forms of money.
Why Mainstream Economists Ignore Finance
The question then becomes why do mainstream economists mostly ignore financial variables? Why does their analysis remain fixated on real variables and at a level of analysis that is often superficial?
Part of the explanation is traceable to their basic training in the discipline. Mainstream macroeconomists—which is the primary subject here—are trained in constructing hypotheses and models based on real variables almost exclusively. Modern macroeconomics begins in the 1920s and 1930s and is concurrent with the development of National Income and Product Accounts (NIPA), sometimes referred to loosely as GDP analysis. GDP by definition excludes financial variables. It was a product of the need to determine the effects of government policy on stimulating real economy growth, in particular during the great depression and subsequent war years. Attempts to understand the financial underpinnings in the 1920s of the origins of the great depression of the 1930s were mostly abandoned thereafter in favor of understanding real economic growth. From the mid-1930s on, financial instability and financial forces were no longer a major focus of macro analysis. Nor did it subsequently become so once again during the several decades following the war, during which real growth was substantial and banking and financial instability not yet a factor of instability. Even at the policy level, central banks played a secondary policy role in relation to Treasury departments until the 1960s, at least in the US. Evidence of the return of financial instability only again began to emerge in the late 1960s, and then only marginally and located in single markets or single financial institutions.
As financial forces and instability began to re-emerge in the late 1960s and gather momentum in the 1970s and 1980s, conditions in the economy changed and it became increasingly susceptible to financial forces and instability events. But mainstream economics was slow to change with the conditions. Ideas upon which careers are established are not readily jettisoned. Anomalies that challenge the old ideas, theories, and models built upon them, are more often ignored than not.
Thus, Hybrid Keynesians who dominated until the 1970s continued to focus on interest rates and money determinants of rates in subsequent decades as financial instability grew; Retro classicalists continued to insist that money supply, and not the rates, were the key determinant and continued to argue money supply was the only significant determinant of instability. With the end of Bretton Woods, stagnating real investment, localized financial instabilities, and slow economic growth throughout the 1970s, the Retros’ continued focus on money supply dethroned the Hybrids as the dominant wing within mainstream economics. With a few exceptions, neither wing paid much attention to financial variables. The de-emphasis continued to widen throughout the 1980s and after, and remains a factor to this day.
There is also the conservative inertia that in general afflicts most academic thought and idea development. Peer pressures are great to avoid fundamentally challenging basic paradigms of analysis. If a young challenger cannot show how her ideas are essentially an extension of previously accepted thinking, the work will not get pass the peer reviewers and committees. Promotions will not follow. Job security becomes problematic. Pressures are significant to engage in what the philosopher of science, Thomas Kuhn, once called ‘mopping up operations’ or ‘normal science’, instead of potentially breakthrough thinking that may challenge, especially fundamentally, prevailing paradigms and acceptable modes of thought. This too contributes to why mainstreamers are still reluctant to explore more deeply the connections and relationships between financial instability and the real economy. Some may attempt so, but are encouraged to gather together and separate themselves voluntarily from the rest of the discipline in special institutes dedicated to such analyses, safely isolated from the mainstream communication channels. A form of institutional containment results, relieving the dominant paradigm’s advocates from having to directly confront and contend with the new ideas.
Thus both the initial training of mainstreamers, the type data they employ, the models they have developed that largely exclude financial variables, conservative career pressures, and the acceptable intellectual preoccupations of the economics discipline itself keeps the consideration of financial variables and financial instability on the fringe. The end result is a continuation of a widespread disregard of financial forces and instability among mainstream macroeconomists to this day. When they do engage the subject, moreover, it is almost always from the perspective of their own non-financial analyses and accepted theory.
Professor Fields’ Mainstream Review
Representative of a number of the above limits of mainstream economics is the recent review of this writer’s book, ‘Systemic Fragility in the Global Economy’, by Alex Fields, which appeared in an earlier edition of European Financial Review.
While Professor Fields acknowledges various positive contributions of the book at the close of his review—and notes that the first third of ‘Systemic Fragility’, which focuses on a description of fragility conditions today in Europe, Japan, China, US, and Emerging Markets, is “the most interesting section of the book” providing “a readable and informed overview”—he nonetheless concludes the third section of the book, which critiques mainstream economic thought and theory, “is the least satisfying”. Nothing “new or original in summarising or critiquing mainstream macroeconomics” was apparently said in the chapter directly critiquing mainstream economic analyses.
We would of course beg to differ. It would have been useful for Fields not to have just brushed off the critique of his theoretical perspective with a single phrase of ‘nothing new or original’. But his reply is not untypical of mainstreamers who don’t like to confront direct challenges to the fundamental propositions of their analytical framework—especially when they involve debate over the need to give more consideration to financial forces and variables.
In the book, fourteen specific points were made in the summarily dismissed chapter critiquing mainstream economics that Fields chose not to consider—including how the hybrid wing (of which Fields is clearly a member) fails to distinguish between real and financial assets in its theory of investment; how it regards debt levels and rates of change as benign so long as the economy is at less than full employment; how it does not distinguish between money and non-money forms of credit; lacks a convincing theory of financial asset price inflation; how mainstream’s Savings = Investment basic assumption makes no sense if financial asset investment is excluded from the Investment variable; and how mainstreamers provide no explanation why multiplier effects have been declining in recent years perhaps due to the excessive accumulation of private sector debt—to name but a few of the fourteen. Nothing new or original? Really?
Even more indicative of mainstreamers’ refusal to confront theoretical challenges to their basic assumptions from the financial side is Prof. Fields’ failure to even mention the book’s concluding chapter, ‘ A Theory of Systemic Fragility’, in which an alternative, financial approach to explaining instability today is offered. However, not a word in the review about the chapter. Nor its specific consideration of the negative relationships between debt, income, and conditions of debt repayment that are at work today at levels of government, households, and business. Nor was anything said about the preliminary equations that summarize the theory in an appendix at the end of the concluding chapter.
Professor Fields elsewhere in his review criticizes the proposition that liquidity has been flowing in ever greater magnitude into financial asset investing—with negative consequences for sustaining real investment. He queries, “what is the purported mechanism”? If he had read the concluding chapter he might have noticed the three specific transmission mechanisms that were proposed in support of the assertion that financial asset investing is crowding out real investment: price systems, investors’ expectations, and public policy.
The middle, second part of the book fares little better. Nine chapters that lay the groundwork for the theoretical critique and restatement that follows. Except for a brief reference as to whether global shadow banking can be effectively regulated—which I concluded cannot and in his view, one must try nonetheless—Fields focuses most of his review on chapters 14 and 15. Here monetary policy and fiscal policy are discussed. Seven of the nine chapters in part two of the book are bypassed, which makes eleven of the nineteen chapters virtually ignored. Given that the first six chapters are descriptive narratives and overview of the global economy, Fields’ review consequently boils down to two chapters—monetary and fiscal policy—and a few passing references elsewhere to regulating shadow banks and other matters. In other words, the review is conducted from a safe ‘high ground’ comfortable to mainstream economic analysis.
Fields dedicates much of his review to refuting the book’s contention that massive liquidity injections by central banks has led to excessive debt-driven financial asset investing at the expense of real asset investment. He acknowledges quantitative easing and near zero interest rate central bank policies have occurred but he is not convinced they “have been harmful”. What about the tens of millions of households in the US alone on fixed income investments? Have eight years of no interest income not ‘harmed’ them? Or what about pension funds and insurance annuity funds that tens of million retirees are dependent upon? Or the union pension plans now going bust? Or the trillions of dollars in high yield corporate bonds—made possible by the super-low rates—that are now in trouble? Of course, investors in equities and bonds were not ‘harmed’, quite the contrary. In the US alone, in just the past five years no less than $5 trillion in share buybacks and dividend payouts were distributed.
Where Fields seriously misses one of the book’s main themes is his refutation that financial bubbles need not require excessively low interest rates in the short term to occur. He notes how the bubbles in the 1990s and early 2000s in tech and global currencies were accompanied by relatively high US central bank interest rates. The same occurred during the 1920s, he adds, when asset bubbles occurred and rates were high. What Fields misses, however, is that years and decades of central bank liquidity injection is what fuels bubbles. Since the end of Bretton Woods in 1973, central banks like the US have been injecting volumes of liquidity with every recession, credit crunch, financial crisis, etc. The money is not recalled, but remains circulating in the global economy, accessible by borrowers from various global markets. The global economy is full of dollars after decades of such injection. It is not a matter of short term central bank interest rates, as Fields maintains (thus revealing mainstreamers’ excessive reliance on the role off interest rates). Speculative investing need not ‘borrow’ from central banks short term. The credit is available in countless global dollar money markets. Indeed, investors need not borrow dollars at all. They can access non-money forms of credit, based on collateralized value of prior financial assets’ price appreciation. No ‘money’ is required. Central bank ‘high powered money’ is not essential in the short term to produce financial asset bubbles. On that Fields and I agree. But we disagree as to where the liquidity has been coming from. Once again, mainstream analysis does not understand the difference between money credit and non-money, or ‘inside’, credit—the latter of which Fields confuses with central bank ‘inside money’.
In typical Hybrid Keynesian analysis, Fields maintains that real asset investment may be declining not due to financial asset crowding it out (or ‘diverting’ and redirecting liquidity as I express it), but due to lack of money demand for bank lending. But if that were so, then US banks after 2009 would not have imposed highly restrictive terms and conditions for borrowing funds by small and medium companies—which they did. Banks were eager and loaned to large multinational corporations, speculated themselves in financial markets, and otherwise hoarded the trillions in cheap dollars provided by the Federal Reserve. The rates of return on these options were far higher than traditional lending to small-medium businesses. The money demand was there; the banks preferred safer and greater returns elsewhere—i.e. in financial asset markets and/or abroad in emerging markets.
With regard to fiscal policy, Fields takes issue with my view that multiplier effects have diminished. A number of studies recently show this is so. But the book does not maintain that multipliers are low because of zero interest rates. They are likely declining because of chronic debt overhang, especially for businesses having loaded up on high yield and other bond debt and median to low income households. And as for the book’s claim that the US 2009 Obama Recovery Act did not aid homeowners, for which he asks for evidence, the US budget is clear that no more than $50 billion was spent on homeowner foreclosure assistance, half of which went to banks holding mortgages, while trillions of dollars were spent by the Federal Reserve bailing out the US banks. And in so far as the book’s assertion that the bank stress test in 2009 was phony, one can only conclude so since the banks at the time were exempted from ‘mark to market’ accounting at the time of the tests, which allowed them to value their assets well above then prevailing market rates.
But critiques and tit-for-tat replies aside, what is evident in Professor Fields’ review is that it is conducted from a typical mainstream economic perspective—a perspective that clearly feels challenged by propositions that increase the weight of financial forces and financial instability in general economic instability.
The slowing global economy, world trade, productivity collapse, disinflation-deflation in real goods and services, rising currency exchange rate volatility, trillions of dollars in global non-performing bank loans, fifty trillions in additional debt since 2009, desperate new forms of central bank liquidity injections, tens of trillions of dollars in negative interest rates, global equity and bond markets teetering on the edge—all represent growing global economic instability, both financial and real. Mainstream economics to date has little to offer in the way of explaining the causes and future trajectory of these trends. Its focus on real variables, and at a superficial level of analysis, continues to result in little understanding of what is behind it all. Mainstream analysis would do well to be more open to approaches that bring a more financial variables focus to the analysis of what is clearly a growing instability in the global economy.
If the defining characteristic of Japan’s economy since 2008 has been perpetual recession, then Europe’s has been chronic stagnation. Europe, and in particular its 17-country core Eurozone group, has been fluctuating between+1% and -1% growth for most of the post-2008 period, whereas Japan has been fluctuating at a still lower level of growth or in recession.
Neither the Eurozone nor Japan has yet recovered the level of economic output they had in 2007-08. That’s more than $20 trillion in combined global GDP that is still mired in ‘epic’ recession conditions—i.e. a kind of muted depression—seven years after the 2008 crash. Add to that $20 trillion the growing number of EMEs that have slipped into recession by 2015—and major independents like South Korea, Australia, Canada and others sliding toward zero growth or worse—it is likely that more than half the global economy in 3rd quarter 2015 is either stagnant or declining.
Much of that half continues, however, to bet that by focusing on stimulating its exports, and growing its share of slowing total global trade, that it can somehow extricate itself from stagnation and decline. That bet is a high risk gamble that will likely not pay off, as the recent history of the Eurozone economy itself since 2010 clearly shows.
The Limits of Exports-Driven Recovery
Since 2009 Europe in general, and the Eurozone in particular, has focused increasingly on exports-driven growth as the primary strategy of recovery from the 2008-09 global crash. So too have Japan and the EMEs. And until 2013, so had China as well. But exports-driven growth, especially since 2009, means one country’s export gain is often another’s loss. The global economy in the longer run consequently slows, as more and more countries retreat from domestic real investment and focus on exports as their primary growth strategy, driving down export and import prices and lowering the value of total trade.
While mainstream economists argue otherwise, based on their archaic theories founded on erroneous assumptions, the historical record since 2010 clearly refutes their argument that more trade, and free trade, always means more economic growth.
As recent data in late 2015 from the World Trade Organization shows, for nearly a quarter century, from 1983 to 2005, the growth of world trade averaged 6% a year. Since 2010 it has averaged only half that at 3%, which includes a boost from a significant but brief surge in trade in 2010-2011 that quickly abated. World trade in 2015 is projected to grow by a mere 1%, but may actually grow less since, for the first time since 2009, global trade actually contracted in the first half of 2015.
Thus, as more countries have tried to focus on expanding exports after 2008-09 as the means by which to grow their lagging domestic economies, the growth of total world trade has progressively slowed. Despite the dramatic slowdown in world trade since 2011, the competition for a shrinking world trade pie continues to intensify as more countries—including most notably those in the Eurozone—turn increasingly to export-driven growth as their primary strategy for recovery.
Not only the period since 2011, but also the decade of the 1930s—contradict the accepted view of mainstream economists that more trade always leads to more growth. In both periods, intensifying export competition resulted in slower global growth. Global trade slowed sharply as a result of competitive devaluations by countries during the 1930s global depression decade, enacted as governments lowered their currency exchange rates by fiat—i.e. legal declaration. Today it is devaluations by central bank liquidity injections that depress currency values and ‘internal devaluations’. And now emerging as well, internal devaluations are implemented by what is called ‘labor market restructuring’, occurring in the form of draconian cuts in wages and benefits to provide an export cost advantage. In the Eurozone today, both forms of devaluation—by central bank liquidity injections and labor cost cutting—are being implemented.
In the 21st century much of global capitalism has been shifting to financial asset investing at the expense of real asset investment. But it has also been reorienting a good part of what real investment remains after the financial shift, to growing exports and trade instead of real investment targeting the domestic market. As a consequence of both shifts—to financial asset as well as export-oriented investment—real investment in the form of infrastructure development, industrial production, new industries development, etc., that might have been directed toward the domestic economy, has slowed.
Unlike financial asset investment, real investment redirected to export production does provide some real growth and income creation. However, export-driven investment and growth is sporadic, volatile, and tends to be short lived. Since more and more economies are playing the ‘beggar my neighbor’ export card, an export advantage of one country quickly tends to dissipate, as other countries respond with similar export-oriented policies. The net result over time is intensifying competition that leads to more volatile, unsustainable, and unreliable growth for those that lose out in the ‘exports first’ competition.
Increasing dependence on trade and exports creates imbalances between the different sectors of the global economy that tend to slow the growth of trade over time: China and EMEs grow their exports, and thus their domestic economies, at the expense of Europe and Japan (2010-2012); Japan responds with QE and other monetary measures to drive down its currency to try to gain a temporary export advantage (2013-14); Europe then injects liquidity via QE and other measures in response in pursuit of the same (2015); China eventually responds with measures to lower its currency (2015-16); Europe and Japan follow with still more QE programs (2016?). And so the export ‘tit for tat’ game goes.
The outcome is currency wars as each sector of the global economy targeting exports for domestic growth attempts to gain a temporary advantage at the expense of the other. Long term, however, currency wars end up reducing world trade, as inter-capitalist competition and fighting over a slowing global export economic pie intensifies.
Select individual economies may benefit from an exports-driven growth strategy, but only in the short run. There may even be net benefits globally, but again only in the short run. Over time, intensifying exports competition leads to destabilizing devaluations by QE and other central bank measures; to more resort by countries to internal devaluations cutting wages, benefits, and disposable incomes that reduce domestic consumption and growth; and to more imbalances in global money flows that contribute to more financial instability as well—all of which slow global growth in the longer run.
Whichever the means—liquidity injections or labor cost cutting—the results are the same. Whether in the 1930s or today or in Europe or elsewhere, those who benefit do so at the expense of the losers, whose collective loss typically exceeds those who gain—for a total net loss to the global economy.
Nowhere has this consequence of an exports-driven growth strategy been more evident at a regional level than in the Eurozone. For more than a decade now, Germany and other northern European economies have benefited—at the expense of growing indebtedness and slowing growth in many of the Eurozone’s peripheral economies (Spain, Portugal, Greece, Ireland, and even Italy).
Stripped of the ability to lower their currency as a result of having joined the Euro, having given up their central bank independence by joining the German-dominated European Central Bank (ECB), and unable to reduce unit labor costs to match Germany and other northern European economies, the Eurozone periphery economies were forced to rely on German-Northern Europe bankers’ and governments’ money capital in-flows as the primary strategy by which they hoped to recover from the 2008-09 crisis. That strategy has proven a dismal failure.
German Origins of Eurozone Instability
The chronic stagnation that has characterized the Eurozone over the past decade begins in Germany— in Frankfurt, the seat of the German-dominated European Central Bank (ECB), and in Berlin where Germany’s finance ministry also dominates Eurozone fiscal policy through a coalition with its allied northern and eastern Europe foreign ministers whose economies are dependent on German trade and financial relations.
With a de facto majority, Germany and its allies dominate the ECB, whose governing body is composed of the head central bankers of the 19 Eurozone countries. A German-led coalition of finance ministers also functions as a bloc within the European Commission (EC), which determines much of the Eurozone policies on fiscal measures, austerity, and government debt bailouts.
The ECB and EC constitute two of the three key pan-European institutions that make up the so-called ‘Troika’ in Europe which together determine much of the Eurozone’s neoliberal policies. The third Troika member, the International Monetary Fund (IMF), located in Washington DC, operates on a more US-Europe consensus. It is less directly influenced by Germany and its allies than the ECB and EC. The IMF may occasionally critique the EC-ECB policy choices, including at times the pace and magnitude of Eurozone austerity fiscal measures. But the IMF tends to eventually fall in line with the ECB and EC where matters directly impacting European economic issues are involved.
The exports first policy and the chronic stagnation in the Eurozone economy begins in 1999 with the creation of the Euro. The Euro enabled Germany to become the dominant force with regard to exports and trade within the Eurozone, especially in relation to the southern and eastern periphery regions. German exports dominance within the Eurozone in turn has created severe trade and capital flow imbalances within the Eurozone—imbalances that have played a key role in the excessive debt accumulation in the Euro periphery after 2009.
While the Euro laid the groundwork for a major increase in trade throughout the Eurozone, the question was who was going to benefit most? That is, which economy would get the lion’s share of the increased internal European goods trade flow?
The country that would gain the most from the anticipated escalating internal trade within the Eurozone would be the country able to lower its production costs the most. The alternative option of lowering costs to get an exports advantage by devaluing one’s currency was no longer available to countries that had adopted the Euro as common currency. The country that would dominate intra-Eurozone exports trade would be the country most successful in lowering its unit labor costs—i.e. the one which reduced wages, benefits, and squeezed more productivity out of labor the most. After joining the Euro in 2002, Germany quickly sought to position itself as the most successful low cost exports producer within the Eurozone and the EU in general.
As the Eurozone began to emerge from the 2001-02 tech recession, the Germany economy was considered the laggard of the Eurozone and was referred to as the ‘sick man’ of Europe. In 2005 its unemployment rate was 11.3%. It thereafter enacted extensive labor market reforms and cut corporate taxes from a rate of 45% of profits to a low of 15%. The labor market reforms included reductions of wages, restructuring of collective bargaining, cuts to welfare, raising the pension age and encouraging and enabling new employment in the form of part time work. By 2014, more than half of all German jobs created after 2009 were part time jobs. Together, the spending program cuts, the labor market reforms dramatically reducing labor costs, and the deep cuts to corporate taxes resulted in a classic demonstration of currency ‘internal devaluation’ by deep corporate cost reduction. By 2005, Germany was in a position to reap the lion’s share of intra-Eurozone exports and trade.
The adoption of the Euro meant that other European countries, especially the periphery, could no longer offset Germany’s internal devaluation cost-cutting with reductions in their currency exchange rates. That was neutralized effectively by the Euro. The Euro was also valued high at the time, so that periphery countries that borrowed from German and northern banks in Euros could buy large volumes of German exports. Conversely, it meant they would also incur large amounts of debt to German and northern European banks as well.
German exports to other Eurozone economies surged, as German banks loaned funds to periphery banks, periphery companies, and to periphery governments in turn. Much of the lending by both German-Northern Europe banks and periphery banks as well went into the housing and commercial property markets in Spain, Ireland, and elsewhere, where prices were rising rapidly and reached bubble levels by 2007-08. The boom spilled over to other industries and sectors of the periphery economies, as is typical in a housing and real estate construction and financial asset boom. Ever rising prices in real estate, properties, and in general in turn encouraged still more lending, as collateral values for real estate and properties rose. More lending, more debt, more market price escalation followed in an upward spiral, as financial asset prices continued to rise.
German non-financial businesses benefited from the increased sales of their exports to the periphery. German banks benefited from financing the export trade. Banks especially benefited from the rising flow of money capital now coming back in the form of interest payments as debt accumulated in the periphery, and as periphery businesses, investors, and wealthy recycled their share of profits from the speculative boom and growth back into the northern banks for safety and future re-investment as well.
This successful strategy convinced German bankers and leaders that if Germany could pull itself out of a deep recession and crisis in 2003-05 by means of austerity and exports, then so could other Euro economies do the same, later after 2010. Germany enacted austerity and it appeared to work. Why couldn’t Greece, Portugal, Spain, Ireland and others then do the same? What this view conveniently ignored, however, is that the German recovery post 2005 occurred in the context of a solidly growing European and world economy after 2003—not a collapsing and stagnating economy after 2009. The success of their own exports plus austerity policies before 2009 convinced German financial and economic elites, and their politicians, that a focus on exports combined with fiscal austerity worked; it was therefore not necessary to establish a Eurozone-wide banking union to centralize monetary policy. National central banks were sufficient to carry out monetary policy as a supplement to the focus on exports and fiscal austerity.
This view pushing an austerity fiscal policy, a central bank with limited powers, and an exports oriented growth strategy would have profound effect on future Euro recovery when Germany became the dominant player after 2010. It would mean Germany would recovery first and most, while other Eurozone economies would struggle and thus call for more banking union and less fiscal austerity.
When the global crisis of 2008-09 hit, like the US and UK, Europe too had created a kind of real estate bubble. But the property crash in Europe was not as widespread as in the US. It was regional, located largely in the periphery and even there mostly in Ireland, Spain, and to a lesser extent Portugal. Nor did the financial real estate bubble involve shadow banks and derivatives as extensively as in the US. The Eurozone’s banking system was still largely dominated by commercial banks and other local, traditional forms of banking. The economic contraction that followed events of 2008-09 was serious, but not as much so as in the US and even UK.
Despite its less severe downturn in 2008-09, Germany in 2009 forced the invoking of an obscure rule that had been introduced earlier in the decade at the time of the creation of the Euro: that rule called for a kind of budget balancing—achieved by means of fiscal austerity—in the event of a crisis. The rule in question called for a ceiling on government budgets and spending, according to which deficits could not exceed 3% of annual GDP. A related rule required that government debt could not exceed 60% of GDP. The deficit-debt ceiling rule was activated by the EC and Eurozone governments in 2010.
By the next full fiscal year, 2011, the full impact of the rule—which in effect required perpetual austerity—began hitting economies hard. At the same time, Germany and its allies in the ECB pushed for the central bank to raise interest rates.
The rate rises that followed in 2011, combined with the austerity policies now taking effect in 2011, exacerbated an already weakened Eurozone economy that had barely just begun recovering from the 2008-09 crash.
The new emphasis on policies of austerity and ECB rate increases also coincided with and exacerbated the debt crises that emerged in 2010 in the weakest of the Eurozone periphery economies—Ireland and Greece. The rate hikes caused bond rates in the Ireland, Greece, and elsewhere in the periphery to rise still further in 2011. The austerity cuts made it increasingly difficult to service the debt, as tax revenue income fell sharply. Government balance sheet fragility in the periphery deteriorated as a consequence of both rising debt and declining tax revenue needed to service the debt, due to austerity.
The Eurozone economies declined further, especially in the periphery, thus requiring still more austerity to meet the 3% budget deficit rule that Germany insisted Eurozone economies adhere to. Fiscal austerity, rate increases, and deteriorating sovereign debt began to negatively feedback upon each other, leading to a still further decline in GDP, again especially in the periphery economies. The weakest of the periphery economies, Greece and Ireland, required still more bailout, which meant debt added to prior debt in order to continue to make payments to Northern Europe lenders on previously incurred debt.
Greece received a 73 billion Euro bailout in May and in November Ireland received an 85 billion Euro bailout. In exchange, they were required to implement even more draconian austerity measures. ‘After all, if Germany did it, why can’t they’ was the rationale heard in northern Europe banking and political circles at the time.
This perverse combination of sovereign debt crises in the periphery; a banking system that was still not recapitalized (i.e. still technically insolvent) with bank lending declining; rising interest rates engineered by the Eurozone central bank; and ever deepening and severe austerity policies—together drove the Eurozone into a severe ‘double dip’ recession beginning in late 2011.
After growing at a Eurozone wide 3% annual GDP rate in the second half of 2010, nearly all the Eurozone economies began to slow noticeably in early 2011. And not just in the periphery. Growth in the northern European economies stagnated by the summer of 2011 as the periphery economies fell deeper into recession by the third quarter. By the final months of 2011 virtually all Eurozone economies, including Germany, were contracting. The Eurozone’s double dip recession was underway; it would last another 18 months, through early 2013. The decline was even more severe in some ways than that experienced during the first recession associated with the global crash of 2008-09.
Eurozone’s Double Dip Recession: 2011-2013
After having contracted roughly -10% during the 2008-09 crash, the Eurozone recovered slowly in 2010. Despite a very short and weak recovery from the 2008-09 contraction, the Eurozone central bank, the ECB, raised interest rates sharply in two quick steps, from 1% to 1.5%, in early July 2011, even as the Eurozone growth rate had slipped to only 0.2% when the rate hikes were implemented. It was a classic example of central bank rate hikes implemented prematurely—in an economy still overly sensitive to rate hikes due to excess household and business debt overhang from the preceding boom period and asset prices still not fully recovered yet from the 2008-09 crash.
Both the debt overhang and the asset price weakness served to exacerbate the negative effects of the ECB interest rate hikes on the real economy. The ECB rate hikes were also implemented as Euro bank lending to non-bank businesses was still declining, thus further exacerbating the effect. Raising rates only made banks even more reluctant to lend. The negative effect of the rate hikes on the real economy was almost immediately and significantly felt throughout the region.
At the time the ECB rate hikes were justified by the ECB, and in particular German ministers and Germany’s central bank chair, as necessary in order to check escalating inflation. But the inflation spike of 2010-11 was not due to domestic conditions. It was due to speculation in oil and rising demand for oil and commodities driven by the surge in China and EME economies in 2010-11. The inflation was therefore external, supply driven and temporary. Raising domestic rates within the Eurozone to reduce demand in the region would therefore not dampen inflation, given these external global forces. Nevertheless, an ideological preoccupation with preventing goods inflation, in Germany in particular, prevailed and was cited to justify the premature rate hikes. The decision revealed the dominant influence of German and allied central bankers within the governing council of the ECB. This decision to raise rates in 2011, given prevailing conditions, would prove disastrous.
Rising interest rates were not the only factor that drove the Eurozone economy into its double dip recession in 2011. The rate rises coincided with the advent of more severe austerity policies enacted in 2010, now beginning to have their full force and effect. Italy, France, Netherlands, Spain—as well as Ireland and Greece all introduced spending cuts ranging from $17 to $24 billion for the year, in addition to raising sales (value added or VAT) taxes, property taxes, and some income taxes. Outside the Eurozone proper, European Union (EU) countries also introduced austerity programs. The UK’s austerity budget passed in 2010 called for a 20% budget cut. More than $130 billion was cut from the budget for 2011 and after. The UK’s VAT was raised from 17.5% to 20%, which was typical.
As the Euro economies slowed, so too slowed their tax revenue intake, raising their deficit levels well beyond the 3% of GDP rule. Consequently, even more spending cuts and sales tax hikes were called for in 2012. Spain cut another $80 billion, Italy another $7 billion. Greece tens of billions more, as it required a second bailout. France introduced what it called a neutral budget plan, cutting business taxes and reducing spending elsewhere.
Surging global oil prices in 2011-12 took a further toll on the Eurozone economy, further depressing real investment that was already falling due to the freeze up in bank lending, the higher ECB rates, and financial asset deflation. It is estimated that Europe’s oil import costs rose from $280 billion in 2010 to $402 billion in 2011, in effect taking $122 billion out of the economy that might have been otherwise invested or consumed.
As nearly all Euro economies slowed or contracted, so did exports and imports, making their contribution to the general slowdown. Eurozone-wide unemployment rose quickly, from 9.8% to 12.2%. In the southern periphery economies, the jobless rate was more than double, as in Spain and Greece unemployment rose to 27%. Rising unemployment and austerity, combined with high debt loads, in turn translated into declines in household consumption as well. All the main elements of economic growth—government spending, household consumption, exports, and business investment—were thus slowing or in decline by mid-2012.
Real investment measured in terms of gross fixed capital formation sharply declined in the 2008-09 crash and then continued to progressively fall during the short recovery that followed and throughout 2011. The focus on exports and external growth, on austerity fiscal solutions, and on raising interest rates led to a chronic decline in real investment. This was true not only of the Eurozone but the entire 27-country European Union. According to a study by McKinsey Associates business consultancy, investment between 2007 and 2011 fell by more than 350 billion euros, or nearly $500 billion—a decline equivalent to 20 times the contraction in private consumption.
In the periphery, falling investment amid rising real debt levels led quickly to collapsing government bond prices, intensified by the professional investor-speculators betting on the fall and thus accelerating it. While external commodity-driven inflation in goods was occurring, financial asset price deflation was also becoming a serious concern. Stock and bond prices were accelerating, as the Euro currency also fell from $1.45 to $1.35. Real estate and property price deflation was particularly severe in Spain and Ireland. Financial instability was thus occurring in parallel to the real economy’s contraction then underway.Badly timed central bank rate increases, counterproductive austerity policies, intensifying sovereign debt crises, and collapsing financial assets all combined to exacerbate the downturn. Given that the private banking system was still fragile, banks loaned even less than before. Bank lending in early 2012 fell at its fastest rate since 2009: whereas bank lending in early 2008 grew at a 12% annual rate, by June 2012 it had essentially stalled, now growing a mere 0.3% annual rate.
The Eurozone economy thus stagnated through the summer of 2011. And by the fourth quarter virtually all the economies were in recession. That decline would continue until the spring of 2013, for a total of six consecutive quarters—i.e. longer and with a greater total negative impact perhaps than the shorter 2008-09 crash and recession. Equally important, by the summer of 2012 it was clear that the real contraction was no longer concentrated in the periphery economies only; it now had clearly begun to spill over and deepen in the northern European ‘core’ economies as well.
ECB Opens the Money Spigot … Just a Little
After the ECB raised interest rates in April 2011 and again a second time in July, it was forced to reverse its policy and quickly lower interest rates in November and December, from 1.5% back down to 1%. But the move had virtually no effect on the slide to recession by then well underway. Meanwhile, the sovereign debt crisis was worsening fast and bank insolvency was still widespread.
Government debt to GDP ratios rose further in 2011. The debt levels in the periphery economies—Ireland, Portugal, Greece and others—were now well over 100%. Spain’s ratio was approaching the century mark, and Italy’s rose to 123% debt to GDP. Private bank debt was even higher, averaging more than 127% of GDP across the Eurozone. By 2012, Spanish, Greek, and even French, Belgian, and Italian banks were growing increasingly insolvent. A banking crisis throughout the Eurozone, not just a government debt crisis in the periphery, thus loomed large on the horizon. $200 billion was needed just for refinancing old bank loans coming due in early 2012 alone. And total long term corporate and government bond refinancing needs for all of 2012 amounted to no less than $1.29 trillion.
What was emerging was a financial crisis situation potentially greater than even that confronted in 2008-09. Moreover, the financial instability was overlaid on a rapidly declining real economy as well. The possibility of one crisis exacerbating the other, sending the region into a downward spiral of real and financial asset deflation, was therefore high.
Given this situation, Eurozone finance ministers and the ECB decided not only to lower interest rates rapidly at year end, but to introduce extraordinary emergency programs to bailout both governments and banks as well. The great Euro liquidity injection was about to begin.
Unlike the US and UK, the liquidity injections did not take the form of ZIRP and QEs, at least initially. True ZIRP and QE would have to wait until 2015. The prevailing Eurozone view at the time was that austerity was sufficient to refloat the economy. Monetary policy would merely buy some time for austerity to start having an effect. Monetary policy was still limited to the ECB reducing interest rates, as the Eurozone economy fell deeper into recession in early 2012.
Two government debt bailout programs were introduced under the aegis of the European Commission in 2010 and early 2011. However, although potentially large they were limited in their application to only the most severe sovereign debt cases. The first program, introduced at the time of the eruption of the first Greek government debt crisis in early 2010 to provide bailout for Greek banks and government, was called the European Financial Stability Facility (EFSF). It earmarked 780 billion Euros specifically for government bailouts, just about $1.1 trillion in exchange rates at the time. Greece would acquire 164 billion euros from it in May 2010 (and a second bailout of 165 billion euros in March 2012). Ireland was given 68 billion later in November 2011. Portugal would receive about $29 billion in April 2011 and Spain much later $123 billion. A second, smaller program run by the European Commission directly was called the European Financial Stabilization Mechanism, or EFSM. Introduced in January 2011, it amounted to 60 billion euros in loan guarantees to bailout financing that might be raised from private sources.
But these were select, targeted government bailout funds and not meant to directly bail out private banks or flood the general economy with liquidity—as the US and UK quantitative easing (QE) programs in 2009 were designed to do. Moreover, the total funding of the two Eurozone government bailout programs were mostly commitments on paper. Only roughly half of the approximately $1.2 trillion in bailout funding provided by the EFSF and EFSM was eventually disbursed to Greece, Ireland and other periphery economies.
In the EFSF and EFSM government bailouts, the respective governments were supposed to pass on the bailout funds to their banking systems as well as use them to refinance their own debt. But typically more went to government than to the private banks, which continued to experience very unstable and fragile conditions. The bureaucratic EFSF and EFSM were thus failures in terms of private sector bank bailouts. Not surprisingly, bank lending continued to contract throughout 2011-2012. Many Eurozone banks remained technically insolvent, with available capital far less than necessary should a classic run on the banks emerge. However, the arrangements did conform to the German preference for rigid ‘rules’ governing bailout fund distributions.
Yet another bailout program was introduced in 2012 as the banking and debt crises intensified and the real economy’s slide into double dip accelerated. It was an emergency program called the ‘Long Term Refinancing Operation’ or LTRO. Unlike the prior two government bailout programs, the EFSF and EFSM, it directly targeted banks. The LTRO allocated initially 489 billion euros to 523 banks facing the need to rollover 200 billion euro loans beginning January 2012, just months away. Another 530 billion euros in funding was added to the 489 billion quickly in February 2012 when it had become clear the earlier amount was insufficient to head off a banking crisis. The combined two issues equaled 1,012 billion euros, or about $1.3 trillion at the time. That raised the total bailout funding—for governments and banks—now potentially available to more than $2.3 trillion.
As the Eurozone economy slide faster into recession in the first half of 2012, a new institution was created to centrally administer the various funds (EFSF, EFSM, LTRO), called the European Stability Mechanism, or ESM. Introduced in June 2012, like the LTRO it was also given authority and funding for bank bailouts, providing another 500 billion euros ($600 billion roughly).
All were introduced in a period of just over six months, from December 2011 to June 2012, with total bailout funds now amounting in dollar terms to approximately $3.15 trillion. While undoubtedly a large sum, once again much was still on paper and represented targeted bailouts of select governments or banks in the most severe trouble. Germany and its allies in the ECB and European Commission (EC) reluctantly agreed to the programs but required various bureaucratic approvals, as well as subsequent approval votes of their respective Parliaments, before the programs might actually disburse funds. In other words, just as Germany was the obstacle on the fiscal front, insisting on rigid rules and implementation of extreme austerity measures in exchange for bailout funds, so too it continued to function as an obstacle to massive direct QE liquidity injections.
All the preceding emergency bailout programs were technically in place by June 2012, at least on paper, as the real economy and debt crisis deteriorated further. The new chair of the ECB, Mario Draghi, had assumed office in November 2011. No time was wasted by Eurozone elites to demand he do still more to stimulate the economy by monetary measures. Fiscal policy was politically frozen as an option. The only tool left was monetary policy action by the ECB. As the Eurozone fell deeper into recession by mid-year, Draghi stole a page from the US central bank playbook that US chairman, Ben Bernanke, had introduced earlier in the decade when Bernanke declared that in the event of a major crisis, if necessary, he would ‘drop money from a helicopter’. Draghi therefore stated boldly and publicly that the ECB would “do whatever it takes” to ensure banks and the economy were provided with all the necessary liquidity. Central bank massive liquidity injection, along the lines of the US and UK, was coming. Exactly when and how was still unclear. Nevertheless, Eurozone stock and bond markets surged on the Draghi announcement of July 2012.
To substantiate his determination to do “whatever it takes”, a subsequent fifth bailout program was announced soon after in September 2012. It was called the OMT or ‘Outright Monetary Transactions’ program. Much like the US third version of QE that was about to be announced in October 2012, the OMT was defined as an ‘open-ended money injection’ program. That is, it would provide an unspecified amount of bailout as needed and therefore potentially unlimited funding.
OMT meant that the ESM, authorized to spend 500 billion euros, with the remaining funding from the EFSF and ESFM and the LTRO all under its umbrella as well, could now purchase bonds from countries which were not already in a bailout program. Government bond purchases could occur pro-actively, even before a formal bailout program was introduced. The OMT had the added feature of the option to purchase a broader range of securities, not just sovereign bonds, in doing ‘whatever it takes’. Yet the purchases still had to get approvals of the bureaucracies and legislatures that were still dominated by the German bankers and their allies. Germany and friends kept their finger on the distribution purse strings. Unlike the US and UK central banks, the ECB still could not unilaterally make purchases that it wanted or targeted simply on its own authority.
The ECB, in other words, was (and still is) not really a true central bank. It is the executive disbursement agency for the governing council composed of the 25 Euro central banks, still dominated by a German and allied northern and east European central bankers majority.
As the bureaucratic maneuvering with regard to monetary policy within the ECB, EC, and other agencies continued throughout early 2012, financial and real economic instability worsened in the Eurozone. The private banking system remained fragile, and banks continued to refuse to make loans, especially to small and medium enterprises in the Eurozone. While the ECB was now permitted to ‘turn on the money spigot’, given the highly bureaucratic management structure of the bailout funds and the German-imposed set of rules that required layers of approval before funds might be disbursed, very little actual general liquidity had yet to flow. That would only occur with a QE program.
But Germany and allies were adamantly opposed to a banking union, as well as other central bank powers like Eurozone-wide banking supervision authority for the ECB, a true Eurozone-wide deposit insurance program, and a Eurozone bond which were all prerequisites for the introduction of a true QE program like that introduced by the US and UK to date. Germany did not want a true centralized central banking system—a bona fide banking union like the US Federal Reserve or Bank of England—any more than it wanted a more unified fiscal union in the Eurozone. It had little to gain and potentially much to lose from both.
Germany was doing quite well in most of 2012 and therefore had little interest in giving up or diluting any power it was exercising through its influence in the ECB, EC and elsewhere. In the first half of 2012, moreover, Germany was still growing modestly, even as the rest of the Eurozone was now deep into its double dip recession. That would change, however, when the German economy also began to decline sharply at the end of 2012 due to a significant drop in its exports. Toward the close of 2012, the value of total German exports fell from the low 90 billion euros range at the start of the year to 80 billion at the end of 2012. The German economy was now joining the general Eurozone recession.
That narrow, parochial and nationalist position meant that the Eurozone—with the second largest combined GDP after the US at the time—would remain the weak link in the global economic system, perpetually responding to crises real and financial, but never really able to generate a self-sustained economic recovery above 1% or for very long. Its long term fate was therefore to stagnate at best, which it would continue to do.
Germany’s Export Pivot to Asia
But didn’t Eurozone stagnation mean that exports to the rest of Europe would decline for Germany? Yes, it did. But after 2010 Germany was already orienting more toward exports to China and the EMEs, which were now booming. During the 1990s Germany was not particularly export driven. After 2010 it would become one of the most exports-dependent. Exports would constitute 20% of its GDP by 2015, about the same as its domestic gross capital investment contribution to its GDP. Its leading export products were autos, machinery and equipment, and chemicals—i.e. just the items that China and other EMEs were interested in as imports. But this was making it increasingly dependent on global economic conditions outside Europe. If the phrase ‘as Germany goes, so goes the Eurozone’ is correct, then overlaid was the phrase ‘as the global economy goes, so goes Germany’.
What Germany’s economic pivot to China and Asia meant is that the Eurozone periphery economies, which had provided such a lucrative destination for German exports up to 2011, were now increasingly on their own so far as German and northern money lending to them to finance expansion and purchases of exports were concerned. With the recessions of 2008-09 and 2011-13 those money flows going to the periphery to buy German exports and develop periphery infrastructure, housing, and commercial property were drying up as Germany turned ‘east’ in its export strategy. That left the periphery with massive debts from the previous money flows from northern Europe bankers that benefited Germany and northern Europe. In a kind of ‘economic strip-mining’, to use a metaphor, the periphery economies were left to clean up the mess on their own. Alternatively, they could continue to borrow money from German and northern banks, global investors, and German and northern Eurozone governments—but now primarily not to finance import purchases or internal development but rather to continue making payments on the previously incurred debt—i.e. increasing their debt in order to pay old debt and ending up paying even more interest on total debt than before.
Money capital to pay for money capital, but not money capital to grow periphery EU economies. That was the new ‘German arrangement’, as Germany pivoted to push export growth to Asia. Thus the Euro banks, especially in the periphery, were still not bailed out and remained financially fragile. Simultaneously governments fell further into ever more debt as their tax revenue source of income declined, requiring greater government debt bailout. And with austerity now ravaging their economies as well, rising unemployment and wage compression meant growing household consumption fragility as well. It was a classic case of growing government balance sheet fragility, adding to bank financial and household consumption fragility. The entire Eurozone system was thus becoming ‘systemically fragile’.
Eurozone’s 2nd Short, Shallow Recovery: 2013-2014
The Eurozone recovered from its double dip recession in the spring of 2013—but only barely. Eurozone growth averaged a mere 0.2% per quarter throughout 2013, driven largely by Germany’s economy which accounts for about a third of the total Eurozone. The Eurozone would continue to grow at a similar tepid 0.2% average GDP rate through the following nine months of 2014.
Indicative of the weak recovery was the consistent decline in the rate of inflation in goods and services, which steadily fell within a year from more than 2% annual rate to 0.8% at the end of 2013. Disinflation—i.e. a slowing rate of inflation—would continue through 2014, crossing into deflation—i.e. negative prices—at the end of 2014. Wage growth would fall even faster than goods and services prices, from 2.8% at the start of 2013 to 1% at year-end 2014. Retail sales continued to contract throughout 2013, as did manufacturing and industrial production. Services spending remained flat during 2013.
The point of all this data is to show that the Eurozone’s weak 0.2% recovery in 2013 was not due to internal growth factors—whether consumer or business spending. It was due primarily to exports, and in particular German and northern European exports. Germany’s growth exceeded the Eurozone region, accelerating in early 2013 due to expanding trade with Asia and, to a lesser extent, due to rising exports to the US as the value of the US dollar rose. Remove Germany and exports in general from the Eurozone growth numbers, and the Eurozone’s 2011-2013 double dip recession continued another six to nine months throughout 2013, rather than officially ending in April 2013.
The weak Eurozone recovery of late 2013-2014 was of course also attributable to the continuation of fiscal austerity measures, as well as ineffective central bank interest rate policies that did little or nothing to stimulating the real economy.
In a March 2013 meeting of finance ministers in Brussels, the pro-austerity argument was reaffirmed, even as France and Spain were given two additional years to reach the 3% budget deficit rule and other region economies were also given more leeway. However, in exchange for the ‘stretching out’ of austerity, as it was called, German and Dutch ministers demanded more structural reforms by those given the extensions.
It was about this time as well that the need for labor market structural reforms was resurrected aggressively by Germany and others. Labor market ‘reforms’ meant reducing wage and benefit costs to lower the price of exports in order to stimulate domestic economies by export demand. This is sometimes referred to as ‘internal devaluation’.
Such reforms were an echo of policies introduced in Germany in 2005, and again in 2010, as German politicians and business leaders shifted to driving down labor costs to give German businesses an export advantage with competitors. Labor cost restructuring was a key element of austerity and exports-driven strategy and should always be viewed in that light. Twice within five years, in 2005 and 2010, Germany reduced pensions, cut unemployment benefits, allowed more hiring of part time workers, as well as weakened unions’ collective bargaining. Now it wanted the rest of the region to do the same—but this time, however, in the context of their undergoing two recessions in just four years.
Spain was the first to follow Germany in adopting the ‘labor market restructuring’ approach and by the end of 2013 had cut real wages by 15%. Its exports coincidentally rose by the same 15%. Workers were thus subsidizing—in effect ‘financing’—Spain’s recovery. Labor market restructuring was but the latest form of austerity. Old forms of austerity were continuing elsewhere in the Eurozone. Netherlands introduced a new 8 billion euro spending reduction program. France announced it would soon sell its major stake in many private French companies, as well as consider later raising pension retirement ages and reducing unemployment and family benefits as well. Labor market restructuring was thus coming to France. Italy too was planning for it. And in Greece, the second bailout deal called for 25,000 public worker layoffs and additional wage cuts of 25% before the ESM and ECB would agree to release more bailout money. ‘Old’ austerity was still much alive, while new forms were being developed and introduced as well.
But austerity did nothing to resolve the problem of still growing sovereign debt. Austerity policies purport to cut spending to restore deficits and reduce debt—thereby somehow encouraging investors to invest. But if that is the main justification for austerity, it continued to accomplish the opposite in 2013-2014; it continued to create more deficits and more debt. Nor did the more than $3 trillion in available bailout funds reduce government debt levels. By mid-2013 the debt levels of all the major Eurozone governments had continued to rise. All were approaching, or were already well over, the 100% of Debt to GDP ratio economists generally agree is a threshold making a future instability event highly likely.
If austerity policies failed to reduce debt or lead to real economic growth, then so had central bank monetary policies during 2013-2014. Despite the ECB having cut interest rates to 0.5% in May 2013 and then 0.25% in November 2013, lending by traditional banks had not improved, especially for small and medium businesses. The ECB’s latest initiative, the ‘OMT’ program, didn’t help. In the Eurozone, small and medium businesses depend almost totally on traditional bank loans, not bonds, so ECB government bond buying through the OMT or other bailout funds didn’t help. Nor did ECB programs targeting specific bank bailouts. Bailing out banks didn’t mean they would turn around and start lending. That was an erroneous key assumption that was by now clearly disproven not only by the Eurozone experience but by bank bailouts in the US, Japan, UK and elsewhere. Banks can be bailed out, but won’t necessarily lend.
The linkage between low interest rates, bank bailouts, and money injections as monetary means to generate real investment and general economic recovery , was clearly now broken in the post-2008 crisis world. Large multinational corporations in the Eurozone could tap into what are called global capital markets following the example of US shadow banks offering their corporate junk bonds to global investors or US Money Market Funds providing capital. But small-medium businesses could not. Thus, as the ECB lowered rates and managed its trillion euro bailout funds, Eurozone private bank credit growth declined every month. Bank lending was actually negative every consecutive month throughout 2013 and through the first nine months of 2014 as well, as banks consistently complained they still had too many non-performing loans (NPLs) on their balance sheets—i.e. were too fragile to loan.
No longer in official double dip recession, during 2013-2014 movement in the Eurozone economy became more ‘crab-like’—i.e. moving sideways, and slowly. Only Germany was doing somewhat better than the region, by focusing increasingly on exports targeting China and Asia. By 2013, 25% of all Europe’s exports were to China and Asia, most of which originated in Germany. This China-Asia export shift effectively impoverished the rest of the Eurozone economies, especially the periphery economies that were now saddled by debt, both public and private, and unable to obtain capital with which to grow their real economies out of recession and stagnation (or depression in the case of Greece, Spain, and Portugal).
On the other hand, while the Eurozone real economy languished, the Euro stock markets and their professional investors were doing quite well during 2013. Already the Euro equity markets had risen by 40%. Corporate cash was piling up on balance sheets, approaching $1 trillion, and dividend payouts to investors continued to rise even faster than in the US.
But the limits of Germany’s export growth strategy were soon to reappear. By 2014 the IMF estimated that more than half of Germany’s (and Spain’s) growth of exports came from sales outside Europe. Should the value of the Euro rise relative to other major competitors, then the 2013 export boomlet could quickly dissipate, and with it the moderate German growth that enabled the Eurozone to raise its economic head briefly above recession with its meager 0.2% growth.
In 2014 three developments began to occur with just that consequence: Japan’s 2013 introduction of its own massive QE program that significantly reduced the value of its currency, the Yen, by more than 20% to the Euro began to take effect and impact German-Euro exports to China and elsewhere. Like Germany, the Japan focus was also on exports to China and Asia. In late 2014 Japan further escalated its QE program, raising the competitive pressure further on the Eurozone. Second, throughout 2014 the US continued to keep the dollar low by not raising interest rates. That ensured further competition for China-Asia export markets. Third, the global oil glut erupted in mid-2014 and commodities sold by EMEs collapsed in price and volume. That drove down the currencies of emerging market economies. The Euro consequently rose rapidly against the dollar, the Yen, and emerging market currencies, reaching a two year high of $1.38.
With austerity continuing to depress domestic economies in the Eurozone, with central bank monetary policies and 0.25% rates failing to generate Eurozone bank lending, with government debt levels still rising throughout the region, and with unemployment remaining well above 11% with more than 19 million out of work—there was little internal Eurozone source for growth.
And now at year end 2014 it appeared the strategy of dependence on exports for growth by Germany-Eurozone was about to collapse as well. Japan, EMEs, and even US currencies were falling in 2014, thus offsetting Germany-Eurozone export competitiveness. It was also becoming clear that by mid-2014 the major source of German-Eurozone exports—i.e. China—was beginning to slow significantly as well. German exports declined once again at year end-2014, thus raising the specter that the major source of the Eurozone’s poor growth performance of 2014 would fade once again, throwing the region into yet another triple dip recession in 2015.
Eurozone’s QE Money Firehose: 2015
If 2012 witnessed the creation of the bailout funds that didn’t work, and if 2013-14 witnessed the introduction of a ZIRP (0.25%) interest rate policy that didn’t work, then in 2015 the ECB and the Eurozone shot its last monetary policy bullet in the form of a Eurozone version of a massive QE liquidity injection program.
The Eurozone’s dominant economic event of 2015 was the introduction of a European version of quantitative easing, or ‘QE’. In December 2014 the ECB all but announced it intended to go forward with a QE program. Almost immediately the Euro currency began to fall against the dollar, having risen initially in 2013 by 12% and 40% from its historic pre-crisis lows.
The ECB crossed this ‘monetary policy Rubicon’ in late 2014. Conditions strongly suggested the $13.2 trillion Eurozone region was potentially about to slip into another recession in 2015—as Euro/German exports began experiencing increasing pressure from the accelerating slowdown in China, Asia and the EMEs and the US economy showed signs of slower growth as well.
Continuing fragility in Euro banks was another growing problem. That concern had just prompted the ECB to conduct a ‘stress test’ to allay public concerns about banking system stability—always the purpose of such tests that always produce positive results regardless of the real condition of banks. The French and Italian economies were also showing severe weakness at year end 2014. Greek and other peripheral countries’ debt conditions were worsening. Unemployment was still 1.8%.
For the first time in five years core deflation in goods and services turned negative across the Eurozone in general, declining -0.2%. The red warning flags went up. Something more must be done. But nothing more would be done with regard to fiscal policy, with austerity policies effectively locked in. And lowering interest rates was no longer an option. Rates were already virtually zero. Worse, should deflation continue, real interest rates would actually rise, above zero, and slow the economy. The task to do ‘whatever it takes’ was turned over to the ECB and its chairman, Mario Draghi, who signaled in December 2014 that QE was coming.
In response to the ECB’s imminent decision, not only did the Euro currency start to plummet, from a high of $1.38 to the dollar to what in the next few months would be a low of $1.07, but conversely, Eurozone stocks accelerated by 25% in anticipation of QE.
In January 2015 the ECB announced a 60 billion euro a month liquidity injection QE program, indicating it would continue purchasing bonds at that rate for at least the next 18 months through September 2016. That amounted to a money injection of about $1.2 trillion.
The justification and ‘selling’ of the program was that it would boost financial asset prices—stocks, bonds, etc.—that would in turn boost business confidence and eventually lead to real investment in goods and production as well. This is always the traditional argument for QE. The first part is of course true. QE and money injection does boost financial markets. It also initially reduces currency exchange rates. The ‘free money’ quickly goes into financial assets, providing a quick return on investment. But the free money does not go into real asset investment in an equivalent way. Cheap money reduces the cost of investment, but that doesn’t necessarily mean a competitive rate of return on real investment compared to investment in financial assets, which is the real determinant, not the cost of money.
German opposition to the QE program was not sufficient to stop it. In Germany, the slowing of exports on the horizon given events in China and the EMEs, and the new more aggressive escalation of QE by the Japanese in late 2014, caused a split in the German-northern and east European allies bloc within the ECB and among the 19 Eurozone finance ministers. Some saw QE as necessary to lower Euro exchange rates to restore German-Eurozone exports. They of course were right. As noted, the Euro did decline significantly even in anticipation of the QE announcement. After a low point of $1.07 to the dollar, for the rest of 2015 the Euro once again drifted up, by late summer 2015 back to $1.15 where it was when QE was announced in January. In the interim, however, German exports did accelerate in 2015, from a previous low of 85 billion Euros at the end of 2014 to a new high of 110 billion. However, other German elements opposed QE since it represented more centralized authority to the ECB and less to the national central banks. QE also represented a further step toward a bona fide banking union, opposed as well by Germany.
In the longer run, the contra-QE argument that would prove most convincing was that QE would ultimately prove ineffective at best at stimulating real growth for the Eurozone over the longer run.
First, critics of the program noted that 80% of the lending in Europe was provided by bank loans to private businesses and households—not by bonds. The fact that almost all the ECB bailout addressed bond buying meant it would have little effect on bank lending and real investment by non-bank businesses. QE bond buying was about protecting and subsidizing the assets of investors and governments, and would not lead to more bank lending, real investment, or general economic recovery. Secondly, the Eurozone banking system was fragmented along national lines and national banking systems. How much QE bond buying would occur within each national economy? How would proportionality in bond buying be assured? A third critique that followed this last point is there was no single Eurozone-wide bond to buy, only the bonds of each of the 25 countries. Did that mean Eurozone countries would now be responsible for the bonds of those Eurozone countries that default? Would their taxpayers have to foot the bill? This had always been Germany’s concern and why it opposed the creation of a true Eurozone bond all along, as well as why it insisted in having final say in any bailout program.
Yet another critique was that the bank bailout program, the LTRO, had not proved particularly successful thus far with regard to stabilizing the private banking system. Despite having bought 528 billion euros to date, the private banking system in the region was still not sufficiently capitalized and thus unstable and refused to make loans. Another point was that how could a QE program significantly influence the economy by reducing bond interest rates, when interest rates on government bonds were already approaching zero?
In another often heard criticism, the concern was that introducing a QE would take the pressure off the economies that needed to undertake the kind of fiscal and labor market restructuring that Germany had successfully introduced earlier in order to become more efficient.. Germany wanted the rest of Europe to become like itself—that meant the kind of restructuring that it had undertaken to become more export driven. QE would delay this restructuring. Finally, some critics had noted whether there were even enough bonds or private securities available in some of the national economies for the ECB to purchase.
Notwithstanding all these serious criticisms, the ECB proceeded in January 2015 to introduce its Eurozone version of QE. It announced it would buy bonds and non-bond securities now, up to a total of 60 billion Euros every month, or $68 billion, for the next 18 months starting in March 2015 through September 2016. The mix of bond vs. non-bond securities was set at 50 billion vs. 10 billion euros respectively. In a significant change to prior policy and programs, the buying would be ‘open ended’, much like the US QE3 program. That is, it would continue potentially beyond the 18 months and $1.1 trillion total for as long and as much as necessary until a 2% Eurozone-wide inflation rate was achieved. In what were important concessions to Germany, 80% of losses on bonds of other countries would have to be covered by those countries’ own central banks, not the ECB, and bond buying would be proportional to each country’s contribution to Eurozone-wide GDP.
With the $1.2 trillion QE program, the Eurozone now had allocated total liquidity injection in the amount of $4.3 trillion. That was ‘open ended’ and subject to further general liquidity injection in subsequent QE2 and after programs. Having already reduced interest rates to 0.05% as well, the Eurozone now also had clearly introduced a ZIRP program.
The justification for the now massive liquidity injection was that QE and ZIRP provided the confidence necessary for banks to loan and businesses subsequently to invest in real assets. It was the monetary policy analog to the justification for austerity fiscal policy—i.e. it would restore business confidence which, once returned, would lead to real investment, jobs, wage income recovery, consumption and eventual GDP recovery. Business confidence restoration was thus the key ‘transmission mechanism’ to both austerity and liquidity overkill. But in neither case, however, did the transmission work. The ‘mechanisms’ were in fact a fantasy, and ideological construct of policymakers intent on simply ensuring that the assets of corporations, bankers and investors would be protected, while they hoped somehow the economy would eventually recover.
‘Triple Dip’ Recession on the Horizon?
By the summer of 2015 it had become abundantly clear that the global economy was rapidly slowing—led by China’s accelerating slowdown, emerging markets’ deepening recessions as global commodity deflation intensified, the collapse of Chinese stock markets, and the ratcheting up of global currency wars.
The Eurozone’s Germany-driven exports first strategy was unraveling. The $327 billion liquidity injection by the ECB from March through August 2015 had raised the Eurozone growth rate by a statistically insignificant 0.2%. The drift toward deflation in Eurozone goods and services continued, with inflation projections for all of 2015 down to only 0.1%. Greece’s debt crisis erupted a third time, resulting in still 86 billion more euro debt imposed on the country along with more austerity, ensuring further debt and austerity to come. US-dictated sanctions on Russia contributed to the slowing of German and select east European economies. The initial advantage the Eurozone QE achieved in reducing the Euro and stimulating exports had dissipated in less than six months, as other economies—including China—devalued their currencies in turn and as the US decided not to raise interest rates and held back dollar revaluation. After an initial 16% decline of the Euro to the dollar in the months leading up to the Eurozone QE, by September 2015 the Euro’s value remained at the $1.2-$1.14 range that it held the preceding February before QE was introduced. As fast as the ECB was able to reduce the Euro’s exchange rate, other countries reduced theirs—in a currency war ‘race to the bottom’.
Nor was the outlook promising for the Eurozone resurrecting its exports-first strategy, given that Asian economies and China were slowing; that Japan was planning to introduce still more QE to offset the Eurozone and China’s August 2015 devaluations; and that the US decided in September to hold its interest rates steady thus preventing the dollar from rising further.
Euro government debt to GDP continued to rise to 93%. EU banks were desperately trying to deleverage their balance sheets still bloated with non-performing loans now equivalent to three times Eurozone GDP levels. With bank lending still moribund, Euro non-bank companies began turning increasingly toward raising junk bond debt in capital markets, which escalated 73% in the first half of 2015. Private corporate debt was thus being piled on to government debt.
By third quarter 2015, financial markets globally were becoming more unstable as well. After initial gains of 25% with the QE announcement, German (DAX), French (CACS) and other Euro stock markets gave up their gains by late summer 2015. US stocks were following China’s down. Still more Euro government bonds slipped into negative interest rate territory. And currency markets were weakening. Non-Eurozone European economies—Switzerland, Denmark, Sweden and others—decoupled their currencies from the Euro to discourage speculators and were also discussing more QEs. The Swiss franc and other currencies immediately began to appreciate, cutting into exports and driving their economies toward stagnation and recession.
This past week the Greek Parliament voted by a narrow margin of 153 to 145 to impose even more austerity on its people—thus implementing the latest austerity demands by the Eurozone Troika required for the Troika’s release of loans earmarked for Greece last August 2015.
Earlier this year the Troika signaled to Greece, if it wanted to receive its next tranche of loans needed to make a scheduled payment of 3.5 billion euros to the ECB this July, Greece would have to toughen its austerity program still further. The Syriza government complied, and cut pensions and raised income taxes beyond what it had even originally agreed to last August.
Greek Government’s Latest Austerity Measures
In its March 22, 2016 decision last week, the Greek government then added still more austerity. That vote raised the sales (VAT) tax to 24%, imposed higher taxes on coffee, alcohol and gas, revised the privatization program to accelerate the sales of public owned transport, electricity, water and port systems, added finances to cover Greek banks’ growing backlog of non-performing business loans, and added contingency measures to cut government spending even further over the next three years should Greece miss the austerity targets imposed by the Troika last August 2015.
Prime Minister, Alexis Tsipras’ public response in the wake of still further austerity was “Greece is keeping its promises, now it’s their (Troika) turn to do the same”. But what promises? And to whom?
The past six years of Troika debt deals and austerity demands shows clearly that whenever the Troika has agreed to terms of lending to Greece in exchange for more austerity from it, the deal is never really closed. The Troika keeps demanding even more austerity, with nearly every quarterly review of Greece’s austerity compliance, before releasing just enough of the loans for Greece to repay the Troika for prior loans. The Troika dribbles out the loans and then squeezes Greece for still more austerity. That has been the Troika’s practice ever since the three major Troika Greek debt restructuring deals of May 2010, March 2012, and August 2015.
Greece’s Unsustainable Debt Load
By latest estimates total Greek debt is 384 billion Euros, or $440 billion. That’s approaching nearly twice the size of Greece’s annual GDP. A decade ago, in 2007-08 before the global crash, Greek debt was roughly half of what it is today, in terms of both total debt and as a percent of GDP. Greek debt was actually less than a number of Eurozone economies. So Greece’s debt has been primarily caused by the 2008-09 crash, Greece’s six year long economic depression followed, the extreme austerity measures imposed on it by the Troika during this period which has been the primary cause of its long depression, and the Troika’s piling of debt on Greece to repay previously owed debt.
Contrary to European media spin, it’s not been rising Greek wages or excessive government spending that has caused the $440 billion in Greek debt. Since 2009 Greek annual wages have fallen from 23,580 to less than $18,000 euros. Government spending has fallen from 118 billion euros to 82 billion.
Bankers and Investors Get 95% of all Debt Payments
Who then has benefitted from the escalation of Greek debt? To whom are the payments on the debt ultimately going? To Euro bankers and to the Troika, which then passes it on to the bankers and investors, the ultimate beneficiaries.
As a recent in depth study by the European School of Management and Technology, ‘Where Did the Greek Bailout Money Go?’, revealed in impeccably researched detail, Greek debt payments ultimately go to Euro bankers. For example, of the 216 billion euros($248 billion) in loans provided to Greece by the Troika in just the first two debt deals of May 2010 and March 2012, 64% (139 billion euros) was interest paid to banks on existing debt; 17% (37 billion euros) to Greek banks (to replace money being taken out by wealthy Greeks and businesses and sent to northern Europe banks), and 14% (29 billion euros) to pay off hedge funds and private bankers in the 2012 deal. Per the study, less than 5% of the 216 billion euros went to Greece to spend on its own economy. As the study’s authors concluded, “ the vast majority (more than 95%) went to existing creditors in the form of debt repayments and interest payments”. And that’s just the 2010 and 2012 Troika deals. Last August’s third deal is no doubt adding more to the totals.
The IMF: Pro-Greece or Pro-IMF?
Recognizing the impossibility of Greece ever being able to repay the debt, the IMF—a member of the Troika—has recently broken ranks with its Troika partners and has recommended the Troika provide debt relief to Greece. The Syriza government is no doubt betting on the IMF being able to convince the rest of the Troika to agree to debt relief. But in so doing, it is making the same error it made in last year’s 2015 debt negotiations: it is depending on the assistance of one wing of the Troika to convince the others to give Greece a break.
Last year it was Syriza’s strategy to leverage certain liberal members of the EC and the Eurozone’s finance ministers group on its behalf. That failed. German ministers and bankers demanding more austerity prevailed last August 2015 over the ‘soft’ or liberal elements in the EC and among the Eurozone’s finance ministers group. Syriza is now betting on the IMF, and proving its willingness to continue with austerity in the interim, to show it is ‘keeping its promises’ to enforce austerity. But that similar strategy will fail as well.
The IMF’s proposal for debt relief for Greece, in its just released ‘Country Report 16/130’, proposes to extend the current Greek loans by 14-30 years more beyond current 2040 expiration dates; to introduce ‘grace periods’ during which payments may be suspended; and reduce interest rates on the loans to a fixed 1.5% instead of variable rates much higher. However, data show that results in no debt relief in real terms at all.
Instead of forcing Greece to generate a budget surplus of 3.5% a year achieved by means of severe austerity, out of which to repay the loans, the IMF also proposes to reduce the annual budget surplus to 1.5%. That would reduce Greece’s debt from 200% of GDP to ‘only’ 127% by 2040. However, even that nominal debt reduction would fail, per the IMF’s own analysis, if Greece’s GDP grows at only 1%. It’s been declining at -5% and more for the past six years, so even that 1% is highly unlikely. And if Greece’s growth is 1% or less, then the IMF admits the other European states will have to add still more debt piled on Greece in order for it to repay the old debt.
In short, the IMF version of ‘debt relief’ for Greece has little chance of economic relief for Greece. Nor will it mean any reasonable change in austerity for Greece. Things will get worse, just perhaps worse not as fast as in recent years. But worse nonetheless.
What’s behind the IMF’s Shift?
The IMF is no friend of Greece. What are its possible motives for breaking ranks with the ultra-conservative elements in the Troika—led by Germany and its northern Europe banker allies in the Netherlands and elsewhere?
First, the IMF sees rising demands for its bailout funding on the horizon, not only in the Ukraine but in emerging market economies in the near future. Second, the IMF is feeling the heat from other IMF members in those economies demanding no more special debt considerations for Greece. Looming large on the horizon is also the possibility of the UK exiting the European Union, and elections in June as well in Spain. As secret discussions within the IMF in March exposed by ‘wikileaks’ revealed, the IMF is concerned a re-emergence of Greek resistance to the Troika, concurrent with a possible Brexit vote and Spain elections, might converge into an economic ‘perfect storm’ this summer. The IMF may want to get in front of the curve with Greece before it escalates. Dampen the resistance before it begins by making concessions to Greece now, that won’t take effect for years to come, could be behind the IMF’s move.
Most likely, however, is that the IMF is maneuvering with the rest of the Troika to work a compromise whereby the Troika will buy the IMF out of the Greek debt negotiations. That would mean restructure the Greek debt, to pay off the IMF’s 14.6 billion share of the Greek debt.
That has some appeal to the hardliners in the Troika. However, Germany is demanding that there be no debt relief for Greece before 2018. It is looking at German elections in 2017. So what is most likely is a compromise, resulting in a phasing out of IMF commitment and a phasing in of Greek debt relief that starts only in 2018 after German elections.
What all that means for Greece, however, is not only likely more of the same austerity, but perhaps even an intensification of austerity between now and 2018—as the German-led conservatives within the Troika demand even more austerity now in exchange for the possibility of debt relief after 2018.
Jack Rasmus is author of the forthcoming book, ‘Looting Greece: An Emerging New Financial Imperialism’, Clarity Press, July 2016, and the just published ‘Systemic Fragility in the Global Economy’, Clarity Press, January 2016. He blogs at jackrasmus.com