posted June 9, 2019
On the Nature of Capitalist Crises & Restructuring

An Interview of Dr. Jack Rasmus by Mohsen Abdelmoumen, American Herald Tribune, June 8, 2019
Dr. Jack Rasmus: “Capitalist Crises & Restructuring in the 21st Century” (Formerly entitled ‘Capital is Cannibalistic’)

Mohsen Abdelmoumen:

In your very interesting book ‘Epic Recession: Prelude to Global Depression’, you make a wise review and provide solutions. Why is the crisis inevitable?

Jack Rasmus:

Because the solutions applied to the last crisis will inevitably lead to a more generalized, and potentially deeper and more serious crisis next time. Here’s how: the excess liquidity injected by the central banks to stabilize the financial markets after 2008-09 has been generating even more debt and debt leveraged investment. That has created financial asset bubbles today in global stocks, junk bonds, leveraged loans, triple BBB (junk) rated investment grade bonds, bubbles in derivatives and other asset markets, commercial real estate, etc. The debt levels have reached a magnitude such that once asset market prices begin to unwind and contract (some of which are now occurring), servicing of the excess debt will fail. That unwinding will contract asset prices further, causes defaults and bankruptcies, and generates a credit crash. The contagion then spills over to the real economy. Non-financial sectors of the economy then begin to contract in turn, as credit availability disappears. Production cutbacks, cost cutting, and layoffs follow. Households, already carrying severe debt loads ($13.5 trillion in US alone) default on their loans. Banks with existing severe non-performing loans (more than $10 trillion globally, centered in Europe, Japan, and India will have to write them off en masse. Business and household defaults result in the collapse of bank lending. Business confidence plummets, real investment dries up further, and prices for assets, goods, and inputs deflate, causing a still further deterioration. In other words, the excess liquidity injected into the global economy by central banks after 2008 (more than $25 trillion) temporarily stabilized the financial system. But in doing so it generated more even cheaper credit and debt that flowed into highly leveraged investment in both financial assets and real assets. The solution—i.e. excess liquidity and more debt and leveraging—thus becomes the basis for renewed bubbles and financial crisis. The now even greater debt and leveraging intensifies contagion effects, amplifies the scope and magnitude of the next crisis, and accelerates the propagation across markets and economies. The solution to the last crisis becomes the fundamental cause of the next. That’s why it’s inevitable. Again, watch the most fragile financial markets associated with junk bonds, leveraged loans, BBB corporate bonds, stock markets, already non-performing loans in Europe and Asia, and government bonds of economies like Argentina, Turkey, and others. I’d throw in exchange traded funds, a form of derivatives, probably as well once stock markets correct more than 20% next time. Another problem is that central banks in Europe and Japan already have negative interest rates. Once the next crisis appears they will be limited as to what they can do. They’ll likely double down on even more QE (note: Quantitative Easing), interest free loans to businesses and other banks, and even more draconian measures like bail-ins of depositors money where depositors are forced to convert their cash to near worthless bank stock.

Mohsen Abdelmoumen:

In your book Systemic Fragility in the Global Economy, you explain that traditional economic policies have failed and that the next crisis may be worse than 2008-09. Is not the capitalist system out of breath and unable to regenerate itself?

Jack Rasmus:

Thus far, it has been able to regenerate—but only temporarily. As the economy is restructured following a major crisis—as it was in 1909-14, 1944-53, and again 1979-88—the restructuring regenerates the leading capitalist economy (e.g. the US) but at the expense of working classes and some capitalist competitors. The recovery thereafter dissipates and the crisis then reappears in more severe form. This has been the case since the early 1970s in particular. Reagan’s restructuring succeeded in generating a recovery—at the expense of Europe, Japan, and American working class—but the same restructuring led to financial instability and crises in all three sectors of global capital and culminated in the crash of 2008-09. The US recovery thereafter was rapid for capital incomes, but slow and tepid for wage incomes. And the recovery never really took hold in the weak links of Europe and Japan where subsequent recessions occurred after 2008-09, in a kind of ‘stop-go’ slow and shallow recovery punctuated by recessions—i.e. what I’ve called a classic ‘epic recession’.

Mohsen Abdelmoumen:

You also wrote Central Bankers at the End of Their Rope ? : Monetary Policy and the Coming Depression. Your analyzes and your work constantly warn about a major economic crisis to come. Why, in your opinion, can’t the capitalist system learn the lessons of previous crises?

Jack Rasmus:

After a crisis capitalists do find a way to restore profitability and expand capital. However, the restoration is only temporary, as I’ve said. But that’s acceptable for them. They’ll take a temporary recovery for all so long as it’s a significant temporary recovery for capital incomes. An alternative, longer term solution to the crisis would not as quickly restore profitability and growth, so they do not undertake it. A broader based, longer term restoration also risks strengthening opposition (to capitalism) forces and they don’t want to ‘go there’, as they say. For example, the US policy makers after 2008-09 embarked on a massive central bank money injection to bail out the banks and large corporations to the tune of more than $10 trillion, half of which was QE direct subsidy by the Fed buying bad securities. Tens of trillions in tax cuts for corporations and investors followed as well. Profits and capital incomes accelerated, as the bailout by the Fed (monetary) and Congress (fiscal tax cuts) was redistributed by corporations to shareholders. More than $1 trillion a year was thus redistributed in the form of stock buybacks and dividend payouts just from the Fortune 500 alone. In 2018 it was $1.4 trillion. In 2019 it’s running at more than $1.5 trillion. Meanwhile, wage incomes are stagnating for the bottom 90% of the 162 million labor force in the US due to the restructuring of labor markets to the disadvantage of working class folks. So the ‘lesson’ capitalists have learned is how to quickly ensure they recover from a crisis by using monetary and fiscal policies to directly subsidize their incomes. Such policies in the 21st century are more about the State subsidizing capital incomes than they are about stabilizing the unstable, crisis prone economy.

Mohsen Abdelmoumen:

You wrote ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’. Why in your opinion can the capitalist system only generate crises?

Jack Rasmus:

Crisis generation is embedded in the very ‘economic DNA’ of 21st century capitalism. It constantly over-expands (externally & geographically and internally & technologically). The over-expansion gets away with itself and results in severe global imbalances of various kinds: financial investment over real investment; money capital outflow excesses from the advanced capitalist core economies (US, Europe, Japan) to the emerging market economies; labor inflows from the periphery economies to the advanced core; trade imbalances or goods flow imbalances; technological change imbalances within the advanced economies; imbalances in the price systems as asset bubbles expand faster than goods or factor input prices; employment imbalances as need for skilled labor goes unfulfilled as unskilled labor accumulates on the sidelines as unemployed, underemployed, and contingent-gig service workers. All these, related imbalances generate the crises. But capitalism feeds off the crises it creates. It feeds off its ‘dead and rotten’ destruction it creates during the. It creates a kind of ‘carrion capital’ during the crisis which it then devours in order to jump start a re-expansion process once again. Capital is by nature cannibalistic. It needs periodic destruction in order to resuscitate itself. The problem is the destruction is growing in magnitude and severity and causing increasingly severe consequences for the working classes, while leading to more intense competition among capitalists sectors globally as well. To use a metaphor, Capitalism is like sharks. It is reborn after a crisis like fetal sharks in the belly of the mama shark. The larger devour their smaller brethren while still in the womb. The few then emerge and reborn even stronger, larger, and more voracious than before.

Let me now provide you a more general, longer answer to your questions and the topic of capitalist crises.

Excess debt is the ‘marker’ of financial and general economic ‘fragility’. Fragility is the condition wherein markets and economies are more prone—i.e. more sensitive and likely to respond to—instability and contractions. Fragility also means the instability is more susceptible to amplification and faster propagation across financial asset markets of various kinds when crises occur, as well as from financial asset markets to the real economy of goods and services production.

There are six major changes in the global capitalist economy since the 1970s that increase the potential fragility, instability, and the amplification and propagation rate of the fragility-instability events:

1. Greater Integration of the Former Colonial Elites into the Capitalist Global Economy as Partners

This began in the 1970s as global capitalism integrated the petro-economies, allowing them to nationalize oil and related resource production and share significantly in the revenues from that production—so long as it was understood those elites would recycle much of their income back to the capitalist core economies through direct purchases or the global banking system. In the 1980s, the US added Japan to this wealth recycling arrangement with the Plaza accords of 1986. Europe was to a lesser extent thus integrated as well via the Louvre agreements of that decade. In the 1990s it was Eastern Europe and to a lesser extent south Asia. In the 2000s it was China in part. The recycling benefited US capital greatly. US dominated institutions like the IMF and World Bank were put in service of helping facilitate the integration. The recycling was accompanied by a major acceleration of US foreign direct investment into the economies of the new partners. The dollars flowing back to the US in the form of US Treasury bonds and bills purchases allowed the US to run chronic massive budget deficits, caused by accelerating defense-war spending and simultaneous business-investor tax cutting in the amount of tens of trillions of dollars. The recycling allowed the US to build up its military into a global force on nearly all continents, with a budget of a $trillion a year, the most advanced technology, and more than 900 bases worldwide. Integration economically with the US enabled the US to more effectively wield a ‘carrot and stick’ policy within its global empire to ensure partners would adhere to its fundamental political interests in turn.

But global financial and economic integration also means that crises that build and erupt in the US and/or within the key core partners of the US economic empire (aka Canada-Mexico, Japan, Europe), now more quickly spread across the integrated markets and economies. Integration increases the amplification magnitudes and propagation rates of crises.

2. Financial Restructuring of the Global Economy and the Relative Shift to Financial Asset Investing

I argued in some detail in ‘Systemic Fragility in the Global Economy’ that what has been underway since the early 1980s decade is a relative shift toward financial asset investing. This shift is structural and has not abated. In fact, technology is accelerating it. The opportunity for greater financial market profits is also a key driver. The financial asset investing shift, as I call it, has had the result of distorting real investment in plant, equipment, etc. The latter still goes on and may also grow during periods, but in relative terms it is slowing and even declining compared to financial asset investing. At the core of this is the explosion of free money provided by the central banks, made possible by the collapse of the Bretton Woods International monetary system in the 1970s. Technology and new forms of what is money have also contributed, and increasingly so after 2000, to the explosion of credit enabled by money and near money forms. With excess credit comes excess debt—at all levels: government, banking, non-bank businesses, households, ‘external’, etc.

The magnitude of debt is not per se the problem. The failure to service that debt (i.e. pay interest and principal) is the problem, and that occurs when prices collapse (asset and goods and inputs prices). Price deflation occurs when financial asset bubbles implode. Assets are all substitutes for each other, and when one key asset collapses it has a contagion effect across others. So the price system is the transmission mechanism. This idea is quite counter to mainstream economics which purports the price system stabilizes the economy and markets via supply and demand. But that’s a myth. The price system is a destabilizer. And there isn’t just ‘one price system’, another mainstream error. There are three key price systems that are inter-related but behave differently. They are financial asset prices, goods & services prices, and in put prices (e.g. wages). The relative shift to financial asset investing tends to drive up financial asset prices into bubble range, that then bust and drag down goods and input prices in turn, causing the recession to deepen and recovery to occur slowly. But the financial asset shift and inflation has a further negative effect: it reduces productivity as real investment slows. That slows wages (price for labor) while causing greater unemployment or underemployment (especially the latter).

Financialization is measured not by the share of profits or jobs going to the banking sector. It is defined by the explosion of financial asset securities (especially derivatives), the new highly liquid markets worldwide created in which to trade those securities, and the new financial institutions that dominate that trade—i.e. what are called the shadow banking system. Around this securities, markets, and institutional new framework (that functions globally due to technology) a new global finance capital elite has emerged as the human ‘agents’ of this new global financial structure that I define as ‘financialization’. That global finance capital elite now manages more investible assets than do the traditional commercial banking system (which by the way is increasingly integrated with the shadow banking system). But the shadow banks are virtually unregulated and thus prone to engage in excess risky financial investing, which is behind the chronic shift to financial investing and the financial instability globally it is creating.

3. Global Restructuring of Labor Markets & Collapse of Unionized Labor

Not all of contemporary capitalism is of course financialized. There is still much non-financial production going on and, in the (non-financial) services sectors, actually growing. It’s just that it isn’t as profitable as financial investing and thus is getting relatively less money capital than it otherwise would for purposes of expansion. Financialization is diverting more money capital to itself relative to non-financial investing—i.e. a shift that is slowing productivity gains in the latter and, as a consequence, wages and raising underemployment as businesses cut costs in order to offset the slowing productivity and higher costs of investing in real assets.

We thus now see major transformations in labor markets worldwide that is resulting in lower wage income gains. The ‘global integration’ process in item #1 above is accompanied by the ‘offshoring’ of higher wage manufacturing and other sector jobs to the emerging markets, following the capital outflow from the capitalist core (US, Europe, Japan) to the periphery of EMEs (note: Emerging market economies). Simultaneously, businesses still producing in the core intensify their cost cutting to compete with producers in the EMEs. That means the rise of contingent labor (part time, temp, gig, etc.) which is paid less and paid fewer benefits. The rise of contingency and offshoring reduces union membership and in turn bargaining power. Whereas in the past unions recovered some of income lost during the recession and downturns during the business cycle upswing, this is no longer occurring as unionization has collapsed. The offshoring of jobs also increases worker insecurity and means less likely worker resistance to wage compression by strikes and collective bargaining. As unions decline their political influence also wanes, and with it the ability to achieve wage and benefit improvements via political action. Minimum wage legislation in particular suffers.

Labor market restructuring thus becomes a popular project of business elites and their politicians. It takes the form of job offshoring as the State increasingly subsidizes foreign direct investment. It takes the form of job creation that is now almost totally contingent in character in the advanced capitalist core of US-Japan-Europe (60%-80% of jobs created in Europe in recent decades have been contingent—part time, temp, etc.). As unions weaken economically, it means the restricting and limiting of what union labor may legally negotiate over. As unions weaken politically, it means slower legislated wage adjustments (min. wages) and cut backs in ‘social wages’ like pensions, national health insurance, etc. As union effectiveness weakens, they are attacked and removed by business action or abandoned by workers who see them ineffective in defending their interests. Business led political parties then propose national legislation to, in part, codify the changes and in part to drive them deeper.

Just as the financial restructuring of the capitalist economy leads to accelerating income and wealth accumulation by the financial elite and business class, the restructuring of labor markets had the effect of compressing and stagnation (or for some sectors of the working class even reducing) wage incomes. The former financial restructuring causes income and wealth inequality to accelerate even faster than the labor market restructuring causes wage, working class, incomes to stagnate and decline. Both restructurings result in accelerating income inequality that we see today. And with income inequality, wealth (i.e. assets) grows in turn. Conversely, more asset accumulation produces even more non-asset income inequality. So the two, income and wealth, inequality in favor of financial and business classes feed off each other to expand even further. Meanwhile wage income stagnates.

Thus de-unionization, wage compression, social benefits cut backs, job offshoring, decline of collective bargaining and strike activity, labor market ‘reform’ legislation, etc. are all the consequence (and objectives) of labor market restructuring. Labor market restructuring is largely for the benefit of those sectors of capital still mostly doing business in the domestic economy.

Financialization, subsidization by the State of foreign direct investment, and free trade agreements are largely for the benefit of the multinational corporate sector. Free trade agreements subsidize multinational corporations in two major ways: They are primarily about legalizing terms and conditions for US multinational corporate and banking penetration of other economies on favorable terms. Free trade deals also serve as a multinational corporation cost cutting aid, as corporations are able to bring back their goods and services and not pay the tariff (tax) to re-import back to the US. For example, 49% of the US’s more than $500 billion a year in goods trade deficit with China involves goods made by US corporations in China.

4. Destruction of Former Social Democratic Parties and Movements

Everywhere globally we see the collapse of social democratic parties that once dominated government. This has been true even in the ‘heartland’ of social democracy, in Europe, but also in USA, in South America, Israel, and select economies in Asia where ‘weak forms’ of social democracy previously participated. The rise of right wing ‘populism’ should be viewed as a direct result of the political vacuum created by the demise of social democracy. It is the consequence. So why have they declined? And how has this decline fueled the global integration, financial restructuring, restructuring of labor markets, the financial investing shift, and the accelerating income and wealth inequality? Those are key questions that remain largely unanswered still today among the so-called ‘left’ or ‘progressive’ movements everywhere. Some likely causes of the collapse of social democracy at the political level parallels include the destruction of their political base, the unions, and their significant loss of political influence. To some extent it has been the result of strategic errors by these parties, allowing themselves to become too closely associated with the neoliberal offensive that began circa 1980. But whatever the cause, their decline has opened the floodgates to legislative and other capitalist initiatives to restructure the capitalist financial system and capitalist labor markets globally along lines noted above. Capital has never been more powerful relative to labor than it is today. That’s why, in desperation, working classes vote in mere protest of conditions without being able to propose and promote solutions in their interest.

Thus we get Brexits. Support for far right parties that promise to change the system and argue falsely the change will better the conditions of workers. That’s why we get Donald Trump. Bolsonaros and Macris in South America. Salvinis and Orbans in Europe. Dutertes in Asia. Etc. Working classes worldwide have been ‘de-organized’ both economically and politically. Into the vacuum step the far right movements, ideologues, and their parties, who take power often by default. The working classes are left with mere periodic protest votes and they vote for parties and movements that say they are going to ‘stick it to’ the capitalists that have created their declining working conditions and standard of living—even if they know little will come of that pledge.

5. Transformation of Mainstream Capitalist Political Parties

Political change has taken the form not only of the demise or rise of certain political movements and parties, but also the change in formerly ruling parties.In the US the Republican party has assumed the mantle of the far right populism. Its former challenger of the past decade, the Teaparty, has been integrated and transformed that party fundamentally.Its ideology, policy mix, and willingness to undermine democratic norms and even institutions has signified a basic change in the composition and strategy (and tactics) of the Republican party. A similar transformation to the ‘left of center’ is in the early stages with the US Democratic party.Not just in the US is this process occurring. In the UK the formerly dominant parties are in crisis and losing popular support.A ‘Brexit’ right wing populist party is emerging within the Conservative party, while the Labor party continues to lose support to nationalists and environmentalists in its ranks as well.At earlier stages a similar development is occurring in France and even Germany, where both the national front and AfD are growing support. And of course, Italy is well ahead in the rightward shift. The parties of the ‘center’ are collapsing in various stages everywhere.

These political party changes are the consequence of the intensifying income and wealth inequality, and the forces driving it associated with global capitalist economic integration, financial restructuring, and labor market restructuring.On the periphery of the political system are the demise of social democracy and rise of the populist right parties;but ‘in the middle’ as well the traditional capitalist parties are becoming fluid and experiencing internal instability.

6. Increasing Subsidization of Capital Incomes by Capitalist States

Capitalists have totally captured the direction of fiscal and monetary policy and have turned it to the benefit of their direct interests.In past periods, the primary mission of fiscal-monetary policy was to stabilize capitalist economies when recessions or goods inflation occurred. Fiscal-monetary policy was also employed in a manner that shared the benefits of such policy with working classes and other sectors. But 21st century capitalist fiscal-monetary policy (taxation, government spending, budget-national debt management, interest rates, inflation targeting, employment, etc.) has been transformed. Today the primary mission of such policy is to directly subsidize capital incomes, both in periods of economic contraction and in subsequent periods of recovery.Keeping interest rates low chronically allows constant cheap credit and the issuance of multi-trillions of dollars of corporate and household debt.Providing excess liquidity fuels financial asset market (stocks, bond, derivatives, etc.) bubbles that boom capital incomes from financial investing. Equally massive, multi-trillion dollar tax cuts for businesses, corporations and investors, bankers and shadow bankers, results in the US alone more than a $1 trillion a year annually in redistribution to shareholders from stock buybacks and dividend payouts (in 2018 rising to $1.4 trillion in US alone).Ever more funding is simultaneously provided for defense and war production.

The direct subsidization fuels the financial asset investing shift and in turn the financial asset bubbles, corporate and household excess debt, and generates the financial fragility and instability in the form of the next crisis. It also results in escalating government sector debt and rising debt servicing costs.

Thus all three major sectors of capitalist economy—business, households, government—keep loading up on debt and leverage. In the US, government debt (national and local, central bank and government agency) is well over $30 trillion. Another $20 trillion could easily be added by 2030. Corporate and business bond and loan debt may be as high as $20 trillion today.And household debt nearly $14 trillion and rising rapidly. The problem of debt is multiplied many fold across the global capitalist economy, with areas of high concentration of either corporate and/or government debt.The amount is easily more than $75 trillion. It is worth repeating, however, that the sheer magnitude of debt is not by itself the problem.The problem is when the incomes for servicing the debt cannot keep up.And that gap widens rapidly when financial asset prices, and other prices, rapidly collapse and contagion spread just as rapidly from the financial to the real economy. Price collapse, beginning with financial markets, is the critical chemical additive that makes the debt problem explode. And when that explosion takes place, the massive debt accumulation at government levels prevents traditional fiscal-monetary policy from playing an economic stabilization role. All it is then used for is to subsidize the losses incurred by owners of capital incomes.

A Digression on the Failure of Economic Theory

My view is not the typical mainstream (e.g. bourgeois) economics analysis of what causes (i.e. ‘cause’ here means distinguishing between what enables, or precipitates, or fundamentally drives) a crisis. There are different ‘forms’ of causation which mainstream economists do not distinguish between, but which I think are necessary. I would not characterize my view as a Keynesian, Schumpeter, Fisher, or even an Austrian (Von Mises-Hayek) economist view.None of these mainstream approaches to economic crisis analysis understand finance capital or how it determines, and is determined by, real (non-financial) capital. They don’t understand how financial and labor markets have both changed fundamentally since the 1980s.Their conceptual framework is deficient for explaining 21st century capitalism and its crises.Nor is my view what might be called a traditional Marxist approach. It too does not understand finance capital.It too tries to employ an even older conceptual framework, from the 19th century classical economics, to explain 21st century capital and crises.
Mainstream economics focuses only on short term business cycles and fiscal-monetary policy measures as solutions. But short term business cycle fluctuations aren’t really ‘crises’. A crisis suggests a fundamental crux or crossroad has been reached requiring basic changes in the system. Mainstream economics doesn’t even raise this as a subject of inquiry. Reality is just a sequence of short term events patched together. Or it attempts to apply business cycle analysis, and associated fiscal-monetary policy solutions, to what is a more fundamental, longer term, chronic instability condition.Consequently it fails both at predicting crises turning points and/or posing effective solutions to them. The two main trends in mainstream economics—what I call Hybrid Keynesians (which is not really Keynes) and Monetarists along with their numerous theoretical offshoots in recent decades—are both incapable of explaining longer term crises endemic in capitalism that have required the periodic restructuring of the capitalist system itself over the last century. That is, in 1908-17, 1944-53, and 1979-88.

Marxist economists have fared little better understanding or predicting 21st century capitalism. This is especially true of anglo-american Marxist economists, although the European and others outside Europe have been more open-minded. Marxist economists do consider the problem of longer term crises trends but attempt to explain it based on the conceptual economics framework of 18th-19th century classical economics, which is insufficient for analysis of 21st century capital. They assume industrial capital is dominant over finance capital, that only workers who produce real goods explains exploitation, and that finance capital and financial asset markets are ‘fictitious’. Hobson-Lenin-Hilferding and others attempted to better understand and integrate the relationship between industrial and finance capital at the turn of the 20th century.This led to an analysis of what’s sometimes called ‘Monopoly Capital’, a school of which still exists today.But subsequent capitalist restructurings of 1944-53 and 1979-1988 in particular have rendered such a view and analysis inaccurate.A century later, today in the early 21st, the relationships between finance capital and industrial capital have significantly changed from how Marx saw them in the 19th century, as well as how Hobson-Hilferding-Lenin envisioned them in the early 20th. In other words, contemporary Marxist economists don’t understand modern finance capital any better than do contemporary mainstream economists. Moreover, they still insist on employing classical economics concepts like the falling rate of profit, on productive v. unproductive labor, and explain money and banking based on 19th century financial structures.Nor do they pay much attention to the new forms of labor exploitation today or explain why the unions and social democratic political parties have declined so dramatically in the 21st century.

My critique of all these mainstream and Marxist economic ‘schools of analysis’, and their numerous spinoffs and offshoots, is contained in Part 3 of my 2016 ‘Systemic Fragility in the Global Economy’ book. That book also advances the analysis I originally began to develop in the 2010 book, ‘Epic Recession: Prelude to Global Depression’. My books published thereafter, 2017-2019, subsequent to ‘Systemic Fragility’, expand upon the key themes introduced in ‘Systemic Fragility’. Looting Greece: A New Financial Imperialism Emerges, August 2016, expands upon analysis in chapters 11, 12 in ‘Systemic Fragility’, addressing financial restructuring of late 20th century capitalism. Central Bankers at the End of Their Ropes (August 2017)expands on ‘Systemic Fragility’, chapter 14, on monetary contributions and solutions to crises.So does ‘Alexander Hamilton and the Origins of the Fed’ (March 2019), which is a prequel to ‘Central Bankers’ as a 18th-19th century historical analysis of US banking.And my forthcoming, September 2019, The Scourge of Neoliberalism book,will expand on Chapter 15 in ‘Systemic Fragility’ addressing fiscal policy, deficits and debt.

So all my work is an attempt at a more integrated analysis of 21st century capitalist economy, its contradictions, its increasing financial—and thus general economic—instability, the profound changing relations between finance and industrial capital, its fundamental changes in production processes and both product and labor markets, the increasing failure of traditional fiscal-monetary policies to stabilize the system, and the growing likelihood of a crisis coming within the next five years, or even earlier, that could prove far more intractable and deeper than even that of the 1920s-1930s.

The Three Restructurings of US & Global Capitalism, 1909-2019

Thus far, American capital, the dominant and hegemonic form of global capital over the last century, has restructured itself successful on three occasions: the first in the period just prior to world war I (1909 -1918) and during that war, as US capital ascended in the 1920s as a global player more or less equal to British capital. British capital in this period was eclipsed as hegemonic and had to share hegemony with American capital. In the wake of the second world war British capital was displaced by American as hegemonic, starting 1944 with the Bretton Woods international monetary system created by US capitalists, for US capital, in the interests of US capital.That second restructuring (1944-1953) began to break down in the early 1970s as global capitalist stagnation set in once again. That 1970s decade witnessed a general crisis of global capitalism, especially in the US and throughout the British empire (or what was left of it). But elsewhere among advanced capitalist economies in Europe and Japan as well.

A third restructuring was launched in the late 1970s by Thatcher and Reagan.This is sometimes called ‘Neoliberalism’ (a term I don’t like but use since it is generally accepted but is somewhat ideological). The third, Neoliberal restructuring re-stabilize US and global capital and expanded US capital, from roughly 1979 to 2008. It underwent a crisis with the Great Financial-Economic crash of 2008-09 in the US, and subsequent European and Japan multiple recessions and general stagnation that followed 2010 in the ‘advanced capitalist economic periphery’ of Europe-Japan which is now the weak link of global capitalism. Trump’s regime should be understood as an attempt to restore and resurrect neoliberalism—as both a restructuring and a new policy mix—albeit in a more violent, aggressive and nasty form of neoliberalism (2.0? perhaps).

I do not believe Trump will be successful in the longer term with this restoration. He’s had definite success with tax restructuring favoring capital, but is still contending with restoring monetary system to neoliberal principles (i.e. free money/low rates/low dollar value),and is in the midst of a major conflict and resistance to restore US hegemony in international trade and money affairs, in particular from China. Should Trump fail in restoring a harsher, more aggressive Neoliberalism 2.0, it will almost certainly mean a ‘fourth’ major capitalist restructuring will follow in the 2020s. That fourth restructuring will be even more exploitive and oppressive than Neoliberalism, especially for working classes as well as for US capitalist competitors in the advanced capitalist economic periphery and emerging market economies.

My Basic Thesis On Capitalist Crises

Is that capitalism experiences periodic crises every few decades (not ‘business cycles’ that may occur in between the crises but are not crises per se) and it must, and does, restructure itself periodically in order to survive.It creates multiple imbalances within itself whenever its shorter term fiscal-monetary policy solutions no longer are able to re-stabilize a system that grows increasingly unstable over time—i.e. a system which inherently and endogenously tends toward crisis periodically. Each restructuring, however, proves to have limits. Its effect at resurrecting capitalism inevitably dissipates over time, typically 2-3 decades.As a consequence of periodic restructurings, stability and growth is restored for a couple decades, but the fundamental contradictions that lead to renewed crisis arise and intensify once again during the periods of apparent growth and stability. Thus even basic economic restructurings as solution are temporary. Think of fiscal-monetary policy as solutions for only the very short term in the case of business cycles that are due to policy errors or other non-financial forces that cause ‘normal’ recessions. Think of periodic restructurings as producing solutions for the medium term (2-3 decades).But the capitalist system’s longer term crisis is that even periodic restructurings don’t prevent the inevitable crises from reappearing.

Mohsen Abdelmoumen:

You are a brilliant economist and a prolific author. Unlike most economists linked to the establishment who see nothing, you keep warning with very solid arguments and careful work that we are heading for another cycle of crises more serious than the previous ones. Is the capitalist system reformable or should we not seek an alternative as soon as possible?

Jack Rasmus:

It depends what you mean by ‘reforms’.There are obviously minor reforms that, while important for protecting average folks income, their standard of living, protecting their basic rights and civil liberties, etc., don’t challenge or stop the fundamental drift of US and global capitalism, including its growing tendency toward crises that I noted above. These should be distinguished from structural ‘reforms’ that do attempt to fundamentally change the direction of 21st century global capitalism. These fundamental reforms are, of course, strongly resisted by capitalists and their political representatives. What then are these transformable ‘reforms’?

They would be changes that halt and roll back the financialization and the multiple forces now accelerating income and wealth economy, with emphasis on ‘roll back’ here.They would reverse the changes in the labor markets of recent decades, by prohibiting for example the excess hiring of part time, temp and otherwise ‘contingent’ labor. They would restore an even field for the recovery of unions and collective bargaining. They would democratize the central banks and give them a new mission to serve not only the banks but the rest of society; central banks would become part of a broader public banking system and their decisions made by elected representatives accountable to all of society (my recent book provides proposals of legislation that would do this). The tax shift of recent decades that gave ever more income to businesses, investors and wealthy 1% would be reversed, perhaps via a financial transaction tax system and would make tax fraud and offshore tax sheltering a criminal offense with guaranteed jail time. And of course the massive $ trillion a year war budget would be significantly reduced by fundamental reforms. All these fundamental reforms challenge the trajectory and dynamics of 21st century capitalism. Capitalists and politicians would vigorously resist them. In that sense the system is not ‘reformable’. Minor reforms are sometimes allowed, and concessions granted especially in times of system crisis. But both kinds of reforms should be aggressively pursued.

There are four great challenges confronting 21st century US dominated global capitalism. It is questionable whether the system can overcome them. If it can’t it will be perceived by the general, non-capitalist populace that it is failing and no long can deliver on improving standards of living or even maintaining past levels of living standards. If that occurs, it’s a game changer. Here are the four great challenges it faces:

1. Will Capitalism be able to resolve the crisis of climate change in the next two decades.

If it can’t do that, the economic negative impacts of climate change by 2040 will have reached such a level that they will become economically unresolvable.The system will be appropriately blamed for not resolving the problem. It remains to be seen if the private profit and capital expansion system of capitalism can co-exist with the climate crisis. Can profits be maintained and the climate crisis simultaneously resolved? We shall see, but I’m not optimistic the two can coexist.

2. Can the system control the coming huge negative impacts of technological change?

We’ve seen how technology has transformed financial and labor markets, to the great detriment of 80%-90% of the working classes. It has spawned new business models like Amazon, Uber, and others that have devastated jobs and wage incomes.In the US more than 50 million are already ‘contingent’ labor of some kind (in Europe and Japan even more) and it’s just the beginning. The real crisis will begin when next decade the technological effects of Artificial Intelligence and machine learning software have an even greater impact. A recent Mckinsey Consultant study predicts a minimum of 30% of all occupations and jobs will be replaced or reduced. How are these people going to earn a decent living, start families, afford housing, etc.? Some say a Guaranteed Basic Income will have to be the answer. I don’t see capitalists going along with that.It’s a ‘structural reform’ they’ll resist tooth and nail. What are the economic and political consequences of AI (note: Artificial Intelligence) if they allow it to happen and drive down living standards for hundreds of millions of workers worldwide? Here again I don’t see the capitalist system, as it pursues profits via AI, being able or willing to soften its massive negative effects on jobs, income and living standards.

3. Will They do anything about accelerating Income Inequality?

Capitalists and politicians talk about this but so far put forward no solutions to it.And the realization of ‘them vs. us’ is beginning to deepen in the consciousness of more workers. That resentment is fueling the right wing populism globally. It is also making the young workers, the millennials and next ‘generation Z’ coming, to turn against the system in droves. Polls in the US show a majority of under 30 year olds now reject the capitalist system as it is and prefer some kind of ‘socialism’. We shouldn’t make too much of this yet, but ‘socialism’ means to them ‘none of the above’ currently.

4. Can capitalists ‘manage’ the radical right populist surge underway?

They think they can but are losing in that effort thus far. They thought they could control Trump, but he is transforming the Republican party by driving out traditional capitalist representative from it and from their initial placement in his administration.He is terrorizing the opposition from within. It’s not unlike what’s going on elsewhere in Europe and South Asia countries where authoritarian right ideologues like Trump and his neocons are slowing changing the political rules of the game in their favor, at the expense of the traditionalists, sometimes called ‘globalists’. But it’s really about an internal internecine intra-capitalist class fight going on the US and elsewhere.A more aggressive and violent wing views the crisis of living standards as an opportunity to assert itself, take control of the institutions of government, transform the State apparatus and bureaucracy to serve it and not the traditionalists, and govern in a more direct way, even approaching a kind of dictatorship of its wing over the formal institutions of government and state. In short, I don’t see that the capitalists have had much success so far in containing this development, this shift toward a more radical right. There are of course some historical parallels here. It’s what Hitler was able to do in the early 1930s. There are numerous disturbing historical parallels between Trump and his movement and Hitler’s early strategies. Of course, the process was accelerating in Germany as the economic and social crisis was more intense and concentrated in a shorter time frame in the 1920s there. The crisis is not as intense yet in the US and the process of Trump’s take over of the political system is more drawn out and protracted. But there are similarities to the process nonetheless. The traditionalist capitalist wing and globalists are clearly ‘losing’ in the US. And if Trump should win another term in 2020, which he might if there’s no recession in the US in the interim, then this transformation of American democracy and American political institutions and culture will then become quite obvious. Meanwhile, we see a similar rightward drift and transformation of the capitalist political systems occurring in the UK, in central Europe, maybe even France soon, in the Philippines, in India, in Brazil-Argentina, in places in Africa and elsewhere. I think the traditionalists have no idea or strategy of how to stop it.

Mohsen Abdelmoumen:

Your article ‘Financial Imperialism: The case of Venezuela’ dated last March caught my attention, as all your work that I advise our readership to read. You wrote: “Venezuela today is a classic case how US imperialism in the 21st century employs financial measures to crush a state and country that dares to break away from the US global economic empire and pursue an independent course outside the US empire’s web of entangling economic and financial relations.” In your opinion, how can Venezuela resist the US-led imperialist war against it?

Jack Rasmus:

It’s important to understand how in 21st century capitalism, where the US is clearly the hegemonic power, how the US expands, maintains, and intervenes to maintain its economic empire. If 21st century global capitalism is increasingly a financial capitalism and depends more on financial means to expand, then its imperialism is more financial than ever before. Unfortunately, the ‘left’ and progressives, including Marxists, are looking in the rear view mirror at imperialism.They still see it in the prism of 19th century, or early 20th century, in its forms. One of my projects is to analyze and explain how financial measures are used by US to maintain its economic empire. It is quite different from classical British imperialism, which collapsed fully after world war II and was replaced by the American empire. In my article, ‘Financial Imperialism: The Case of Venezuela’ I explained how some of these financial measures work, and continue to work, to destabilize Venezuela’s economy and set it up for violent political change, either from within or without via invasion of some kind that is organized and managed by the US. My 2016 book, ‘Looting Greece: A New Financial Imperialism Emerges’, looked at how it works in the Eurozone as well, with Greece a microcosm case example that has implications elsewhere.

What can Venezuela do to resist the US-led imperialist war against it is your question. First, it is essential for Venezuela to organize, mobilize and arm its base of popular support. This I think it has been doing. But I’m not sure it has a strategy how to use that mobilized base against its opponents, internal and external.I may be wrong there, since I have no way of knowing what it may be doing internally in that regard. Second, the Maduro regime must retain support of the Venezuelan military.So far it appears it is succeeding in that regard. The recent attempted uprising by the US-puppet, Gaido, failed miserably in its attempt to co-opt and ‘turn’ the military against the government. Third, its important that popular forces find a way to throw out Bolsonaro in Brazil and Macri in Argentina.Those two US-assisted governments would probably send the military forces should a military invasion occur in Venezuela. The US will use the OAS (note: Organization of American States)and their militaries as proxies. But if they’re out of the picture or preoccupied with serious problems at home, its unlikely they could be used.The people of Brazil and Argentina can thus play a role here as well. State allies of Venezuela could help significantly as well by trade and loans to help Venezuela.And by purchasing its oil and restoring its refinery production to offset US sabotage and sanctions.Notably here are China, Russia, Cuba and other South American countries not already the clients of Washington like Brazil, Argentina, and perhaps now Ecuador. Finally, within the US progressive forces can work more aggressively and coordinate better their efforts to reveal to American people what’s really going on in Venezuela, how the US neocons are intensifying the attack in preparation for invasion, what’s really behind the problems in the country’s economy, etc. There needs to be something similar to the Latin American defense movement that arose in the 1970s after the Chilean coup engineered by the US and the defense of central American progressive forces in the 1980s.

Mohsen Abdelmoumen:

How to explain why the influence of neocons in the US continues despite changes in presidents and administrations?

Jack Rasmus:

The neocons represent a particular right wing radical social and political base in America that has existed for some time. In fact, it’s always been there, going back at least to McCarthyism in the early 1950s, and even before. This is a radical ideological right, even pro- or proto-fascism base in the US. It was checked by the great depression and world war II temporarily but quickly arose again in the late 1940s with the advent of the cold war and China’s successful war for independence. It formed around Barry Goldwater in the 1960s. It arose again in the 1970s with Nixon.When Nixon was thrown out, it reorganized and set forth a plan to take over the American government and political institutions.It even developed position papers and internal proposals how this takeover might be achieved.

Ideologues like Dick Cheney, Donald Rumsfeld, and others assumed positions of power in the Reagan administration. Their movement took over the US House of Representatives in 1994 and vowed to create a dysfunctional government that would be blamed for gridlock and give their more radical proposals a hearing as to how to break the gridlock and govern again in their interests.We saw them reassert their influence when Cheney was made vice president in 2000.He was actually a co-president, and perhaps more, as George W. Bush, was the publicized president but really a playboy figurehead. Cheney and his radical right ran foreign policy, giving us Iraq and setting the entire Middle East afire in its wake.This radical right is also behind the decline of democratic and civil rights since 2000, using the 9-11 events as excuse to push their anti-democratic agenda. The Koch brothers, the Adelman and Mercer families, and scores of others are the moneybags in their ranks.They funded the teaparty movement that has since entered the Republican party, terrorized the party’s moderates and driven them out of office and the party itself. Without them, their money, their grass roots organizations, their control now of scores of states’ legislatures, their stacking of judgeships across the country, the Trump phenomenon would not have been possible in 2016. Ideologues like Steve Bannon, John Bolton, Navarro, Abrams, Miller and others are now running the Trump administration and its domestic (immigration) and foreign (trade fights, Israel, No. Korea, Venezuela, Iran) policies.

The point is they’ve always been there, a current in US politics below the radar, but since 1994 aggressively asserting itself and penetrating US institutions with increasing success—aided by media like Fox News and their analogues in radio and on the internet.

Mohsen Abdelmoumen:

Trump made promises of employment during his election campaign and was elected on the slogan “America first” by the disadvantaged classes, especially in rural areas. Isn’t Donald Trump the president of the rich in the United States? What is your assessment of Trump’s governance?

Jack Rasmus:

That assessment must first distinguish between governance in the interest of whom? It’s been a disaster for working-class America. All Trump’s promises of bringing jobs back is just a manipulation of concerns by workers of massive job losses and wage stagnation due to offshoring of US jobs and free trade. While Trump talks of bringing jobs back, he opens the floodgates to skilled foreign engineers and workers taking more jobs based on H1-B and L-1 visas, covered up by cuts to unskilled workers entering from Central America.

Trump is a free trader, just a bilateral free trader not a multilateral one. Trump’s trade offensive is about the US reasserting its hegemony in global markets and trade for another decade as the global economy weakens. It’s a phony trade war against US allies. Just look at the deals made with South Korea, the exemptions given for steel and aluminum tariffs, the go slow and go soft with Japan and Europe. Contrast that with the increasingly aggressive attack on China trade relations—which is really about the US trying to stop next generation technology development by China in AI, cyber security, and 5G wireless. These are technologies that are also the military technologies of the 2020s. The neocons and military industrial complex in the US, along with the Pentagon and key pro-military chairpersons in Congress, want to stop China’s tech development. It’s really a two country race in tech now, with almost all the patents roughly equally issued by China and the US and everyone else way behind. So the trade war has delivered nothing for the working classes except rising prices now, and even for farmers who are the losers (but they’re given direct subsidies to offset their losses, unlike working families that have to bear the brunt of the tariff effects).

Look at the tax legislation of 2018 and the deregulation actions of 2017 by Trump. Who benefited. Business got big cost cuts. The rest of us got higher taxes to offset the $4 trillion actual Trump tax cuts for business and investors and wealthy households.US multinational corps got $2 trillion of that $4 trillion. And households will have to pay $1.5 trillion in more taxes, starting this year and accelerating by 2025. In deregulation, we get the collapse of Obamacare and accelerating premiums, while the bankers got financial regulations of 2008-10 repealed. As far as political ‘governance’ is concerned, what we’ve seen under Trump is widespread voter suppression, gerrymandering by his ‘red states’ to help him get re-elected next time, the approval of two conservative judges to the US Supreme court engineered by Trump’s puppy, McConnell, in the Senate. Then there’s the now emerging attacks on immigrants, including jailing their kids, and the attacks on womens’ rights that was once considered unimaginable.

Politically Trump has been engineering a bona fide constitutional crisis. He’s appeared to have gotten away with the Mueller investigation which should have led to his impeachment but hasn’t. He continually undermines US political institutions verbally. He clearly is moving toward bypassing Congress and governing directly by ‘national emergency’ declarations, refusing to allow executive branch employees to testify to Congress despite subpoenas, ordering the launching of a new McCarthyism by ordering his Justice dept. to start investigating opponents, etc.—i.e. all of which were the basis of Nixon’s impeachment.

In short, Trump’s governance has been a disaster for working-class America, immigrants of color, small farmers and even manufacturing companies, but a boon to far right and white nationalists whom he publicly supports. It’s been especially beneficial to wealthy households, businesses and investors, moreover. And maybe that’s the most important reason why the capitalists still tolerate him and let him remain in office. If they really wanted to impeach and remove him from office they could find a way. But he’s delivering for them financially and economically. He’s ‘good for business’, in other words. But so was Hitler.

Mohsen Abdelmoumen:

You have worked on trade union issues and you have been a trade unionist yourself. In the face of the fierce neoliberal offensive, do we not have a vital need for a very strong trade union movement to defend the working class?

Jack Rasmus:

Absolutely. One of the great tragedies in recent decades is the destruction and co-optation of what’s left of that trade union movement. The destruction was planned in the 1970s and the implementation of a strategy of union destruction began in earnest under Reagan and has not ceased ever since. One of the greatest and most successful union strike waves occurred in 1969-71. Workers won wage and benefit gains of 25% in the first year of contracts at that time. First construction trades, then teamsters, then auto and steel, then longshore. Employers could not stop them. They were too well organized and remembered how still to fight from the traditions left over from the 30s and 40s. That’s when a plan was developed first to destroy the building trades. That was implemented back in the late 1970s, even before Reagan. Under Reagan the attack was directed at manufacturing and transport unions. At its core was the offshoring of their jobs and the deregulation of their industries to intensify competition to drive down wages. The beginning of the ‘contingent’ labor transformation began in the 1980s as well, then accelerated. Free trade wiped out more jobs, especially under Clinton in the 1990s. Pensions were destroyed in the private sector in the 80s and 90s. Minimum wages were allowed to lag. Healthcare costs were privatized and shifted to workers. Some workers fought back, a rear-guard action.

But the explanation for the demise of unionization in America in the private sector cannot be understood as solely the result of capitalist offensives. That was important. But so was the lack of leadership by unions at the top. They thought it would temporary, under Reagan, and they could recoup losses thereafter in membership, wages, and benefits. But it was not temporary. It continued under Democrats in the 1990s. The problem was that unions, as they weakened, turned to the Democratic Party to save them. It didn’t. As they got weaker they pleaded with Democrats even more, but the latter simply took their support for granted and did little in return. The Democrat party insisted the Unions not embarrass them by strikes, especially under Clinton. The leadership abided by the party’s request. And got weaker still, losing more members. Then came NAFTA, China, and H1-B visas giving hundreds of thousands of jobs to skilled labor coming to the US. Millions of jobs were lost after 1997 to trade. Then came tax cuts for business that subsidized the replacement of labor by capital and machinery. That devastated at least as many jobs as free trade deals. Then came the collapse of housing markets and permanent loss of millions of construction jobs. Filling the gap of jobs were more low paid service employment and more contingent part time, temp work, at lower pay and no benefits. All the while the leaders of unions pleaded with Democrats to help them. Obama promised reforms to help unions organize new members in 2008, then buried the promise once elected and having received union members’ contributions in the millions for his campaign.

The problem of declining unions is a problem of capitalist restructuring and change, of capitalist offensives to de-unionize and weaken collective bargaining. But it’s also a consequence of wrong union strategies, especially becoming more dependent on Democratic party leaders who abandoned unions once they took their campaign contributions. If unions are to resurrect themselves, and I believe they will, it will have to be an independent union movement, not depending on either wings of the corporate party of America—aka the Democrats and the Republican wings of this single, essentially capitalist party. It will probably have to assume a new kind of organizational form as well. Not organized along lines of ‘smokestacks’, for this or that industry, and not placing contracts as its key objective but forming alliances and new organizations that include allies outside of work and pursuing political-legislative objectives as equally important strategies.

Having personally lived and worked in unions when they were at their peak, and then experienced and witnessed the decline, from within and from afar, it is clear union labor will have to undergo a major organizational and strategic restructuring of its own if it is to become a force it once was. But this is not the first time historically it has undergone such a transformation and arose to resume its critical economic and political role. I’m convinced it will do it again. But only if that resurrection attempt is done independently and it breaks as an appendage of either of the wings of the corporate party of America.

Mohsen Abdelmoumen:

In your opinion, does not the working class need alternative media to defend its interests knowing that the dominant media are in the hands of a handful of capitalists? And isn’t the alternative press a bulwark against mass misinformation that serves the interests of imperialism and big capital?

Jack Rasmus:

Again, the answer is absolutely yes. I think, however, it will have to come mostly from digital communications sources which are still more ‘open’, compared to traditional TV, print, and radio sources. On the negative side, it is also becoming clear that capitalist sources are doing their best to capture the internet and regulate it to their advantage. The tech companies like Facebook, Google, etc. are, step by step, being ‘brought to heel’, as they say. They once demanded full independence of government as their business model, but that is changing as they are made the target of, and blamed for, the growing problems of violation of privacy, blackmail, money laundering, unregulated money creation (via cryptocurrencies), and foreign political manipulation (which, by the way, all countries including the USA are now engaged in). Surveillance capitalism, as it is called, will become an important element of capitalist ideology transmission and control. This augurs poorly for the future. But I don’t underestimate the potential for clever people to find a way around the surveillance. It’s not as easy for capitalist political enforcers to control the internet of things, as it has been the more centralized TV and radio transmission. It should be noted as well in closing comments that capitalist ideology, in general, has become more powerful than ever before. By ideology here I mean the manipulation of ideas and truth, the purposeful creation of misrepresentation of reality, in the service of certain political and economic interests. Technology has provided capitalist ideology an enormous weapon with which to advance its interests and its dominance. Average working folks are more confused than ever before about who their friends and allies are, and who are their real enemies. Digital technology media is a battle ground of class confrontation and class conflict in the 21st century.

Mohsen Abdelmoumen:

In the face of imperialist wars and neoliberal domination, shouldn’t peoples throughout the world unite to fight together for a better world?

Jack Rasmus:

Yes. But the question is how best to do that? As in the case of uniting to fight within a particular country, across

posted June 6, 2019
Central Banks Worldwide Rush to Cut Rates

Central banks are lowering interest rates worldwide, in anticipation of the US Federal Reserve soon to do so, as the global economy continues to weaken.

Both the IMF and World Bank have this past week cut their estimates of economic growth… again. Global oil prices continue to decline (as I predicted earlier this year after prices rose following last year’s 40% collapse). US and Europe factory orders and output are flat. Manufacturing globally is stagnating. (Watch for US jobs, a lagging indicator, likely to soon retreat as well). Emerging market economies are slipping into recession, one by one. Advanced economies like UK and Australia now beginning to contract. Bond prices worldwide are booming as bond (long term) rates fall everywhere due to weakening global economies, dragging down short term rates, as the Fed prepares to ‘catch up’ by cutting its own benchmark rate now lagging behind the real economy.

Can the Fed and other central banks boost the sagging US and global economy? Can European central banks even try–with more than $10 trillion in negative interest rates already, with trillions of dollar equivalent in non-performing bank loans(NPLs)? With trillions $ more in bad bank debt and NPLs in Japan, India and China?

Why the Fed’s official 2% inflation target is, and has always been, a phony target and number. And subsidizing capital markets and incomes always its true target. Why monetary policy and central banks are at the end of their fraying ropes and their imminent rate cutting moves will prove ineffective.

For my discussion of these and related questions about the ineffectiveness of monetary policy approaches to the economy (including the emerging popular notion of modern monetary theory–i.e. ‘QE turned on its head’–listen to my 2-part hour long interview with Radio4All on my 2017 book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’.

    GO TO: (for part 1 of the interview)

http://www.radio4all.net/index.php/program/102429

    GO TO: (for part 2 of the interview)

http://www.radio4all.net/index.php/program/102732

posted May 31, 2019
Mueller Talks…and the Tyrant Walks

Today special counsel Mueller went before the cameras and in nine minutes essentially said his report was all he had to say and he wouldn’t go before Congress, even if subpoenaed, to say anything else.

Mueller summarized his recent report in the nine minutes. Here’s what he concluded were its main points:

First, there was insufficient evidence to conclude Trump colluded to a criminal extent. Insufficient evidence. Not no evidence. Insufficient. And much of that was destroyed by Trump (erased emails). Or Mueller couldn’t get it because the Trump administration wouldn’t release it. Or key witnesses refused to testify to the Muller commission, including Donald Trump Jr. who had direct conversations with the Russians but was prevented talking to Mueller by Trump from speaking. Which raises the question: why didn’t Mueller subpoena Trump Jr.? Or even Trump himself? After all, special prosecutor Starr subpoenaed and questioned Bill Clinton in his impeachment. Why were the Trumps let off the hook by Mueller?

In short, the first conclusion was that some kind of collusion between Trump and the Russians was likely, according to the Mueller Report, but not enough evidence was provided to prove the more demanding charge of criminal intent.

Second, in contrast, the Report concluded there was an abundance of evidence that Trump obstructed the investigation. In fact, multiple times and in various ways. Take a look at the summary of evidence on Trump’s obstruction of justice in vol. 2 of the Mueller Report. It’s overwhelming.

Nixon was impeached in 1974 in large part based on his obstruction of the Watergate investigation. And if obstruction is a criminal act, why then did Mueller not also indict Trump on that evidence, as Nixon had been?

In the Nixon case, impeachment was actually based on three findings: Nixon was found to have engaged in obstruction of the investigation of the “Watergate” burglary inquiry, of misuse of law enforcement and intelligence agencies for political purposes, and of refusal to comply with the House Judiciary Committee’s subpoenas.

The Mueller report substantiates without a doubt that Trump obstructed the investigation many times and in many ways. But History here is repeating itself, as they say. Trump’s recent order to have his Justice Dept. start investigating the origins of the Mueller investigation, using law enforcement and intelligence agencies, is an act for which Nixon was also impeached. It’s using government agencies to go after political adversaries. And then there’s Trump’s recent additional order in recent weeks, that no one in his executive branch should respond to Congressional subpoenas if called on to testify before the House (which includes Mueller, by the way, who technically works for Trump as a member of the Justice Dept. Maybe that’s why Mueller stood before the cameras and won’t stand before Congress). As in the case of Nixon, refusing to cooperate with Congress in an investigation is also an impeachable act.
So Trump is not only impeachable based on his actions and events that preceded the Mueller Report release. He’s impeachable based on his repeated follow up acts since the Report. In other words, the obstruction continues.

So why is Trump not being impeached? Do you hear that Nancy Pelosi? (Not that Nancy doesn’t already know, of course). Pelosi’s excuse is that impeachment might cause the Democrats to lose the House in 2020 and the presidency. She should tell that to the Republicans who, after their failed impeachment of Bill Clinton, actually gained House seats in 2000 and won the election that year as well! So much for false historical analogies.

This leads to the third essential, and most important, point made by Mueller today in his brief appearance before the cameras: Mueller said he couldn’t indict Trump, based on the rules of the Justice Department no matter what were Trump’s criminal acts. What? Trump engages in criminal acts but is above the law simply based on a rule his own Justice Dept. created to protect presidents while in office?
Mueller apparently places his obligation to abide by a rule created by the bureaucracy above his obligation to recommend action due to obvious criminal activity! Maybe that’s the new modus operandi of the FBI, of which he is a former director.

Mueller was supposed to be the paragon of right and justice, according to the eastern elite establishment media that elevated him to a rank just short of secular saint during his investigation. He was the incorruptible, a straight shooter. So how does one explain Mueller’s decision to place bureaucratic rules above the prosecution of criminals then?

Is it because he’s always been a Republican and Republican pols always cover each other’s ass? Or maybe he just preferred to toss the hornet’s nest into the lap of Congress and retreat to the sidelines to personally avoid being engulfed by the firestorm that might result if he indicted Trump. Or maybe he just didn’t want to go ‘head to head’ with Justice Secretary, Barr, who happens to be an old buddy of Mueller. Their families have reportedly socialized together for years. Of course, I would not think of suggesting that had any effect on Mueller’s decisions in his report.

Regardless the his motive, before the cameras today Mueller made it clear he agrees with the Executive-Justice Dept. rule preventing him from indicting Trump for criminal obstruction of justice—examples of which abound in the report. That’s the real take-away from Mueller’s Report and his 9 minute historical contribution to the further demise of Democracy in America.

Just consider that carefully folks. It’s worth repeating. That interpretation, that rule, means a president can engage in any kind of criminal act. He could launch world war III on a whim. He could order the incarceration of protestors en masse. He could strangle his grandmother on the white house lawn, but nevertheless he can’t be indicted because it, the Justice Dept., issued a rule that said he can’t while in office!

You know what that is? That’s Tyranny. Which is the definition of someone in power who is ‘above the law’.

We now have a tyrant in the oval office and the Justice Dept., the highest government office responsible for upholding law and prosecuting criminals, simply says it’s not allowed. What bureaucrat assumed the authority to make that rule?

Barr and Mueller agree that the Justice Dept. rules preventing indictment of a sitting president for criminal activity is based on the US Constitution. Oh Yeah. So where does the Constitution say that? I couldn’t find it anywhere in Article II of the US Constitution on the Presidency. Nor in Article I on the legislative powers of Congress. Nowhere does it say a rule created by a department of the executive branch of government negates criminal law. Or can stop an investigation of the president relevant to impeachment proceedings.

What I did find is that the Constitution doesn’t even require a criminal act to justify impeachment. (Hear that Nancy?). Criminality certainly strengthens the case for impeachment. And we have now three clear cases of criminal activity by Trump that a former crook, Richard Nixon, was impeached on: obstruction of justice, using law enforcement and intelligence agencies to investigate his political opponents, and refusing to respond to Congressional subpoenas.

So here we are in 2019. A President is above the law. Bureaucratic rules absolve criminal activity. The president continues to move toward unilateral governing by the executive branch, thumbing his nose at the legislative. Trump repeatedly violates the US Constitution by arbitrarily diverting money appropriated by Congress for specific legislation to whatever he wants. He orders investigations of his opponents—i.e. McCarthyism write large. He orders employees of the Executive branch to refuse to cooperate with Congress, including subpoenas, ignoring Congress’s Constitutional right to investigate. He repeatedly invokes phony ‘national emergency’ declarations to take unilateral action, bypassing Congress. He has publicly declared he will pardon himself if convicted. And so it goes, as the US drifts into a bona fide Constitutional Crisis not seen since the 1850s.

What’s next? Could Trump refuse to leave the White House if defeated in 2020? Don’t think that’s outrageous. It’s more than just possible.

And what would the leaders of the Democratic party do in that case, when they can’t even show enough backbone to take up their Constitutional duty to confront a criminal in the White House, who almost daily abridges their Constitutional rights and marginalizes them as a governing body.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy From Reagan to Trump’, Clarity Press, September 2019, and the recently published ‘Alexander Hamilton and the Origin of the Fed’, Lexington books, March 2019, and ‘Central Bankers at the End of Their Rope’, Clarity Press, August 2017. He blogs at jackrasmus.com, tweets at @drjackrasmus, and hosts the Alternative Visions show on the Progressive Radio Network.

posted May 13, 2019
China-US Trade War: Hiatus or Busted Deal?

This past week the US and China failed to reach agreement on a new trade deal, despite high level China representative Lie He meeting in Washington on Thursday-Friday, May 9-10.

In the wake of the meeting, Trump and his administration mouthpieces attempt to put a positive spin on the collapsed talks, while placing blame on China for the break up. The ‘spin’ at first was that China had reneged on a prior agreement and changed its terms when they arrived in Washington. China had caused the breakdown, not the US. The stock markets swooned. Trump quickly jumped in and said he got a nice letter from China president, Xi, and that it wasn’t all that bad.

But make no mistake, a trade negotiations ‘rubicon’ has been reached. The real trade war may be starting. Or, it may all be theater to make it look like both sides are acting tough and that an agreement will be reached this summer. But that scenario may now be fading. Trade wars—like hot wars—have their own dynamic. Once launched, they drive their adversaries in directions they may not have initially sought.

So who’s actually responsible for last week’s trade breakdown?

To listen to Trump and his neocons running the US foreign (and trade) policy show now, it was the Chinese. They changed the agreement at the last minute. But who really did the changes? Who set off the process? And how?

If the Chinese backtracked on some terms of the deal, it was clearly in response to the Trump-Neocon trade team initiating the backtracking. Here’s what the Trump team did:

• The US publicly declared the week before that the US would keep tariffs on even after an agreement. This violated the understanding that both sides would remove the new tariffs once an agreement was reached ($100 billion China on US; $250 billion US on China)

• Trump threatened tariffs on the remaining $300 billion of China imports

• The US signaled that China would have to not only stop technology transfer from US corporations doing business in China, but that China would have to share its tech development with the US if it wanted an agreement. That included the military-sensitive nextgen technologies like 5G, AI, and cybersecurity.

• The US demanded that China stop subsidizing its state owned enterprises (SOEs) with low interest rate loans that put US multinational corporations in an uncompetitive position in China (even as the US continued to subsidize via tax cuts, trade credits, etc.)

• The US indicated it would continue its global efforts to prevent US allies from doing business with China tech companies like Huawai, ZTE, China Mobile, etc. regardless if an agreement was reached.

If one wanted to scuttle negotiations at the last minute, this was certainly a way to do it. And as this writer has been saying for the past year, scuttling is just what the neocon China hard-liners driving the US negotiations have wanted all along. They don’t want a deal to reduce the US goods trade deficit with China, and they are willing to forego China’s significant concessions already made to the US in negotiations on US company access to China markets, if they can’t also stop China’s technology development—especially in the key nextgen technologies of AI, cybersecurity and 5G.

These are not only the new industries of the next decade, they are also the new technologies with major military implications. Should China reach parity or leapfrog the US in these areas, it could upset the US empire’s military dominance.

From the very beginning of negotiations with China, back in March 2018, the tech issue was central. Neocon, China hard-liner and head of the US negotiation team, Robert Lighthizer, issued way back in August 2017 a warning report that China’s 2025 plan aimed at surpassing the US in these three tech areas. That report promised to show that China was in fact stealing US technology from US companies in those areas. Lighthizer’s March 2018 subsequent report than allegedly proved it. The US-China trade war was then launched that month.

At first it was led by Treasury Secretary, Steve Mnuchin. He led a team to Beijing and came back indicating a deal was reached with China. As part of the deal, it was later revealed publicly, China had agreed to allow US banks and businesses a 51% or more ownership of joint venture companies in China. This was the US bankers’ main demand. China also indicated, revealed later, that it would purchase $1 trillion more of new farm, natural gas, and manufacturing goods from the US over the next five years. So much for the goods trade deficit imbalance and issue. Both concessions were major wins for Mnuchin and the US. But China refused apparently to budge on the major issue of nextgen tech. It suggested concessions, but, failing a final agreement, would not agree to US demands before hand or up front.

Over the summer in 2018 the neocon faction reasserted control over the US trade negotiating team. Mnuchin’s firing of anti-China neocon, Peter Navarro, was reversed and Lighthizer put him back on the team. Over the summer Neocons deepened their influence and control of the Trump foreign policy, as Pompeo policy took charge at the State Dept., and as notorious neocon, John Bolton, took over as main Trump foreign policy adviser. His buddies (Abrams, Miller, etc.) were given enhanced roles in the administration as well. These were the guys that gave us Iraq war in 2003 and after. And they’re on the same path again.

In the area of trade they have clearly convinced Trump that a more aggressive stance on trade negotiations will eventually produce a bigger ‘win’ for the US. They are the originators of the ‘use national security’ as an excuse to impose sanctions and use tariffs and sanctions to intimidate and force opponents (including allies) into major concessions.

We see this aggressive, high risk brinkmanship not only in trade negotiations with China. It’s behind the collapse of negotiations with North Korea on missiles and nukes. (The North Koreans offered to dismantle a number of sites if the US removed an equal number of sanctions. But the neocons refused, saying all the sites must be dismantled before the US would even consider lifting any sanctions at all. That’s a non-starter in negotiations with anyone. If effect, it says: capitulate and then we’ll think about lifting sanctions). It’s there in the imminent attack and invasion of Venezuela. The recent US failed coup there is only the beginning. It’s there in the refusal to stop supporting Saudi Arabia in Yemen. It’s there in the escalation of military threats toward Iran. It’s even there in the current threat of sanctions on Germany if it doesn’t stop buying Russian gas and buy US gas instead. It’s everywhere in US foreign policy. And it’s there in the recent blowup of negotiations on trade with China.

The neocon, anti-China hardliners—Lighthizer, Navarro, and Bolton—don’t want an agreement with China. They want a capitulation on the tech issue. They are aligned with the US Pentagon, Military Industrial Complex, Congress right wing—faction on the US trade team.
There has been in fighting on the trade team from the beginning. The neocon faction has been contending with the US bankers-big business faction that want the 51% and the deeper control in China. China has already conceded that and in fact has begun implementing it. The farm-manufacturing-natural gas faction wants more purchases of their products. China has already agreed on that as well. But since last mid-2018 the neocon faction has Trump’s ear and they are driving the policy.

That’s why the US ‘moved the goalposts’ the week before the China delegation was to come to Washington last week to finalize a deal. They announced or leaked all the backtracking US terms well before the China team was to come: the retaining of US tariffs despite an agreement, the required sharing of tech regardless of limits on tech transfer in China, the demands that China stop subsidizing its SOEs (even as the US would continue subsidizing US corporations via massive tax cuts, export-import bank, and direct payments from the US government), and so on.

China’s reply was to send its vice-chairman and head of its negotiating team, Liu He, to Washington last week nevertheless. Their reply was they would respond in kind to US tariffs with more tariffs of their own and that China would not capitulate on matters of ‘principle’ (read technology development and its 2025 plan).

So where does it go from here? Is this a bona fide breakdown or just a hiatus, with both sides posturing to look tough?

Trump advisor, Larry Kudlow, trotted out on national syndicated talk shows on Sunday, May 12, and admitted that Trump and China president Xi would not meet until June at the next G20 meeting—maybe. No doubt some discussions will continue next in Beijing in the interim. But it is now far less likely a deal will be made this year. But that’s what the US necons prefer, short of China capitulation.
The neocons have apparently convinced Trump a deeper trade war with China would be good politics domestically. The US economy is showing signs of slowing in key areas of business investment and household consumption. The trade war with China has produced a sharp decline of imports from China. Lower imports translates into higher ‘net exports’, a category in US GDP calculations that raises GDP. So less imports from tariffs means higher GDP. That could offset some of the slowing US economy in 2019-20.

The neocons believe China’s economy is also slowing and that its stock market is fragile. China cannot conduct a deeper trade war over tariffs with the US. It will eventually capitulate and agree to US demands, including tech, they no doubt argue. And Trump buys it.
But there are potential economic consequences to wars, including trade wars, that the neocons and their obsession with US imperial power do not understand or else do not want to acknowledge. Maybe they think they’ll prevail before the economic negatives occur. The negatives mean a corresponding severe contraction of US stock values as well. This now appears emerging. The negatives include a sharp rise in US consumer inflation, as the higher tariffs on China imports get passed on in the US economy. That will reduce an already fragile US consumer spending and US business investing, as costs rise for both. Both business and consumer confidence are poised for a major contraction, and the trade war may just be enough to tip the balance. And rising inflation may force a new conflict with the central bank, the Fed, as it raises interest rates again to fund an even larger US budget deficit and debt caused by the economic slowdown.

But if the worse economically happens, the neocons no doubt are whispering in Trump’s ear that he can then blame the US stock market collapse and economic recession coming on the Chinese—as well as on the Democrats. He can resurrect his extreme ‘economic nationalism’ appeals of 2016 to his base, once again claiming it’s the ‘foreigners’ and the ‘socialists’ (e.g. everyone proposing a reversal of his war spending, tax cuts for the rich, cuts to education and social programs, etc.).

These are indeed dangerous times for the US, economically and politically. As even Democrat Party leaders are now saying, a bona fide Constitutional Crisis is brewing in the US as Trump insists on governing for his 35% supporters and to hell with the rest of the country, and as he governs increasingly at the expense of Congress’ s constitutional rights.

It is also a dangerous time for the US economy, and the global economy as well. We can thank the growing influence, and disastrous policies, of the neocons who are now again firmly in control of US policy as Trump is now aligned with them on almost every policy front.

Jack Rasmus
May 13, 2019

Dr. Rasmus is author of the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, September 2019; and the just published ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019. He blogs at jackrasmus.com and hosts the radio show, ‘Alternative Visions’. His twitter handle is @drjackrasmus.

posted May 12, 2019
Condition of US Economy April 2019: GDP & Jobs

Article 1: 1st Quarter US GDP: The Facts Behind the Hype

By Jack Rasmus
April 28, 2019

US GDP for the 1st quarter 2019 in its preliminary report (2 more revisions coming) registered a surprising 3.2% annual growth rate. It was forecast by all the major US bank research departments and independent macroeconomic forecasters to come in well below 2%. Some banks forecast as low as 1.1%. So why the big difference?

One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. First preliminary issue of GDP stats are typically adjusted significantly in the second revision coming in future weeks. (The third revision, months later, often is little changed).

There are many problems with GDP accuracy reflecting the real trends and real GDP, that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3% (and $500b a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2% ‘real’ GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9%. If actual inflation were higher, which it is, the 3.2% would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the ‘rent’ that 50 million homeowners with mortgages reputedly ‘pay to themselves’.

Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2% are some red flags revealing that the 3.2% is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end next month with the conclusion of the US-China trade negotiations. How does the trade war boost GDP temporarily?

Two ways at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade dispute initially result in lower imports. In US GDP analysis, lower imports result in what’s called higher ‘net exports’ (i.e. the difference between imports and exports). Net exports contribute to GDP. The US economy could be slowing in terms of output and exports, but if imports decline faster it appears that ‘net exports’ are rising and therefore so too is GDP from trade.

Looking behind the 1st quarter numbers it is clear that the 3.2% is largely due to excessive rising business inventories and rising net exports contributions to GDP.

Net exports contributed 1.03% to the 3.2% and inventories another 0.65% to the 3.2%. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), US GDP in the quarter would have been only 1.3%. (And less if adjusted more accurately for inflation and if the 2013 phony re-definitions were also ‘backed out’). US GDP in reality probably grew around the 1.1% forecasted by the research departments of the big US banks.

This analysis is supported by the fact that around 75% of the US economy and GDP is due to business investment and household consumption typically. And both those primary sources of GDP. (the rest from government spending and ‘net exports).
Consumer spending (68% of GDP) rose only by 1.2% and thereby contributed only 0.82% of the 3.2%. That’s only one fourth of the 3.2%, when consumption typically contributed 68%!

(Durable manufactured goods collapsed by -5.3% and autos sales are in freefall). And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act).
Similarly private business investment contributed only a tepid 0.27% of the 3.2%, well below its average for GDP share.

Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined ‘intellectual property’, and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest. In the first quarter 2019, structures declined by -0.8%, housing b y -2.8% and equipment investment rose only a statistically insignificant 0.2%.

This poor contribution of business investment contributing only 2.7% to GDP, when the historical average is about 8-10% normally, is all the more interesting given that Trump projected a 30% boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7% is a long way off 30%! The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors). And they compressed household consumer spending to boot.

Sine Trump’s tax cuts there’s been virtually no increase in the rate of Gross private domestic investment in the US. It’s held steady at around 5% of GDP on average since mid-2017. Within that 5%, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising.

In short, both Consumer spending and core business investment contributions to US GDP have been slowing, and that’s true within the 3.2% GDP. First quarter GDP rose 3.2% due to the short term, and temporary contributions to inventories and net exports–both driven artificially by Trump’s trade wars.

The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1% in 1st quarter GDP. (Conversely, nondefense spending was reduced -5.9% in the first quarter GDP).

Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken.

Trump is betting on his 2020 re-election and preventing the next recession now knocking at the US and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end.

Meanwhile, beneath the surface of the US economy the major categories of US GDP–business structures, housing, business equipment, and household consumer spending (especially on durables and autos)–will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.

Bottom line, however, the 3.2% GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.

Jack is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, Summer 2019, and ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019. He blogs at jackrasmus.com, tweets at @drjackrasmus, and hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network on Fridays, 2pm eastern time.

(For those interested in a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).
GO TO:
http://prn.fm/alternative-visions-us-gdp-latest-release-preview-new-book-scourge-neoliberalism/
OR GO TO:
http://alternativevisions.podbean.com

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Article 2: How Accurate Are US Jobs Numbers?

May 6, 2019

The just released report on April jobs on first appearance, heavily reported by the media, shows a record low 3.6% unemployment rate and another month of 263,000 new jobs created. But there are two official US Labor dept. jobs reports, and the second shows a jobs market much weaker than the selective, ‘cherry picked’ indicators on unemployment and jobs creation noted above that are typically featured by the press.

Problems with the April Jobs Report

While the Current Establishment Survey (CES) Report (covering large businesses) shows 263,000 jobs created last month, the Current Population Survey (CPS) second Labor Dept. report (that covers smaller businesses) shows 155,000 of these jobs were involuntary part time. This high proportion (155,000 of 263,000) suggests the job creation number is likely second and third jobs being created. Nor does it reflect actual new workers being newly employed. The number is for new jobs, not newly employed workers. Moreover, it’s mostly part time and temp or low paid jobs, likely workers taking on second and third jobs.

Even more contradictory, the second CPS report shows that full time work jobs actually declined last month by 191,000. (And the month before, March, by an even more 228,000 full time jobs decline).

The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase.

And there’s a further problem with the part time jobs being created: It also appears that the 155,000 part time jobs created last month may be heavily weighted with the government hiring part timers to start the work on the 2020 census–typically hiring of which starts in April of the preceding year of the census. (Check out the Labor Dept. numbers preceding the prior 2010 census, for April 2009, for the same development a decade ago).

Another partial explanation is that the 155,000 part time job gains last month (and in prior months in 2019) reflect tens of thousands of workers a month who are being forced onto the labor market now every month, as a result of US courts recent decisions now forcing workers who were formerly receiving social security disability benefits (1 million more since 2010) back into the labor market.
The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, ‘Not in the Labor Force’, reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). ‘Not in the Labor Force’ for March, the previous month Report, revealed an increase of an additional 350,000 added to ‘Not in the Labor Force’ totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate.

Bottom line, the U-3 unemployment rate is basically a worthless indicator of the condition of the US jobs market; and the 263,000 CES (Establishment Survey) jobs is contradicted by the Labor Dept’s second CPS survey (Population Survey).

GDP & Rising Wages Revisited

In two previous shows, the limits and contradictions (and thus a deeper explanations) of US government GDP and wage statistics were featured: See the immediate April 26, 2019 Alternative Visions show on preliminary US GDP numbers for the 1st quarter 2019, where it was shown how the Trump trade war with China, soon coming to an end, is largely behind the GDP latest numbers; and that the more fundamental forces underlying the US economy involving household consumption and real business investment are actually slowing and stagnating. Or listen to my prior radio show earlier this year where media claims that US wages are now rising is debunked as well.
Claims of wages rising are similarly misrepresented when a deeper analysis shows the proclaimed wage gains are, once again, skewed to the high end of the wage structure and reflect wages for salaried managers and high end professionals by estimating ‘averages’ and limiting data analysis to full time workers once again; not covering wages for part time and temp workers; not counting collapse of deferred and social wages (pension and social security payments); and underestimating inflation so that real wages appear larger than otherwise. Independent sources estimate more than half of all US workers received no wage increase whatsoever in 2018–suggesting once again the gains are being driven by the top 10% and assumptions of averages that distort the actual wage gains that are much more modest, if at all.

Ditto for GDP analysis and inflation underestimation using the special price index for GDP (the GDP deflator), and the various re-definitions of GDP categories made in recent years and questionable on-going GDP assumptions, such as including in GDP calculation the questionable inclusion of 50 million homeowners supposedly paying themselves a ‘rent equivalent’.

A more accurate ‘truth’ about jobs, wages, and GDP stats is found in the ‘fine print’ of definitions and understanding the weak statistical methodologies that change the raw economic data on wages, jobs, and economic output (GDP) into acceptable numbers for media promotion.

Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It’s about failure to evolve data and methodologies to reflect the real changes in the economy.

Government stats are as much an ‘art’ (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the ‘whole picture’, not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates.

When so doing, the bigger picture is an US economy being held up by temporary factors (trade war) soon to dissipate; jobs creation driven by part time work as full time jobs continue structurally to disappear; and wages that are being driven by certain industries (tech, etc.), high end employment (managers, professionals), occasional low end minimum wage hikes in select geographies, and broad categories of ‘wages’ ignored.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy From Reagan to Trump’, Clarity Press, September 2019, and previously published ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017 and ‘Alexander Hamilton and the Origin of the Fed’, Lexington Books, March 2019. He hosts the Alternative Visions Radio show on the Progressive Radio Network and blogs at jackrasmus.com. His twitter handle is @drjackrasmus.

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Article 3: What Government Job Stats Are Inaccurate: Reply to Doug Henwood’s Apology for Government Stats

May 7, 2019

In his reply to my just published article, “What’s Wrong with Government Job Statistics,” Doug Henwood, a ‘left’ New York intellectual who has for years accepted without question government reported stats as ‘gospel truth’, has taken the opportunity to challenge my analysis.

The nub of our differences is that Henwood accepts government Labor Dept. definitions, assumptions, and methodologies as near sacrosanct, whereas I do not. And when I challenge them, he engages in nasty personal attacks to carry his critique. I’ll not engage in that kind of exchange, but will address his various points here as follows.

For Henwood doesn’t like my most recent view that government job stats reported may not reflect a labor market as sanguine and booming, as official government and business commentary suggest. And he apparently doesn’t appreciate anyone challenging his friends over at the Labor Dept.

So let’s take a look at our latest disagreement.

In his blog today, May 6, he starts out with his first lightweight critique that in my article I refer to the two labor department jobs surveys, the CES and CPS, as two reports instead of two surveys; there being only one report, the Labor Dept.’s monthly ‘Employment Situation Report’.

Yes, there’s one umbrella ‘Situation’ report but the CES and CPS are really separate reports that are then combined but kept separate in the single ‘Situation’ report. They are indicated as ‘Tables A’ and ‘Tables B’ in the ‘Situation’ Report. This is just a semantic difference as to what’s a report and what’s a survey. But if Doug thinks that’s significant, OK. He can have that one.

What is significant is that Henwood thinks the CES (Current Employment Survey) is more important and accurate than the CPS (Current Population Survey). But the CES is not really a survey; it’s a partial census and thus a statistical population that gathers data from, as Henwood admits, 142,000 establishments. As a group the 142,000 send in their data to the government every month. But because, according to Henwood, the CES 142,000 compares to the CPS ‘only’ 60,000 monthly interviews of households (actually 110,000 individuals interviewed), he argues “the CES is much larger (than the CPS)…it’s far more accurate”.

But the CPS is not just a “household survey”; it is also a survey of employment conditions of millions of smaller businesses through the survey of worker households. In fact, it can be argued that, in surveying 110,000 individuals each month, and then rotating and adding more households throughout the year, (roughly doubling the number contacted) the CPS in fact reflects a much larger body of business hiring, layoffs, and thus total employment, than does the CES.

Henwood further argues that the CES 142,000 is more accurate because it is checked against the unemployment insurance system. But unemployment insurance has nothing to do with the numbers of employed or unemployed. And checking it is done to determine, among other things, if the 142,000 are not cheating the system by underpaying unemployment payroll taxes. Contrary to Henwood’s point referencing it, saying the CES is checked against unemployment insurance rolls adds nothing to the idea that the CES misses coverage—i.e. job creation or decline—for 9 million small and medium businesses.

Henwood is confused about the CES and CPS in another important way. There are more than 9 million businesses in the US economy. The 60,000/110,000 CPS survey is a statistically significant survey of employment in those 9 million. The comparison therefore should be 142,000 businesses vs. 9 million businesses. Henwood thus erroneously compares a population (CES 142,000) to a sample (60,000), when the comparison should be a business population (CES 142,000) to a business population (CPS 9 million businesses).

In short, it makes little sense to argue as Henwood does that 142,000 is more accurate than 9 million based on number of businesses compared. If it’s just a question of the size of total businesses addressed, the CPS makes more sense. But comparing size to size makes little sense as well. The two sources look at different things. My point is don’t defend one at the exclusion of the other. Look to both for a more comprehensive view of the condition of the labor market. And the CPS suggests perhaps the 263,000 jobs may not be all that accurate.

But Henwood would have readers believe the CES, with 142,000 businesses, and the 263,000 jobs created last month in that group, is all that matters. Forget the other roughly 9 million businesses where, as even most economists admit, most of the job creation in the US occurs (or does not). Like the business press and government politicians, to believe Henwood we should take the 263,000 as the final word of the state of the US job market and forget all the rest.

For years I’ve been arguing there is a problem with government job stats that rely on two different, often conflicting populations to determine employment/unemployment: the job gains (or losses) and unemployment rate should be calculated from the same survey, but aren’t. Instead we get jobs created by large businesses (CES) and unemployment from the 9 million population of all businesses. This problem leads to often conflicting data reported by the two sources, CES and CPS.

This problem gives us the 263,000 jobs created in the CES from a survey of larger businesses, while it gives us the 191,000 full time jobs decline in the CPS, and in the preceding month, an even larger 228,000 full time jobs decline, from the CPS survey of the 9 million businesses. Which is correct? How does Henwood choose to explain this? By simply claiming the reported 191,000 full time job loss in the CPS in April is just normal short term volatility—which, by the way, is the typical government excuse one hears whenever there’s a contradiction in the numbers.

Henwood further assumes the role of slavish apologist of government stats by defending the U-3 unemployment rate as the best and final word on the state of the US labor market. He does refer to the U-6 unemployment rate, but unquestionably accepts the government’s current (and chronic) low estimates for the U-6.

The U-6 picks up ‘involuntary part time’ employment. (U-4 and U-5 reflect what’s called ‘marginally attached’ and ‘discouraged’. These latter numbers too are grossly underestimated in the official stats). Henwood disputes my claim that the U-3 is essentially an estimate of ‘full time’ jobs and says “No, it refers to work of any kind, not just full-time”. But if that were true, why add on ‘part time’ as the U-6 category separately? If there were part time unemployed in the U-3 and part time in the U-6 there would be likely ‘double counting’ of part time unemployed. No, U-3 is mostly full time and excludes all involuntary part time. Either that or there is indeed double counting. Maybe he means the U-3 includes voluntary part time. Even if so, however, the overwhelming number of the 162.5 million in the labor force is still full time jobs.

But this does not in any way contradict the anomaly of the CES reporting April’s 263,000 (mostly full time) jobs gain, while the CPS reports 191,000 (and 228,000 in March) full time jobs declines. And if the CPS reports 155,000 part time job creation, should it not mean that only 108,000 full time jobs were created in the CES report? How do you square the 108,000 full time jobs created in the CES with the 191,000 full time jobs lost in the CPS, Doug? What’s your explanation?

And if you say this contradiction is just a short term statistical volatility problem, how then do we know if the 263,000 is also not just a short term inaccurate statistically volatile (and inaccurate) number?

Given the CPS number showing full time job decline (191,000), and the otherwise CPS rise in part time jobs last month (155,000), in my prior article I suspected that there are more workers taking on second and third jobs. Henwood pooh poohs this and trusts the government numbers on ‘multiple job holders’ showing little change. Once again, trust the government numbers!

Official government stats show multiple job holders as of December 2018 at 7.7 million. Comparing that to December 2006, the last full year before the great recession,the number was 7.9 million. Does anyone out there really believe this number? That folks working part time second and third jobs has actually declined, given all the low paid service jobs, part time work, temp work, Uber, Taskrabbit, gig economy jobs created since the great recession, now accelerating? Doug does. Government bureaucrats can do no wrong and always report the facts.

Henwood provides charts that show that Temp jobs (almost always part time) have not been changing for at least the past two decades. As he says, temp jobs have been steady as a percent of the total work force for the past two decades, peaking at 2% of total jobs. “It’s barely changed for five years.” Sure, Doug. No one’s been hiring attempts except through agencies. That’s all the government data you slavishly offer as a rebuttle show. If you were more ‘skilled and knowledgeable’ (an insult you direct to me) you would know the Labor Dept. data you cite refers only to Temp Agency hiring. I suggest you try talking to your local auto worker and ask him how many temps have been hired since 2009. It’s about at least a third of the auto work force today. It’s the same throughout manufacturing, and other sectors as well. But trust the government stats, Doug. They’re always right and never misleading or wrong.

The Labor Dept. has been covering up the growth of temp jobs since the 1990s. It produced three one-off reports, then George Bush stopped it. Too volatile. (There’s that word). Henwood says “It’s nowhere big a deal as Rasmus would have you believe”. The basis for his comment is, of course, you guessed it: the government’s data and reports.

How the government purposely underestimates labor stats that are embarrassing to it was clearly revealed, yet again, last year in its report on ‘precarious jobs’ (meaning temp, part time, gig, otherwise contingent, etc.). I and others have dissected that official report which claimed the gig economy was insignificant. But it turned out what the report defined as ‘gig’ was only full time uber/lyft drivers. Drivers as second and third jobbers were left out. There are many ways to lie. One is to simply redefine it away. Another to quietly omit data and facts. Another to insert false data and facts. Another to change the causal relation between facts and propositions. And more.

As far as my suggestion that the April jobs numbers may reflect hiring of census workers, it is true the government to date has not indicated how many hired. I simply suggested it may explain some of the 155,000 part time job gains in the CPS report. My suggestion was based on past practice by the government during census years. By April 2009 the government had hired 154,000 for census work. By April 1999, it had hired 181,000. If the hiring is really negligible to date in government reports, either Trump is not planning to do the census properly (another of his violations of the US Constitution), or the hiring is in fact underway but not yet reported, or, if not, excess hiring will soon have to occur. Trump likely wants to create chaos in the census, which suits his political purposes. Again, my point here was only a suggestion that census workers were part of the hiring, not a claim they were.

Henwood does give a backhanded concession to me that maybe my point of the 646,000 ‘Not in the Labor Force’ reported number indicates something is going on with the government data underestimating the total actually unemployed by having left the labor force in recent years. But he just can’t let himself admit it. It would not be in keeping with his personalized attack style or nasty comments that pepper his critique.

My point concerning the ‘Not in the Labor Force’ numbers (646,000 rise last month) is that it likely corroborates that more workers are long term dropping out of the labor force because they can’t find decent full time jobs and the part time jobs pay less and less in real terms (requiring taking on second and third jobs?). Once again, he gives a backhanded comment that a point is made but says ‘the bigger point eludes me’(Rasmus).

Really? I’ve only been writing about the collapsing labor force participation rate and how it’s not being properly picked up in jobs numbers since 2005 and especially since 2013. A drop in the labor force participation rate from 67.3% of the total labor force in December 2000 to the latest participation rate of 62.8% represents more than 7 million workers either leaving or not entering the labor force. And if they’re not counted in the labor force, that reduces unemployment rates.

They should be added to the ‘unemployment’ rolls. They’re not working. The labor force today should be 170 million not 162.5 million. Maybe they’re not working because they can’t afford to live on the part time, temp, contingent jobs that have been steadily replacing full time jobs that have been stagnant or declining, while part time/temp/gig has been accelerating? But given his commitment to government stats, Henwood could never agree to that interpretation, could he?

Here’s another difference on the veracity of government labor stats he and I have. In 2006 the labor force was approximately 152 million. It has grown by roughly 10 million–not including the dropping out of 7.3 million represented by the falling labor force participation rate. Henwood accepts as accurate the Labor Dept’s estimate of discouraged workers (U-5) as accurate. In November 2007 just prior to the great recession the discouraged workers category represented only .2 of 1% of the labor force. Given the 10 million increase in the labor force since then, it is today still .2 of 1%. Can it be true that the percentage of discouraged workers has not risen at all in the intervening years–given the impact of the great recession, lagging economic recovery for years, and the fact of 7 million have dropped out of the labor force? It makes no sense that there should not be a corresponding increase in the percent of discouraged workers given the changed conditions of the last decade. The government data must be underestimating the discouraged worker category of unemployed (defined as out of work but having given up looking for the past year).

Yet Henwood once again sees no problem here at all with this category of U-4, discouraged worker unemployment. All he can do is defend his buddies at the Labor Dept. and agree with their stats. Accept all their assumptions, definitions, and methodologies as absolutely correct. Reproduce all their graphs based on those definitions, assumptions and methodologies. And then use them as evidence to attack my alternative interpretations of the data.

Doug, you should spend less time performing his task of defender of government data and stats that Americans know increasingly contradict the reality they face.

You can show all the graphs you want. But they’re graphs based on data (and the definitions, assumptions and methods behind the data) that are sometimes erroneous. And while not all government data is incorrect or inaccurate, to slavishly defend it as you do is a gross disservice to the truth. You defend your positions by employing the very government data that I am arguing is not always truthful. It may be factual, but facts are selective and not necessarily truthful.

You can attack me personally all you like, Doug, but your attack shows one irrefutable conclusion: You believe unconditionally in the government’s data instead of challenging it when called for. In that regard you are an apologist and, when it comes to government data, you are clearly in the camp of the bureaucrats and other government conscious mis-representers of the truth. Misrepresentation by clever statistical manipulation, by omission of facts and alternative interpretations, and by obfuscation based on methodologies that are intended to conceal rather than reveal—-all of which you defend.

You help them maintain the fiction that the economy is doing great, that jobs are plentiful and well-paid, and we’re all better off than we think. That makes you an ideologist, not an economist. I think you’d be great writing editorials for the Wall St. Journal. Given your style and content, you really have more in common with those guys. I’ll write them on your behalf and see if they’re interested.

posted May 1, 2019
US 1st Quarter 2019 GDP: Facts Behind the Hype

Last week’s US GDP for the 1st quarter 2019 preliminary report (2 more revisions coming) registered a surprising 3.2% annual growth rate. It was forecast by all the major US bank research departments and independent macroeconomic forecasters to come in well below 2%. Some banks forecast as low as 1.1%. So why the big difference?

One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. First preliminary issue of GDP stats are typically adjusted significantly in the second revision, coming in future weeks. (The third revision, months later, often is little changed).

There are many problems with GDP accuracy reflecting the real trends and real GDP that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3% (and $500b a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2% ‘real’ GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9%. If actual inflation were higher, which it is, the 3.2% would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the ‘rent’ that 50 million homeowners with mortgages reputedly ‘pay to themselves’.

Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2% are some red flags revealing that the 3.2% is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end next month with the conclusion of the US-China trade negotiations. How does the trade war boost GDP temporarily?

Two ways at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade disputes initially result in lower imports while negotiations are underway. In the latest US GDP analysis reported last week, lower imports resulted in what’s called higher ‘net exports’ (i.e. the difference between imports and exports). Net exports contribute to GDP. The US economy could be slowing in terms of output and exports, but if imports decline faster it appears that ‘net exports’ are rising and therefore so too is GDP from trade.

Looking behind the 1st quarter numbers it is clear that the 3.2% is largely due to excessive rising business inventories and rising net exports contributions to GDP.

Net exports contributed 1.03% to the 3.2% and inventories another 0.65% to the 3.2%. That is, over half. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), US GDP in the quarter would have been only 1.3%. (And less if adjusted more accurately for inflation and if the 2013 phony redefinitions were also ‘backed out’).

US GDP in reality probably grew around the 1.1% forecasted by the research departments of the big US banks.

This analysis is supported by the fact that around 75% of the US economy and GDP is due to business investment and household consumption typically. And both consumption and investment are by far the primary sources of GDP. (The rest is from government spending and ‘net exports).

Consumer spending (68% of GDP) rose only by 1.2% last quarter and thereby contributed only 0.82% of the 3.2%. That’s only one fourth of the 3.2%, when consumption, given its size in the economy, should contribute 68%!

Durable manufactured goods collapsed by -5.3% and autos sales are in freefall. And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act).

Similarly private business investment contributed only a tepid 0.27% of the 3.2%, well below its average for GDP share.

Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined ‘intellectual property’, and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest categories of business investment. However, in the first quarter 2019, structures declined by -0.8%, housing by -2.8% and equipment investment rose only a statistically insignificant 0.2%.

This poor contribution of business investment contributing only 2.7% to GDP, when the long term historical average is about 8-10% normally, is all the more interesting given that Trump projected a 30% boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7% is a long way off 30%! The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors). And they compressed household consumer spending to boot.

Since Trump’s tax cuts, there’s been virtually no increase in the rate of Gross private domestic investment in the US. It’s held steady at around 5% of GDP on average since mid-2017. Within that 5%, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising.

In short, both Consumer spending and core business investment contributions to US GDP have been slowing, and that’s true within the recent 1st quarter US 3.2% GDP.

In other words, 1st quarter GDP rose due to the short term, and temporary contributions to inventories and net exports–both driven artificially by Trump’s trade wars.

The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1% in 1st quarter GDP. (Conversely, nondefense spending was reduced -5.9% in the first quarter GDP).

Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken. Meanwhile, business investment on structures, housing, and equipment and household consumption will continue to remain weak at best.

Trump is betting on his 2020 re-election and preventing the next recession now knocking at the US and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end.

Summing up, beneath the surface of the US economy the major categories of US GDP–business structures, housing, business equipment, and household consumer spending (especially on durables and autos)–will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.

Bottom line, therefore, the 3.2% GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.

(For those interested in a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).

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More articles by:Jack Rasmus

Jack Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

posted April 1, 2019
The Capitulation of Jerome Powell & the Fed

This past week, on March 20, 2019, Federal Reserve chairman Jerome Powell announced the US central bank would not raise interest rates in 2019. The Fed’s benchmark rate, called the Fed Funds rate, is thus frozen at 2.375% for the foreseeable future–i.e. leaving the central bank virtually no room to lower rates in the event of the next recession, which is now just around the corner.

The Fed’s formal decision to freeze rates follows Powell’s prior earlier January 2019 announcement that the Fed was suspending its 2018 plan to raise rates three to four more times in 2019. That came in the wake of intense Trump and business pressure in December to get Powell and the Fed to stop raising rates. The administration had begun to panic by mid-December as financial markets appeared in freefall since October. Treasury Secretary, Steve Mnuchin, hurriedly called a dozen, still unknown influential big capitalists and bankers to his office in Washington the week before the Christmas holiday. With stock markets plunging 30% in just six weeks, junk bond markets freezing up, oil futures prices plummeting 40%, etc., it was beginning to look like 2008 all over again. Public mouthpieces for the business community in the media and business press were calling for Trump to fire Fed chair Powell and Trump on December 24 issued his strongest threat and warning to Powell to stop raising rates to stop financial markets imploding further.

In early January, in response to the growing crescendo of criticism, Powell announced the central bank would adopt a ‘wait and see’ attitude whether or not to raise rates further. The Fed’s prior announced plan, in effect during 2017-18, to raise rates 3 to 4 more times in 2019 was thus swept from the table. So much for perennial academic economist gibberish about central banks being independent! Or the Fed’s long held claim that it doesn’t change policy in response to developments in financial markets!

This week’s subsequent March 20, 2019 Fed announcement makes its unmistakenly official: no more rate hikes this year! And given the slowing US and global economies, and upcoming election cycle next year, there’s essentially no rate hikes on the horizon in 2020 as well.

Central bank interest rate policy is now essentially ‘dead in the water’, in other words, locked into a ceiling at 2.375%, which makes it now a useless tool to address the next economic downturn around the corner.

The US Economic Slowdown Has Arrived

For those who believe the business press and government ‘spin’ that the US economy is doing great, and recession is not just around the corner, consider that US retail sales have fallen sharply in recent months. In December they declined by -1.6%, the biggest since September 2009. Residential and commercial construction has been contracting throughout 2018. In January, manufacturing, led by autos, dropped by -0.9%. The manufacturing PMI indicator has hit a 21-month low. Despite Trump’s early 2018 multi-trillion dollar business-investor tax cuts, investment in plant and equipment growth by year end slowed by two thirds over the course of 2018. Recent surveys show CEO business confidence has declined the last four quarters in a row—i.e. a bad omen for future business spending on equipment and inventories. Despite Trump’s ‘trade wars’, the US trade deficit finished the year at a record $800 billion in the red. Service sector revenues rose a paltry 1.2% in the fourth quarter 2018 compared to the same period a year earlier.

And word is out that the US GDP for fourth quarter 2018 will soon be revised downward. Initially posted at 3.1%, in February it was reduced to 2.6%. Next week, in April, it will be reduced still further, to 1.8% or less, according to JP Morgan researchers. Meanwhile various bank research and other independent sources are predicting a 1st quarter 2019 US GDP of only 1.1%, and possibly even less than 1%. The economic scenario predicted by this writer a year ago is thus materializing.

Trump’s economy is clearly in trouble. And now he’s on an offensive to get the central bank not only to halt rate hikes, but to start lowering interest rates before the end of this year. And if Powell doesn’t comply, watch for the Trump and right wing to push for firing Fed chair, Powell, as well.

To head off Trump-Investor offensive against the central bank, Fed chairman Powell held an historically unprecedented public interview with the national 60-minutes TV show in early March. He attempted to placate Trump and the growing attacks. Only Fed chairman, Ben Bernanke, held a similar public interview—during the worst depths of the collapse of the US economy in 2008. Trump’s latest tactic has been to nominate Steven Moore as a Fed governor. Moore is one of those right winger economists affiliated with the Heritage think tank. He publicly called for Trump to fire Powell during the December near-panic over the US stock market’s plunge. Watch Powell and the Fed therefore drift over the course of 2019, toward not just freezing Fed rates, but lowering them as well by year end.

Monetary Policy Tools Collapsing?

The current peaking of the Fed’s rate at 2.375% compares to a Fed peak interest rate of 5.25% in 2007 just before the onset of the last recession; a 6.5% peak on the eve of the preceding recession in 2000; and the 8% peak rate just before the 1991 recession. In other words, Fed rate policy effectiveness has been deteriorating over the longer run for some time, and not just recently.

That deterioration is traceable to Fed policy since the 1980s, which has been shifting from using interest rates to stabilize the economy (low rates to stimulate economic growth/higher rates to dampen inflation) to a policy of ensuring long term low interest rates as a means for subsidizing banks, businesses and capital incomes in general.

Chronic, low rates subsidize business profits by lowering borrowing costs and, in addition, by incentivizing corporations to also issue trillions of dollars of new (low cost to them) corporate bond debt. Money capital from the record profits and the cheap debt raised are then distributed to shareholders and managers via stock buybacks and dividend payouts—which have averaged more than $1 trillion a year every year since 2010 and in 2018 alone hit a record $1.3 trillion. But the chronic, low rates are the originating source of it all, i.e. the ‘enabler’.

While Fed (low) rate policy has become a major means for subsidization of capital incomes, after each business cycle the rates cannot be restored to their pre-recession levels—leaving the Fed now with its mere 2.375% rate level as it enters the next recession. The rate level at the end of the cycle ratchets down. In other words, the Fed’s interest rate gun is reloaded with fewer bullets. It is now close to being out of ammunition.

Beyond Quantitative Easing, QE

The declining effectiveness of interest rate policy has forced the Fed, at least in part, to develop another monetary tool the past decade, so-called Quantitative Easing (QE). The introduction of QE in 2009 in the US (and earlier by the Bank of Japan which originated the idea) should be viewed in part, therefore, as a desperate attempt to create a new tool as interest rates have become increasingly ineffective at stopping or even slowing a business cycle contraction or at stimulating an economic recovery from recession. With QE the central bank goes directly to investors and buys up their bad debt by providing them virtually free money at ultra-low (0.1%) rates. QE is therefore about the Fed transferring the bad debt from investors and banks’ balance sheets directly onto the Fed’s own balance sheet. But that subsidization via debt off loading and low long term rates also reduces the effectiveness of monetary policy performing its historic role of economic stabilization—i.e. stimulating economic growth or dampening inflation.

During the period 2009 to 2016 the Fed’s QE program transferred between $4.5 trillion to $5.5 trillion from investors to its own balance sheet. And if one counts other major central banks in Europe, Japan, and China the amount of debt offloaded from bankers and investors to central banks amounted to between $20 to $25 trillion.

To prepare for the next business cycle crash and recession, the Fed and other central banks in recent years announced they would begin to ‘sell off’ their bloated balance sheet debt. The purpose was to ‘clean up’ the central bank’s balance sheet so it could absorb and transfer even more corporate-investor bad debt to itself during the next crash. (This debt sell off was called ‘Quantitative Tightening’ or QT). The Fed was first among central banks to begin the sell off, with a token $30 billion a month. Other central banks in Europe declared they too would do so but have since abandoned the pretense. The Bank of Japan with its $T to $5T debt never even pretended. So the world’s central banks remain bloated with tens of trillions of dollars equivalent in off-loaded corporate-investor debt from the last crisis of 2008-09 and face the prospect of even tens of trillions more—and possibly much more—in the next crisis.

However, Powell further announced on March 20 that the Fed will also halt, by September 2019, its QT sell off. Like interest rate policy, QE/QT policy, is also likely now ‘dead in the water’.

Can the Fed add $5T to $10T more in QE come the next crisis? (And the world’s major central banks add another $30T more in addition to their current $20T?) Perhaps, but not likely.

Doubling QE and Fed balance sheet debt is not any more likely than the Fed significantly lowering interest rates come the next crisis. Even less so for the Europeans and Japanese, whose interest rates are already less than zero—i.e. negative.

Central Banks as Capital Incomes Subsidization Vehicles

What’s becoming increasingly clear is that in the 21st century capitalist economies—the US and others—are having increasing difficulty generating profits and real investment from normal business activity. Consequently, they are turning to their Capitalist States to subsidize their ‘bottom line’. Central banks have become a major engine of such subsidization of profits and capital incomes. But that ‘subsidization function’ is in turn destroying central banks’ ability to perform their historic role to stimulate economic growth and/or dampening inflation. The latter historic functions deteriorate and decline as the new subsidization of profits and capital incomes become increasingly paramount. The historic functions and the new function of central banks as engines of capital subsidization are, in other words, mutually exclusive.

The same subsidization by the State is evident in fiscal policy, especially tax policy. Once the Fed started raising rates in late 2016 the policy shifted from monetary tools to subsidize capital in comes to fiscal tax policy as primary means of subsidization.

Since 2001 in the US alone business and investor and wealthy households have been provided by the Capitalist State with no less than $15 trillion in tax reductions. Like low rates & QE, that too has mostly found its way into stock buybacks, dividend payouts, mergers & acquisitions, etc. which have fueled in turn unprecedented financial asset market bubbles in stocks, bonds, derivatives, foreign exchange speculation, and property values since 2000. And by such transmission mechanisms, the accelerating income and wealth inequality trends in the US and elsewhere.

Business-Investor Tax Cutting as Subsidization Vehicle

While subsidization via tax cutting has been going on since Reagan, it accelerated since 2000 under Bush and continued under Obama. But it has accelerated still further under Trump. The impact of the Trump tax cuts is most evident on 2018 Fortune 500 profits. No less than 22% of the 27% rise in 2018 in Fortune 500 profits has been estimated as due to the windfall of the Trump tax cuts for businesses and corporations. The total subsidization of business-investors over the next decade due to the Trump tax cuts is no less than $4.5 trillion—offset by $1.5 trillion increase in taxes on middle class households and Trump’s phony assumptions about GDP growth that reduces the $4.5 trillion further to a fictitious $1.5 trillion negative hit to the US budget.

The subsidization via tax cutting has also generated record US budget deficits and national debt levels that have been doubling roughly every decade—from roughly $5 trillion in 2000 to $10-$11 trillion by 2010, to $22 trillion by 2019, with projections to $34-$37 trillion or more by 2030. Roughly 60% of the US budget deficits and debt are attributable to tax policy and loss of tax revenues.

Bail-Ins: Next Generation Monetary Tool?

Long touted by mainstream economists as ‘tools of stabilization and growth’, in reality both central bank monetary policy (rates, QE, etc.) and government fiscal policy (business-investor tax cuts) have been steadily morphing into means of subsidization of capital incomes. Having become so, the ability of both monetary (central bank) and fiscal policy to address the next major crisis could prove extremely disappointing.

Monetary policies of low interest rates and even QE are now ‘played out’, as they say. And with US debt at $22.5 trillion, going to $34 trillion or more by 2027, fiscal policy as means to stimulate the economy is also seriously compromised.
So what are the likely policy responses the next recession? On the monetary side, watch for what is called ‘bail ins’. The banks and investors will be bailed out next time by forcing depositors to convert their cash savings in the banks to worthless bank stock. That’s a plan in the US and UK already ‘on the books’ and awaiting implementation—a plan that has already been piloted in Europe.

On the fiscal-tax side, watch for a renewed intensive attack on social security, medicare, education, food stamps, housing support and all the rest of social programs that don’t directly boost corporate profits. The outlines are clear in Trump’s just released most recent budget, projecting $2.7 trillion in such cuts. And of course Trump & Co. will continue to propose still more tax cuts, which has already begun in a number of forms.

In other words, as both monetary and fiscal policy become increasingly ineffective in the 21st century as means to address recessions and/or restore economic growth, they are simultaneously being transformed instead into tools for subsidizing capital incomes–during, before, and after economic crises!

Jack Rasmus is author of the just published book, ‘Alexander Hamilton and the Origins of the Fed’, Lexington books, March 2019; and its sequel, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017. He blogs at jackrasmus.com, hosts the radio show, Alternative Visions, on the Progressive Radio Network. His website is htttp://kyklosproductions.com and his twitter handle is @drjackrasmus

posted March 28, 2019
Trump vs. Powell: How Independent Is the Fed?

It was just a few months ago, October 2018, that Federal Reserve Chairman, Jerome Powell, announced the Fed would continue raising its benchmark federal funds interest rate in 2019 and 2020. A next hike was due in December 2018, followed by four more in 2019, and a possible three more in 2020. That would put the fed funds rate at around 4% by the time of the 2020 November national elections.

Powell cited, as justification for the 7 to 8 more hikes, a strong US labor market with robust job creation and moderate, though rising, average wages; inflation remaining stable around the Fed’s target 2% annual rate; and indications of a continued growth in the US economy well above a 2.5% annual GDP.

If Not the Economy—What?

Fast forward just a couple months—to January 2019—following Powell’s fall announcement to stay the course on rate hikes. Somehow the entire economic scenario had reversed, justifying Powell to announce a halt in future rate hikes. The keyword Powell offered for the media was that the Fed was now adopting a policy of ‘patience’, as he called it, with regard to future rate hikes. Translated, the reference to ‘patience’ really meant no more rate hikes in the foreseeable future unless US economic data strongly recovered. But had the US economy downshifted that much since October 2018 to assume it was now so weak, in January 2019, that a halt to all future rate hikes was justified? Had the GDP, jobs, and the US economy dramatically ‘reversed course’ between October 2018 and January 2019, in just a few months, to justify Powell’s abrupt reversal of Fed policy?

Not really. US GDP growth rate, QoQ, from late October to late December 2018, had declined only 0.1%, and after December 21, 2018 up until Powell’s announcement in January the US economy was forecast to continue to continue to grow at 2.7%–i.e. a normal post-holiday seasonal softening and comfortably still above the Fed’s 2.5% GDP target. The same lack of data indicating a dramatic shift in employment or wages over the October to January period was also evident. Average hourly earnings rose 0.3% on average each month in the 3rd quarter 2018 (0.9% for the quarter). And it continued to rise at the same 0.3% per month in the 4th quarter. Employment from October through January 2019 grew on average at 241,000 jobs a month. At the same time, the Fed’s target inflation indicator, the PCE, continued to hover around 2-2.2%, suggesting no change in rates necessary in either direction.

So if the US real economy hadn’t radically shifted direction after October, i.e. had not fallen off an economic cliff in just two months, what then lay behind Powell’s mid-January 2019 decision to reverse course and abruptly halt 2019-2020 anticipated rate hikes?

One possible explanation is that President Trump’s repeated and intensifying criticism of Powell’s rate hikes resulted in the Fed chairman doing an ‘about face’ with regard to Fed interest rate policy that had been in place since 2016. But if Powell shifted policy direction in response to Trump criticism that would mean that the oft repeated claim that the Federal Reserve acts independently of the government is something of a fiction. So was Powell’s shift in response to Trump criticism? Or was it a response to something else? And if something else, what?

Central Bank Interference—From Elected Politicians?

The idea of the Fed always acts independently is somewhat a myth of conventional wisdom. The notion of central bank independence became generally accepted only around the early 1970s, when monetary policy (and the central bank) arose as the preferred policy choice compared to fiscal policy, which had been viewed as the primary policy choice before that decade. According to the notion, elected government officials were too prone to change policy to ensure their re-election, it was argued. Only appointed, long term, ‘experts’ in monetary theory and practice would not be influenced by personal gain and would decide on behalf of the economy and not their careers.

But the idea that central bankers would not be responsive to outside pressure is a fiction. Moreover, the source of outside pressure need not be limited to elected politicians. Since the emergence of the notion of central bank independence there have been several notable cases of political interference to the contrary. And who knows how many cases of private sector pressure on the Fed resulted in Fed policy shift—given the rising frequency of ‘revolving doors’ career changes between appointed Fed governors and Fed district presidents in recent decades.

The more obvious cases of political interference have been occurring since the 1970s.

President Richard Nixon sacked the standing Fed chairman, McChesny Martin, when he came into office in 1969 and replaced him with his personal friend, Arthur Burns, who proceeded to do Nixon’s bidding by lowering interest rates—despite a massive fiscal stimulus at the time—in order to help ensure Nixon a booming economy in 1972 and his re-election.

In 1979 president Jimmy Carter was pressured to replace his standing Fed chairman with a new chair, Paul Volcker. Who were the private and political forces, outside as well as inside government, who forced Volcker on Carter?

In 1985, president Reagan, together with his de facto policy vice-president, James Baker, Secretary of the Treasury and later Secretary of State, engineered the removal of Fed chair, Paul Volcker. Volcker had refused to go along with Baker’s demand to shift Fed interest rate policy more aggressively, to drive down interest rates further and more rapidly in order to boost the stock market. Volcker refused and was gone. His replacement, Alan Greenspan, who had done Reagan’s bidding as chair of his Social Security Reform commission, readily agreed to Baker’s demands upon assuming the Fed chair in 1986. That shift in Fed rate policy contributed heavily to accelerating financial speculation that followed Greenspan’s appointment.

Excess liquidity from the Fed lowered rates, which in turn played a central role in the subsequent stock market crash of 1987, the concurrent junk bond bubble at the time, and the residential housing bubble and crash that followed both.

Another case example was the relationship between president George W. Bush and Fed chairman, Alan Greenspan, during Bush’s first term in office, 2001-2004. As Bush took office in early 2001 the US economy slipped into a moderate recession following the dot.com Tech bust of 200-2001. Though moderate, the 2001 recession showed signs of faltering once again in 2002. The economy appeared to be slipping back into a second contraction after a brief recovery in late 2001 due to a quick infusion of US government spending in the aftermath of 9-11 and accelerated government spending for the invasion of Afghanistan in the fourth quarter of 2001. However, Fed interest rates were already low in 2002 by historical standards. Nevertheless, Bush met with Greenspan and the Fed lowered rates still further after 2002, to an unprecedented 1% fed funds rate. That boosted a housing market that was already long ‘in the tooth’, as they say, and had largely run through a normal cycle that began seven years earlier in 1996-97. The Fed’s further lowering of rates to 1% resulted in the housing market an artificial second wind again in 2003, boosting the US economy out of recession and setting the stage for a robust recovery in 2004 just before Bush’s re-election. Bush thereafter named Greenspan to an extended term as Fed chair. Greenspan continued on the job as chair. Bush got re-elected. But at the cost of the artificially low 1% rates driving the housing market into a bubble starting 2003 for another four years until it bust in 2006-07. Perhaps more of a ‘smoking gun’ case example, the Bush-Greenspan relation suggests the Fed bowed to Bush pressure (i.e. interference) and represents a case of a central bank acting less than independently. Certainly Greenspan must have known that stimulating the housing market so late in its cycle, with so unprecedented low 1% rates, could only have resulted in an inevitable bubble with all its consequences.

Were these examples of Presidents—Nixon, Carter, Reagan, G.W. Bush—pressuring Fed policy in order to ensure their re-election chances? In the case of Nixon. perhaps. Certainly not in the case of Carter. By appointing Volcker—who had publicly indicated he would quickly raise rates in the 1980 election year as high as necessary if he were appointed—Carter surely must have known it would seriously jeopardize his re-election prospects that year. The rapid escalation of rates in fact played an important role in the 1980 recession and Carter’s losing the election that year.

In the case of Reagan, it appears that stimulating financial asset markets were the primary motive for removing Volcker. There was no re-election on the horizon in 1985. Which raises the question: on behalf of whom and whose interests was James Baker acting by driving out Volcker and replacing him with a more compliant Greenspan? If the motivation was not political re-election, and it was clear the real economy was not in recession and in need of a low interest rate boosting, why then was Baker so determined to have rates lowered? Who would it benefit? In retrospect, the main beneficiaries were the financial markets and investors, especially those associated with junk bond financed mergers and acquisitions and the residential housing-commercial property markets.

In the case of Bush, both financial markets and re-election appear the likely motivations for the Fed policy shift. The financial sector in 2003-2007 had a lot to gain from selling securitized assets and related derivatives on subprime mortgages. Their lobbying the Bush administration, and undoubtedly Greenspan as well, was intense at the time. Lower Fed rates played a crucial role in keeping the quantity of new housing contracts rising—upon which the securitization and derivatives financial boom at the time depended. Of course, it may not have been solely financial markets motivated. Bush got his recovery—and thus economic cover to invade Iraq in 2003 and his re-election in 2004 with a strong economy and a war.

The point is that presidents don’t interfere with central bank policy only for their own personal political gains. They interfere as well on behalf of other private interests, who may also be ‘interfering’ by lobbying the Fed behind the scenes as well—or lobbying key committee members of Congress and the President to interfere on their behalf as well. It is therefore too simplistic to argue that politicians’ interference in central bank policy is always for personal political reasons, just as it is too simple to assume that private investors and bankers have no access to the Fed and never try to influence Fed policy behind the scenes.

This does not mean that private interests do so on the eve of every Fed rate policy decision before its Open Market Committee meets bi-monthly to decide on short term rate changes. The interference typically intensifies when a strategic shift in Fed policy is desired.

Central Bank Interference—From Bankers?

Reaching back further in US central banking history, the original Federal Reserve created in 1913 was essentially the economic sandbox of private sector bankers. It was structured so the Fed districts and their presidents were primarily staffed by bankers themselves, while the Washington Board of Governors was dominated by representatives of the big New York banks as well. This private banker dominated and run structure prevailed for more than two decades following the founding of the Fed.

Only when the Fed screwed up during the great depression of the 1930s, and especially by raising rates in 1932 into a rapidly collapsing US economy—which it did in order to try to protect the financial assets of bankers and investors—did the era of direct banker control of the Fed come to an end. Fed rate hikes in the midst of the depression caused an even worst contraction. Thereafter, central bank reforms were introduced under Roosevelt to bring more direct government appointed governors onto the Fed’s Washington Board of Governors. Other reforms also dampened banker influence at the district Fed. One may argue with evidence, however, that the era of direct banker-investor operation of the Fed ultimately gave way in the course of ensuing decades to a more subtle, indirect banker-investor influence over Fed strategic directions by more indirect means.

The direct dominance by banking interests over Federal Reserve day to day, tactical decision making during the Fed’s first two decades was generally considered normal and acceptable at the time. There was no notion that the Fed should be ‘independent’ of the bankers themselves.

With Roosevelt’s 1935 Fed reforms, for the next two decades at minimum the central bank was relegated to a more passive policy role. The US Treasury Secretary effectively ran monetary policy from the background. It was widely accepted from World War II and immediately beyond that the central bank, having screwed up in the early 1930s, should relinquish its independence to the government—i.e. to the US Treasury. The Fed was relegated to serving as the government’s fiscal agent and to selling bonds to pay for the US debt incurred during depression and war time. Its interest rate policy was ultimately decided by the US Treasury. It wasn’t until the 1950s that the Fed was permitted to slowly reassert a more independent and active role in monetary policy matters. And it was not until the 1960s that monetary policy itself was perceived as an activist economic tool once again. Through the 1950s and 1960s fiscal policy was still king.

The Fed gained more policy independence in the 1970s, as fiscal policy failed to stabilize the economy and, in fact, was viewed as having contributed heavily to its destabilization. It was at this time that the notion of central bank independence gained more credence. The collapse of the postwar Bretton Woods international monetary system in 1973, and the dollar-gold standard as means to stabilize currency exchange rates, provided further impetus to monetary policy as primary and thus to a greater role for central banks’ in the ‘managed float’ international monetary system that replaced Bretton Woods. With the even greater reliance on central banking and monetary policy in the post-1980 period in the US, and globally, the notion that central banks were, and should remain, independent grew concurrently.

Behind Trump’s Attack on Powell

President Trump’s recent attack on Powell and the Fed, building throughout 2018 as the Fed continued its rate hikes, and intensifying at year end 2018, is thus in the long tradition of presidential interference in Fed policy—its strategic direction if not its tactical day to day decision making.

But this still leaves open the question of ‘why presidential interference’? Is it because the president wants a robust real economy prior to a re-election? Trump’s attack on Powell and the Fed peaked the week of the Christmas holiday, well after the midterm elections. It’s unlikely therefore that political motivation lay behind Trump’s attacks. Nor could a deteriorating real economy been the motivation. As noted early, nearly all real economic indicators at the time of October-December 2018 show no collapse or even downward trend.
On the other hand, financial markets were in freefall after October 2018. US stock markets had collapsed by 30%. Oil was falling by 40%. Emerging markets’ currencies were plummeting, and as a consequence depressing US multinational corporations’ offshore profits repatriation from those economies. For the first time, virtually no high yield corporate bonds were sold.

As Trump turned up the heat on Powell in late December, it is likely that representatives of financial interests and investors in the private sector were demanding political action by Trump to halt financial asset deflation—and the massive loss of wealth and values that deflation threatened? Treasury Secretary Mnuchin did not appear panicked for no reason. It was beginning to look a little like late August 2008.

The Fed’s Dangerous Legacy: Low Rates Addiction

As this writer has written elsewhere for some time, financial markets (and the real agents behind them, the wealthy investors and their institutions) have become addicted to low interest rates since 2008. This writer has predicted that the Fed funds rate could not rise above 2.75% without precipitating a major financial markets’ negative response. The Fed has stopped at 2.5% in response to the November-December markets contraction, the worst since 2008 or 1931. Since the Fed halted its rate hikes in January, the same markets have recovered much of their loss—i.e. further evidence of the growing elasticity of stock and other asset prices to Fed interest rate cuts.

The financial crash of 2008 was set in motion, at least in part, by the excessive Fed rate hikes in 2008. Well behind the curve of real developments and events, the Bernanke Fed kept raising rates into the slowing real economy and growing financial instability. The Fed funds rate topped off at 5.25% in 2008—i.e. almost twice as high as the peak in 2018 of 2.5%. Fed rate hikes may not have been the fundamental cause of the 2008-09 crash, but can be accurately considered one of the main precipitating causes. In previous recessions and financial crises, in December 2000 and July 1990, respectively, the Fed Funds rate had peaked at 6.5% and 8%.

The longer term trend clearly means the US real economy (i.e. real asset investment) is becoming less and less responsive to interest rate change, while the financial side of the economy (i.e. financial asset investment) is becoming increasingly sensitive and responsive to rate changes. The question is why is this so? What’s behind the declining ineffectiveness of interest rates in stimulating the real economy and goods and services prices, while the rate policy is becoming more effective in stimulating the financial economy and financial asset prices? A complete answer to that critical question is not possible here, except to say it has to do with the radical structural changes that have been impacting both financial and labor markets that are being driven by increasingly rapid technological change and the very nature of capitalist economy itself.

The Financial Markets, Trump & Powell

Presidents act on behalf of financial interests when called upon. And this is probably more true in the case of Trump, himself a long time financial speculator in commercial property markets. It’s not by accident that the press often reports that Trump sees the stock market as the prime indicator of the health of the economy. Trump likely perceived the stock and financial markets steep correction of last November-December as the possible unraveling of the economy in general. He therefore probably intervened in Fed policy without the further factor of at-large financial investors, officers of investment and commercial banks, hedge fund and private equity CEOs, and others lobbying him to do so. But those sources directly lobbying Trump cannot be disregarded either. The relationship between financial sector interests and Trump is undoubtedly quite tight, given Trump’s own origins and his business investments. It has been reported that Trump often calls private business supporters and contributors for advice in critical situations. And they no doubt call him.

It is also likely that those same financial interests in late 2018 as markets were imploding were not limiting themselves to just lobbying Trump. Their deep connections with Fed district presidents and their committees (on which they typically hold 3 to 6 of the nine committee seats in each district) almost certainly means they were communicating, interceding, and demanding action by the decision makers within the Fed structure itself. Many former Fed governors and district presidents return to the banking industry after a stint at the Fed. Their personal connections with the Fed enable them to informally and indirectly ‘lobby’ with their Fed colleagues.

What these relations between Presidents, the Fed, and financial sector players suggest is that what may appear at one level as presidential or political interference in central bank policy may, at a deeper level, represent private financial interests demanding action by politicians and presidents in particular to ensure the central bank in a crisis shifts its strategic policy direction in order to back-stop and support financial markets. The Fed and Powell may deny that the central bank responds to financial markets, that its mandate is only goods and services price stability and employment, but the reality suggests otherwise. That is especially true of the recent Fed policy shift—where no issues of the real economy demanded Fed policy shift but the financial economy strongly demanded the Fed respond by changing strategic direction. The real economy showed no justification for Powell and the Fed to reverse course with regard to interest rate hikes and policy. But the collapse of US stock markets and other financial asset markets after October 2018 clearly coincides with Trump’s intensifying attacks on the Fed—as well as Powell’s abrupt shift in policy direction in response.

Central Banking Myths & Prospects

It is a myth, and a more contemporary one at that, that central banks always act independently. So too is the corollary, that politicians should not interfere with central banks decision making. Central banks’ strategic decisions are often influenced by elected government officials—and should be. That’s because central bank chairpersons and their committees are not perfectly shielded or uninfluenced by private banking interests. It’s not a question of central bank independence or lack thereof. It’s a question of ‘independence from whom’? It’s a question of central banks functioning on behalf of the public interest—and not in the service of interests of private bankers and finance capitalists or serving politicians acting on their own behalf.

But central banks, whether the Fed or others, have never been structured up to now to serve first and foremost the public interest. Central banks were born out of, and emerged and evolved from, the private banking industry, and their first function was to serve as loan aggregator for governments and the political system. They serve those two masters, in a tug of war depending on the crisis at hand. In the latest iteration of that contest between financial interests and government interests, the Fed has clearly responded to the financial sector (despite its denial it never does so) to stop hiking interest rates in order to relieve pressure on the financial asset markets which were beginning to fracture and break due to Fed rate hikes.

But the longer term trend appears that central banks, the Fed in particular, can serve both masters increasingly less effectively. Central bank interest rate policy actions are growing increasingly ineffective and destabilizing at the same time. In the case of Europe and Japan, central bank responses to the last crisis in 2008-09 (and subsequent double dip recessions) has rendered their potential for response to the next crisis virtually nil. Rates are near zero or negative. QE appears baked into the monetary structure going forward. Balance sheets cannot be recovered—i.e. QT is dead. Europe and Japan (and Bank of England and Swiss Bank, etc.) have shot off their ammunition and the gun is now jammed and cannot be reloaded. They will resort to ever more risky economic and political alternatives come the next crisis.

The US Fed’s is a situation not much better. It has created trillion dollar annual budget deficits for the next decade. The central bank must raise rates to fund an additional $12 trillion in debt coming (on top of the existing $21 trillion today). To do that the Fed must raise interest rates to attract more buyers of its Treasury bonds. But Trump and Powell have stopped raising rates—in response to financial markets’ fragility and inherent instability. And there’s the rub, as they say. The Fed can’t raise rates above 2.75% without precipitating more financial instability. And it must raise rates to finance a $33 trillion US national debt by 2028.

All the talk about global trade war pales in comparison to this great contradiction in monetary-fiscal policy now looming on the near horizon.

Dr. Jack Rasmus
February 8, 2019

Dr. Jack Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017; ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019; and ‘Systemic Fragility in the Global Economy’, Clarity Press, 2016. He teaches economics at St.Marys College in California and blogs at jackrasmus.com

posted March 1, 2019
Financial Imperialism–The Case of Venezuela

Invasion of Venezuela by US and its proxies is just around the corner! This past week vice-president Pence flew to Colombia once again—for the fifth time in recent weeks—to provide final instructions to US local forces and proxy allies there for the next step in the US regime change plan.

Evidence that the ‘green light’ for regime change and invasion is now flashing are supportive public statement by former president, Barack Obama, and several high level US Democratic party politicians and candidates, directly attacking the Maduro regime. They are signaling Democrat Party support for invasion and regime change. Events will now accelerate—just in time perhaps to coincide with the release of Mueller Report on Trump.

Behind the scenes it is clear, as it has been for months, that US Neocons are once again back in charge of US foreign policy, driving the US toward yet another war and attempt at regime change of a foreign government.

US Strategy in Brief

The US Neocon-led strategy is increasingly clear: establish a ‘beach-head’ on the Colombian-Venezuelan (and Venezuelan-Brazilian) border under the guise of providing humanitarian aid. Use the aid to get Venezuelans on the border to welcome the US proxy forces to cross over. Set up political and military structures thereafter just inside the Venezuelan borders with Colombia and Brazil, from which to launch further similar efforts deeper into Venezuela. Repeat this province by province, step by step, penetrating Venezuela space until enough local units of the Venezuelan military change sides and convince one or more of the Venezuelan military hierarchy to join them. Establish a dual state and government within and along the border of the Venezuelan state this way. A breakaway State and dual power within the country. Make it appear, by manipulating the media, that the Venezuelan people are rising up against the Maduro government, when in fact it is US proxy forces invading and using opportunist local politicians, military, and others in the ‘conquered’ zones, as the media covers for their invasion.

The main ideological justification being used for the invasion and regime change is that the Maduro government has grossly mismanaged the Venezuelan economy and driven its people into poverty. With Democrats now joining Trump and Republicans in support of invasion, the liberal mainstream US media, as well as the rightwing alternative media, are both pushing the same line, to blunt US opposition to invasion and yet another war before the final military assault is launched. Somehow the democratic elections less than a year ago, which returned the Maduro government to power, did not represent the ‘will of the people’. Explanations how they did not are thin and unconvincing, moreover. Nor is any explanation given how US policies and actions have played the central role in destroying Venezuela’s currency and economy. And the financial measures used to destabilize the economy are especially opaque.

Financial Imperialism: The Case of Venezuela

Venezuela today is a classic case how US imperialism in the 21st century employs financial measures to crush a state and country that dares to break away from the US global economic empire and pursue an independent course outside the US empire’s web of entangling economic and financial relations.

Here’s how US ‘financial imperialism’ has worked, and continues to work, with the intent of assisting regime change in the case of Venezuela.

In a world where US Capitalism is the dominant hegemon the US currency—the dollar—is the centerpiece of the US global economic empire. The dollar serves as the global trading currency as well as the global banking reserves currency. More than 85% of all global trade (export and import) is done in dollars. Certain commodities, like global oil and oil futures contracts, are traded virtually only in dollars. Recently more countries have begun to peg their own currency to the dollar, allowing it to move in tandem with the dollar. Some have even eliminated their currency altogether and now use only the US dollar as their domestic currency. Increasingly as well, more countries are issuing their domestic bonds in dollars (i.e. dollar denominated bonds). And their central banks follow the US central bank, the Federal Reserve’s, policy as it raises or lowers US interest rates that in turn cause the US dollar to rise and fall. They do so even if rising US interest rates mean rising rates in their own economies that precipitate recessions and mass unemployment. These are all examples of the growing financial integration with the US Imperial State and economy.

But even those economies that maintain their own currency are at the mercy of the US dollar. Since the dollar is the global trading and reserves currency, whenever the dollar rises in value due to US monetary policy changes, or US inflationary pressures, or just changes in supply or demand for the dollar, the currencies of other countries fall in value. As the dollar rises in value, other currencies fall. That’s how global exchange rates work in the 21st century global US empire where the dollar is the trading-reserves currency. Other currencies—the British pound, Euro, and even less so the Japanese Yen or China Yuan—are still largely insignificant as reserves or trading currencies. And it appears very unlikely they will soon replace the dollar—one of the key pillars of the US empire.

The US has the power to engineer a collapse in a country’s currency. A collapse in its currency means the price of imported goods rises rapidly, especially those goods it can only be obtained by imports—i.e. medicines, critical food commodities, intermediate business goods necessary for domestic manufacturing, etc. Accelerating import inflation in turn leads to domestic businesses cutting back production due to lack of affordable resources, commodities, or parts. Mass layoffs follow production cutbacks. Rising inflation brought on by currency collapse is thus accompanied by rising unemployment. Wage income and consumption in turn collapse and thereafter the economy in general.

Widespread shortages of key imports, inflation, and domestic production decline and unemployment brought on by the shortages and inflation simultaneously lead to social discontent and loss of support for the government. Opposition groups and parties proclaim these problems are due to the mismanagement of the economy by the government, or corruption by its leaders, or just socialist policies in general. But in fact the economic crisis—i.e. shortages, inflation, production, unemployment—is traceable directly to the root cause of the collapse of the currency engineered by US imperialist policies intent on crashing the economy as a prelude to regime change and economic reintegration to the US global economic empire.

There are many ways the US can, and does, cause a collapse of a country’s currency. One set of measures are designed to cause a severe shortage of dollars in the target country’s economy.

A shortage of dollars drives up the value of the US dollar in the target economy which, in turn, drives down the value of the country’s own currency. The US has been engineering a collapse of Venezuela’s currency, the Bolivar, now for years—first by causing dollars in Venezuela to flow out of the country and, secondly, by measures preventing Venezuela from obtaining dollars from abroad.

US policy over the last several years at least has been to force US companies doing business in Venezuela to repatriate their dollars back to the US or else divert them elsewhere globally among subsidiaries. Or just to leave Venezuela and take their dollars with them. US policy has also been to publicize and promote wealthier Venezuelans with dollars to take them out of the country and invest them in Colombia, where the US has arranged an online investment firm with the assistance of its Colombian government ally. Rich Venezuelans have been encouraged as well to send their money to Miami banks. And to move there in large numbers, which they have, taking their dollars with them or dumping their Bolivars in exchange for dollars. The outflow of dollars from Venezuela has raised the value of dollars that remain in Venezuela on the black market there, thereby helping to depress the value of the Bolivar in Venezuela even further.

These measures pale, however, to US imperial efforts to prevent Venezuela from obtaining dollars in global markets in an effort to try to offset the outflow of dollars from the economy.

For example, the US has taken action to prevent US and global banks from lending dollars to Venezuela, or from participating in underwriting and insuring Venezuelan bond issues which would also raise dollars for Venezuela if allowed. Bank loans and bond funding thus dry up, depriving the government of alternative sources of dollars. More dollar shortage; more Bolivar domestic currency collapse—i.e. more expensive imports, more inflation, more shortages, declining production, rising unemployment….more discontent.

The main effort by which the US is attempting to deprive Venezuela of dollars is to impose sanctions on other countries that try to buy Venezuelan oil. Oil sales are the number one source of the country’s dollar acquisitions, since all oil trade is done in dollars and Venezuela depends on 95% of all its government revenues from selling its oil. The US imposes sanctions on would be buyers and thus cuts off access to dollars, as it simultaneously through other policies works to encourage dollar flight out of Venezuela and cut off bank loans and bond issuance by the country. And if the prior bonds and loans were ‘dollar denominated’, then the lack of dollars to pay the interest and principal coming due leads directly to defaults and in turn to business collapse and even more unemployment.

Venezuela has turned to selling its oil to China and Russia and a few other countries. It has been forced to resort to paying its interest and principal on past loans from these governments with shipments of oil instead of payments in dollars. As the US turns to sanctions as an economic ‘weapon’ to enforce its will on other countries, which it has been doing in recent years, more countries are become aware of the tactic and are taking countermeasures. They are dumping dollars (or reducing their purchases of dollars in world markets) and buying gold. China and Russia are leading this way, while experimenting with non-currency dependent trade.

Another recent move by the US to deny Venezuela dollars and collapse its currency has been to seize the Venezuelan oil distribution company, CITGO in the US. Its remittances back to Venezuela have been in dollars. By seizing CITGO, the US deprives the country of yet another source of dollars, with which Venezuela might otherwise have been able to purchase imports of food, medicines, and other economically critical goods. So Venezuelans in this case are clearly forced to forego these critical imports due to US policy—not due to economic mismanagement by its government. Moreover, adding insult to injury, the dollar funds from CITGO seized by the US are being delivered to the Venezuelan government’s opponents and its hand-picked ally of the US, Guido. The opposition now gets to finance its counter-revolution with the money formerly remitted to Venezuela. The counter-revolution is financed at the expense of critical goods and services that otherwise might have been made available to the Venezuelan people.

Seizure of the CITGO asset is not the only such example of dollar deprivation. Other assets in the form of inventories, investments, cash in US banks, etc. are also being impounded. And not just from the Venezuelan government. Individual Venezuelan companies and individual citizens have been having their assets in the US impounded as well. And the US is increasing its pressure on foreign governments to impound and seize assets as well—of the government, businesses, and citizens.

The impoundment and seizure has recently been extended as well to Venezuelan gold stocks held offshore in other countries, in direct violation of international law. Recently the US company and mega bank, Citigroup, has been forced to withhold Venezuelan gold in violation of its contracts with the country. The Bank of England has also been asked, and is complying, with the US demand to freeze Venezuelan gold deposited in the UK. And countries like Abu Dhabi, where gold is traded globally, have been asked to stop trading in Venezuelan gold. Gold is a substitute money for the US dollar. So preventing gold access to Venezuela is like preventing dollar access as well. With its gold, Venezuela could more easily buy dollars, or trade for goods directly, than with using Bolivars that are falling in value and sellers are less likely to take as payment.

Countries with economies whose currency is seriously declining in value are able to get a loan to stabilize its currency from the International Monetary Fund, the IMF. Recent examples are Argentina, Turkey, South Africa, and even Pakistan. But the IMF is an institution set up by the US in 1944. The US maintains with its close European allies a majority vote on IMF decisions. The IMF does nothing the US does not approve. Its mission is to lend to countries in need of stabilizing their currencies. The IMF, however, as an appendage of the US global empire, has refused to lend Venezuela anything to help stabilize its currency.

This is in contrast, for example, to the record loan of more than $50 billion recently provided to Argentina once that country put in its current business and US-friendly Macri government. (The record IMF loan, by the way, was so that Argentina could pay off debts owed to US and other speculators in the early 2000s. So Argentina saw little of that $50b. What the payoff did enable, however, was for Macri and other Argentinian bankers to go to New York to get new loans from US banks once it repaid the speculators, from which Macri and friends no doubt personally benefited immensely).

As the Venezuelan currency collapses due to US arranged dollar shortages, Venezuela must print even more Bolivars to enable it to purchase what goods from abroad it might still be able to buy. A collapsed currency means the price of imported goods rises proportionately. So more Bolivars are needed to buy the goods that are continually rising in price. Printing more Bolivars adds to the supply of Bolivars in the economy which raises domestic price inflation even further. But the excess printing is in response to the currency collapse which is engineered by the dollar shortage and the falling exchange rate in the first place. The over supply of Bolivars is not due to mismanagement; it is due to the shortage of dollars and the desperate effort by the Venezuelan government to somehow pay for inflating import goods.

The falling price of crude oil in 2017-18 added further pressure on the Bolivar. The collapse of oil prices globally appears unrelated to US policy. But it wasn’t. The oil Venezuela has been able to continue to sell, mostly to China or Russia, declined by 40% in price in 2018. The global oil deflation of 2018 thus generated less oil revenue for the country and thus fewer dollars.

But that too was due indirectly to US policy and economic conditions. The collapsing price of oil in 2018 is directly attributed to US shale oil producers raising their output by more than a million barrels a day, which increased the world oil supply and depressed world oil prices. The US then attempted to manipulate world oil output with Saudi Arabia but that exacerbated the over-production and deflation problem still further. Here’s how: The US attempted to impose sanctions on Iranian oil in 2018. Saudi Arabia believed it would capture the customers that Iran would lose, and therefore it, Saudi Arabia, also raised its output of crude as US shale producers raised theirs. But Iran was able to continue to sell its oil, as US sanctions broke down. The result of the US shale overproduction plus Saudi overproduction was a 40% collapse in world oil prices in 2018 that further deprived Venezuela of much needed government revenue—apart from US sanctions on Venezuela oil sales.

US monetary policy in 2018 further exacerbated the currency crisis in Venezuela—as it did elsewhere in Latin America and emerging markets in general. In 2017-18 the US central bank launched a policy of raising interest rates. Since other world central banks respond to the US central bank, world rates began to rise as well. Rising US interest rates caused a rise in the US dollar, and as the dollar rose in 2017-18 emerging market currencies fell. They fell for Venezuela in part due to this effect, as well as due to other causes mentioned.
Falling currencies precipitate what is called ‘capital flight’ out of the country. Less money capital means less available for investment and thus lower production output and more unemployment. So currency collapse precipitates not only inflation but recession as well. To prevent the capital fight, emerging market economies raise their own domestic interest rates. This led to recession, for example, throughout Latin America in 2017-18. Capital flight out of Venezuela has been significant since 2016, as wealthy Venezuelans sent more of their dollars out of the country to Miami, thus exacerbating dollar shortages in Venezuela and further driving down the value of the Bolivar left behind.

US sanctions on other countries, banks, and companies offshore are designed not only to prevent Venezuela access to dollars and money capital offshore. Sanctions also target real goods trade, like oil and other key commodities. But there’s another means by which the US shuts down the flow of real goods into and from a country, causing shortages of critical goods. It’s the US controlled international payments exchange system, called SWIFT. This is where US banks arrange the exchange and transfer of payments for goods and services by converting from one currency to the other and transferring the funds from one bank to another across countries. The US has been preventing Venezuela from normally using the SWIFT system. So even if another country is willing to buy Venezuela goods, including oil, and exchange Bolivars for its own currency, it is prevented from doing so by the US bank-controlled SWIFT system.

Summing Up

Financial imperialism has been waged against Venezuela for decades, but the attack on Venezuela employing financial measures has recently intensified as the US neocons and imperialists have accelerated their plans to launch a more direct attack by political means, including military, to force regime change in Venezuela. At the center of the on-going, and now intensifying, financial warfare against the country by the US are measures designed to destroy Venezuela’s currency.

Imperialism is often thought of as military conquest and colonialism. That’s 19th century British and European imperialism. But the American Empire in the 21st century does not need colonialism. It has a more efficient system for forcing the integration of other economies and for extracting value and wealth from the rest of the world. The US empire is increasingly knitted together in the 21st century by a deep web of financial relationships that afford it multiple levers of economic power it can pull if and when it desires. And when those economic and financial levers prove insufficient to overthrow domestic forces and governments that remain intent on pursuing a more independent path outside the Empire’s economic and political relations, then the breakaway State is attacked more directly once the economy is sufficiently wrecked. Such is the case of Venezuela today. Financial imperialism has paved the way for more direct political and military action.
*

Dr. Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, 2019. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network in New York, blogs at jackrasmus.com, and tweets at @drjackrasmus. His website is http://www.kyklosproductions.com.

posted February 10, 2019
Youtube Interview: US-China Trade Evolution & February Events

Senior negotiators of the US (Lighthizer) and China (Liu He) met in Washington Jan. 30-31 as the US-China trade war approaches a climax. Discussions were a accompanied by a virtual news blackout. China continued publicly in early early Febuary to offer concessions to the US on market access to China, US corporate and bank majority ownership of China companies, and China resumption of purchases of US farm and other goods. Meanwhile, the US continued to assume a hard line on China technology development, going after China companies and arranging US allies to do the same. The US also began proceedings to extradite from Canada the co-chairperson of the giant China tech company, Huawei. No meeting has been scheduled by the March 1, 2019 deadline between Trump and China president, Xi, and Trump has publicly declared there will be none by March 1. Nevertheless US trade negotiations will be meeting in Beijing the week of February 11-16. Trade ambassador Lighthizer and Treasury Secretary, Steve Mnuchin, reportedly will both represent the US, a development that suggests a deal which Lighthizer opposes but Mnuchin favors. Press reports indicate technology will be the central, unresolved thus far topic of negotiations.

On the eve of last week’s negotiators, I was asked to give an hour interview on TV by the Peninsula Peace and Justice center in Palo Alto, California. Topics focused on China-US trade, NAFTA 2.0, and Trump policies in general. That hour interview can be viewed on Youtube at the following link:

https://youtu.be/xoR2eMIBgPk

Reaffirming my past predictions I continue to predict there will be a deal–but not by March 1–and both sides will agree to extend the discussions until there is an agreement.

posted January 25, 2019
Global Economy on the Brink as Davos Crowd Parties On

At Davos, Switzerland every year the global capitalist elite gather to party…and to prepare for the year ahead. This year more than 1500 private jets will reportedly fly in. Thousands more of their underling staff will travel via business class to handle their personal, and corporate, logistics. Shielded from the media and the pubic, the big capitalists share views in back rooms and listen to experts on finance, government policy, technology, and the economy. The experts are especially probed to identify and explain the next ‘black swan’ or ‘gray rhino’ event about to erupt. Wealthy celebrities are invited to entertain them as well after evening dinner and cocktails. But the real networking goes on privately afterwards, in small groups or one on one, among the big capitalists themselves or in private meetings with heads of state, finance ministers, and central bank chairmen.

Typically each annual meeting has a theme. This year there are several: the slowing global economy, the fracturing of the international trade system, the growing levels of unsustainable debt everywhere, volatile financial asset markets with asset bubbles beginning to deflate, rising political instability and autocratic drift in both the advanced and emerging economies, accelerating income inequality worldwide—to mention just a short list.

On the eve of this year’s World Economic Forum gathering, some of the most powerful, wealthy, and more prescient capitalists have begun to speak out to their capitalist cousins, raising red flags about what they believe is an approaching crisis.

Ray Dalio, the billionaire who found and manages the world’s biggest hedge fund, Bridgewater Associates, warned that he and other investors had squeezed financial markets to such “levels where it is difficult to see where you can squeeze” further. He publicly admitted in a Bloomberg News interview that, in the future profits will be low “for a very very long time”. The era of central banks providing free money, low rates, and excess liquidity have run their course, according to Dalio. He added the global economy is mired in dangerously high levels of debt, comparing it to the 1930s.

Paul Tudor Jones, another big finance capitalist, similarly warned of unsustainable debt levels—created by companies binging on cheap credit since 2009—that “could be systemically threatening”. Not just government debt. But especially corporate debt, where levels in the US alone have doubled to more than $9 trillion since 2009 (most of it high risk ‘junk bond’ and nearly as risky ‘BBB’ investment grade corporate bond debt).

Almost as worrisome, one might add, is the now more than $1 trillion leverage loan market debt in the US (i.e. loan equivalent of junk bonds). US household debt is also now approaching $15 trillion. And US national government debt, at $21 trillion, is about to surge over the next decade to $33 trillion due to the Trump 2018 tax cuts. And that’s not counting trillions more in US state and local government debt; or the tens of trillions of new dollarized debt undertaken by emerging market economies since 2010; or the $5 trillion in non-performing bank loans in Europe and Japan; or the even more private sector debt escalation in China.

Corporate debt levels are not alone the problem, however. Debt can rise so long as financial asset prices and real profits do so—i.e. provide the cash flow available to service the debt. But when profits and asset prices (of stocks, bonds, derivatives, currency exchange rates, commodity futures, etc.) no longer rise, or start to turn down, then debt service (principal & interest) cannot be repaid. Defaults often follow, causing & investor confidence to slide. Real investment, employment, and household incomes thereafter collapse, and the real economy is dragged down in turn. The real decline further exacerbates the collapse of financial asset prices, and precipitates a mutual feedback of financial and real economic collapse.

And financial markets began to deflate in 2018; and it is now becoming increasingly clear that the real side of the global economy is slowing rapidly as well.

In February 2018 the first early warning appeared for financial markets. Stocks plunged in the US, Europe and even China. They temporarily recovered—a ‘dead cat bounce’ as they say before an even deeper decline in the fall. Then oil and commodity futures prices collapsed by 40% or more in late summer-early fall 2018. Stock markets followed again in October-December 2018 by 30-40% in US, China, Europe, and key emerging markets. Key merging market currencies—Argentina, Turkey, Indonesia, Brazil, South Africa—all fell precipitously as well. And housing prices from the UK to Australia to China to New York began to implode as the year ended. In January 2019 stock markets recovered—i.e. a classic, short term, bull market recovery in what is today’s fundamentally long term global bear market.

Dalio’s and Jones’ worries by unsustainable debt and pending crisis have started to become real, in other words.
Becoming real as well is evidence of emerging defaults, a critical phase that typically follows asset markets’ decline and slowing profits. In the US there’s the Sears default, with JCPenney in the wings. And the giant corporation, once the largest in the world, the General Electric Corp., slouching toward default. Its global profits slowing and stock price imploding, GE is now desperately selling off its best assets to raise cash to pay its excess debt. It’s not alone.

Scores of energy companies involved in US shale oil and gas production are teetering on the brink. In Europe, there’s deepening troubles at Deutschebank, and just about all the Italian banks, and UBS in Switzerland, and the Greek banks. In Japan, there’s trillions of dollars in non-performing bank loans as well, which Japan’s central bank continues to cover up. And then there’s China, with more than $5 trillion in bad loans held by local governments, by shadow bankers, and by its state owned enterprises that the China central bank and government keep bailing out by issuing ‘trusted loans’ (i.e. equivalent of junk bonds in US).

Default cracks have begun to appear everywhere in the global economy, in other words, major indicators that the excess debt accumulation and financial bubbles of the past decade cannot be ‘serviced’ (principal-interest paid) and have begun to negatively impact the global economy.

What’s becoming clear is that the next crisis will not emerge from the housing sector with excess debt and price bubbles driven by subprime mortgage loans and related financial derivatives. What’s more likely is that the next crisis will emerge from debt defaults and collapsing real investment by non-financial corporations. Moreover, the tipping point is nearer than most in business or media will admit.

Trump’s 2018 tax cuts simply threw a veil over the real condition of corporate performance in the US this past year. The tax cuts provided a windfall, one time subsidy to corporations’ bottom line. It is estimated that US S&P 500 corporations’ profits were boosted 22% by the Trump windfall tax cuts alone. Since S&P 500 profits for 2018 were roughly 27%, it means actual profits were barely 5%. That’s the real situation going into 2019—a condition that assures US stock markets, junk bond markets, and leveraged loan markets in particular will experience even greater contraction in 2019 than they did in 2018. The bubbles will continue to pop.

In the global economy, it is even more evident that by the end of 2019 it is likely there will be recession in wide sectors of the real global economy amidst further asset markets’ price declines.

In Europe, the growth engine of Germany is showing sure signs of slowing. Manufacturing and industrial production in the closing months of 2018 fell by 1.9%. After a GDP decline in the third quarter 2018, another fourth quarter 2018 German contraction will mean a technical recession. Equal to at least a third of all the Eurozone economy, as goes Germany goes Europe. France and Italy manufacturing are also contracting. Nearly having stagnated at 0.2% in the third quarter, the Europe economy in general may have slipped into recession already. And all that before the negative effects of a UK Brexit or an Italian banks’ implosion or deepening protests in France are further felt.

In emerging market economies, the steady rise of the US dollar in 2018 (driven by rising US central bank interest rates) devastated emerging market economies across the board. Rising dollar values translated into corresponding emerging market currency collapse. That triggered capital flight out of these economies, and their falling stock and bond markets in turn. To stem the outflow, their central banks raised interest rates, which precipitated deep recession in the real economy, while their collapsing currencies generated higher import prices and general inflation in their economies as well. That was the story from Argentina to Brazil to Turkey to South Africa and even to Asia in places.

The US halting of interest rate hikes in 2019 may relieve pressure on emerging market economies somewhat in 2019. But that easing will be more than offset by China’s 2019 economic slowdown now underway. In the second half of 2018 investment, consumer spending, and manufacturing all slowed markedly in China. Officially at 6.6% for 2018, according to China statistics, China’s real economy is no doubt growing less than 6% due to the methods used to estimate growth in China. Its manufacturing began to contract in late 2018, and with it a significant slowdown in private investment and even consumer spending on autos and other durable goods. China’s slowing will mean less demand for emerging market economies’ products and commodities, including oil and industrial metals. A respite for emerging market economies from the US dollar rising will thus be offset by China slowing.

When both financial asset markets and the real economy are together slowing it is a particularly strong ‘red flag’ warning for the economic road ahead. And more contractions in stocks and other financial assets, together with slowing of manufacturing, housing, and GDP in Europe, US, and Japan in 2019, are likely which means trouble ahead in 2019.

Along with all the data increasingly pointing to financial asset deflation gaining a longer term foothold—and with real economy indicators like manufacturing, housing, GDP, exports as well now flashing red—there is also a growing list of political hotspots and potential ‘tail risks’ emerging in the global economy. Some of the ‘black swans’ are identifiable; some yet to be.

In the US, the government shutdown and the prospect of policy deadlock between the parties for two more years could qualify as a source of further economic disruption. In Europe, there are several ‘tail risks’: the Brexit situation coming to a head in April, the challenge to the Eurozone by the new Italian populist government, the chronic and deep street protests continuing in France, and the general rightward social and political drift throughout eastern Europe. In Latin America there’s the extremely repressive policies of Bolsonaro in Brazil and Macri in Argentina, which could end in mass public uprisings at some point. In Asia, there’s corruption and scandals in Malaysia and India. And then there’s the US-trade war with China, which some factions in the US are trying to leverage to launch a new Cold War. Not least, there’s the potential collapse of negotiations between the US and North Korea that could lead to renewed threats of military conflict. All these ‘political instabilities’ , given their number and scope, if left unresolved, or allowed to worsen, will have a further negative effect on business and consumer confidence—now already slowing rapidly—and in turn investment and therefore economic growth.

Ray Dalio’s and Tudor Jones’ warnings on the eve of Davos have been echoed by a growing list of capitalist notables and their government servants and echoes. IMF chairperson, Christine Lagarde, has been repeatedly declaring publicly that global trade and the economy are slowing. Reflecting Europe in particular, where exports are even more critical to the economy, she has especially been warning about a potential severe US-China trade war disrupting the global trading system—and global economy in turn. The IMF has been issuing repeated downward adjustments of its global economic forecasts. So too has the World Bank. As have a growing number of big bank research departments, from Nomura Bank in Japan to UBS bank in Europe. Former US central bank chairs, Janet Yellen and Ben Bernanke, have also jumped in and have been raising red flags about the course of the US and global economies. Former Fed chair, Greenspan, has even declared the US is already on a recession path from which it can’t now extricate itself.

Given all the emerging corroborating data, the red flags and warnings about the current state of the global economy, and the growing global political uncertainties, the Dalios, the Jones, and others among the Davos crowd are especially worried this year.

On the eve of the Forum’s first day on January 23, 2019, a leading discussion topic among the cocktail parties is the buzz about the just leaked private newsletter from billionaire Seth Klarman, who heads one of the world’s biggest funds, the Baupost Group. In his newsletter leaked to the New York Times, and widely circulated among early Davos crowd attendees, Klarman reportedly chides his readers-investors about not paying more attention to the social and political instabilities growing worldwide, about Trump’s direction which is “quite dangerous”, and the US in effect retreating from global leadership, leaving a dangerous vacuum behind. Investors have also become too complacent about global debt and risk levels now rising dangerously, he argues. It could all very well lead to a financial panic, he adds. The US in particular is at an ‘inflection point’. He ominously concludes, “By the time such a crisis hits, it will likely be too late to get our house in order”.

The recent statements by Dalio, Tudor Jones, Klarman, and the others reminds one of the last crisis and crash of 2008. When Charlie Prince, CEO of Citigroup, the biggest bank at the time, was asked after the crisis why he didn’t see it coming and do something to avoid the toxic mortgage-derivatives bomb and protect his investors and customers, Prince replied he did see it coming but could do nothing to stop it. His investors and customers demanded his bank continue—like the other banks were—investing in subprime mortgages, lending to shadow banks, selling risky derivatives and thereby continuing to make money for them, just as the other banks were doing. Charlie’s response why he did nothing to stop it or prepare was, ‘when you come to the dance, you have to dance’.
No doubt the Davos crowd will be partying and dancing over the next several days in their securely gated, posh Switzerland retreat. After all, the last ten years has increased their capital incomes by literally tens of trillions of dollars. And capitalists are driven by a mindless herd mentality once they’ve made money. They believe they can continue doing so forever. They believe the money music will never stop. One can only wonder, if they’ll be dancing later this year to the same song as Charlie’s in 2008.

Jack Rasmus
January 22, 2019

Dr. Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, 2019. Jack hosts the Alternative Visions radio show on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.com. He is a frequent contributor to Global Research.

posted January 20, 2019
Trump’s Deja Vu China Trade War-Part 2

Here’s Part II of my China trade article. Jack

Trump’s Déjà vu China Trade War (Part II)
By
Jack Rasmus
Copyright 2019
Summary Part I
In 2018 China and the US came to the brink of a bona fide trade war and then halted at the precipice. At the G20 meeting in Buenos Aires in late November 2018, Trump and China President, Xi, met offsite. The outcome was an agreement to put off further escalation of tariffs on both sides for another 90 days during which their trade teams would meet to try to seek a resolution. Economies of both countries were showing signs of growing weakness and instability by November. The indicators worsened notably in December. Trump agreed to postpone US announced tariffs on an additional $200 billion of China imports, effective January 1, 2019, and suspend increases on already existing tariffs from 10% to 25%, also scheduled for January 1. China agreed as well to postpone further its scheduled tariffs. In early weeks of January 2019, middle level officials of both China and the US began meeting to discuss details for subsequent higher level negotiations set for Washington on January 30, 2019.

Unlike Trump’s trade ‘war’ with US allies, which has always been ‘phony’ (see Part 1 of this article). Trump never envisioned major changes in US trade relations with US allies, starting with South Korea, then NAFTA trade partners, Mexico and Canada. Tariffs on steel and aluminum were offset by more than 3000 exemptions announced by the Trump administration. Tariffs on European autos, threatened by Trump, were suspended. And trade negotiations with Japan were left unscheduled.

Before the November 2018 US midterm Congressional elections, Trump sought just token adjustments to US-ally trade relations that he then exaggerated and boasted to his US domestic political base, claiming his ‘America First’ economic nationalism policies were delivering results. China-US trade was another matter.

On the surface, the China-US dispute appeared as the US attempting to reduce the trade deficit with China—although that US trade deficit with China had not changed much for the past several years. A second apparent US objective was the US long-standing demand that China open its markets to US business, which meant that China should allow US companies a greater than 50% ownership of their operations in China, especially US banks and financial corporations. But reducing the trade deficit and opening China markets were secondary objectives. The primary US objective, that became increasingly apparent over the course of 2018, was to prevent, or at least slow, China’s ‘2025’ technology development program. That program focused on next generation technologies like AI, cybersecurity and 5G wireless—the technologies of the future that new industries would be built upon. And, equally important, the technologies that would determine military dominance by 2030.

Throughout 2018 three factions within the US trade negotiation team would ‘fight it out’ over which of the three objectives of US-China trade relations would prove primary: reducing the trade deficit (mostly by China buying more US farm products from US agribusiness companies; allowing US corporations, especially banks, to have majority ownership and control of their operations in China; or US forcing China to stop its technology transfer and slow its nextgen technology development and thereby reduce the threat to US military dominance over the 2020s decade. A major faction fight roiled within the US trade team. The main contention was between the banking interests, led by ex-Goldman Sachs senior manager, US Treasury Secretary, Steve Minuchin, and on the other hand the anti-China hawks, reflecting US military industrial complex and Pentagon interests, led by US Trade Ambassador, Robert Lighthizer, and his allies, anti-China advisor to Trump, Peter Navarro, and later, Trump’s national security advisor, John Bolton.

What follows is Part II of the analysis of Trump’s Déjà vu China-US trade ‘war’ from last March 2018 through mid-January 2019.

The Real Trade War: China Technology

Trump’s trade strategy in relation to China has always been to pressure China on technology transfer and slow its nextgen technology development. Reducing the US-China trade deficit and getting China to open its markets to US financial interests have been objectives as well, but of secondary importance.

Early in 2018 China signaled publicly it would buy $100 billion a year more US products and open its markets to US corporate majority 51% or more ownership. It even granted 51% ownership to select global companies while negotiations with the US were underway. But it refused to make concessions on the technology issue. US defense companies, the Pentagon, the US military-industrial complex interests on the one hand, and US banks on the other, are the major players in determining US trade policy.

Throughout 2018 US trade policy is best described as schizophrenic. Was it Trump driving policy? His anti-China neocons and hawk advisors–Lighthizer, Navarro, and later John Bolton, appointed to the post of National Security Advisor to Trump in 2018, who later joined the administration? Was it Treasury Secretary, Steve Mnuchin, who represents US banking and multinational corporate interests on the US trade team? Larry Kudlow, Trump’s interface to his domestic base? And what about Jared Kushner, son-in-law of Trump who has Trump’s closest ear, who has been serving as Trump’s interface to the three major factions on the US trade team? Throughout 2018, the factions contended for Trump’s support, with influence shifting and fluid among the various factions.

Pre-negotiations with China started in early March with Trump’s announcement of the steel-aluminum tariffs. After the tariff announcement, Trump began tweeting the idea that China should reduce its imports to the US by $100 billion. A day after the Office of US Trade Representative (OUST report) was issued by chief Trade Representative, Robert Lighthizer, Trump announced tariffs of $50 billion on China imports recommended by Lighthizer. However, a window of at least 60 days was required before any definition of the $50 billion or actual implementation by the US might occur, giving ample time for unofficial negotiations to occur between the countries’ trade missions. (Technically, the US could even wait for another six months before actually implementing any tariffs). Announcing intent to a dollar amount of tariffs is one thing; providing a list and definition of what goods would be tariffed is another; and setting a date they would take effect is still another.

China immediately sent its main trade negotiator, Liu He, to Washington and assumed a cautious, almost conciliatory approach at first. China responded initially in March with a modest $3 billion in tariffs on US exports. It also made it clear the $3 billion was in response to US steel and aluminum tariffs previously announced by Trump, and not Trump’s $50 billion tariff threat specifically targeting China. But China noted more action could follow, as it forewarned it was considering additional tariffs of 15% to 25% on US products, especially agricultural, in response to Trump’s $50 billion announcement.

China was waiting to see the US details. At the same time in April it signaled it was willing to open China brokerages and insurance companies to US 51% ownership (and possibly even 100% within three years). It also announced it would buy more semiconductor chips from the US instead of Korea or Taiwan. It was all a carefully crafted public response, designed not to escalate trade negotiations with the Trump administration prematurely. A series of token concessions and minimal tariff responses.

Behind the scenes China and US trade representatives continued to negotiate. By the end of March, all that had actually had occurred was Trump’s announcement of $50 billion in tariffs on China imports, but without details, plus China’s $3 billion token response to prior US steel-aluminum tariffs. From there, however, events began to deteriorate.
On April 3, 2018 Trump defined his threat of $50 billion of tariffs—25% on a wide range of 1300 of China’s consumer and industrial imports to the US. It was Lighthizer’s OUST Report’s recommended March list that launched Trump’s trade offensive with China. Influential business groups in the US, like the Business Roundtable, US Chamber of Commerce, and National Association of Manufacturers immediately criticized the move, calling for the US instead to work with its allies to pressure China to reform—not to use tariffs as the trade reform weapon. The anti-China hardline US factor brushed aside the criticism.

China now responded more firmly, promising an equal tariff response, declaring it was not afraid of a trade war with the US. That was an invitation for a Trump tweet and declaration he believed the US would not “lose a trade war” with China and maybe it wasn’t such a bad thing to have one. He suggested that another $100 billion in US tariffs might get China’s attention.
China’s initial $3 billion tariffs, and China’s suggestion of more billions of 15%-25% tariffs, targeted US companies and agricultural production in Trump’s Midwest political base. This may have especially aggravated Trump, disrupting his plans to mobilize that base for domestic political purposes before the November 2018 elections. Trump’s typical approach to negotiating—employed repeatedly during his private business dealings before being elected—is to never let his adversary ‘one up’ him, as they say. He always keeps raising the stakes until the other side stops matching his demands. Then he negotiates back to original positions, controlling the negotiating agenda and maintaining the upper hand in the process.

China initially fell into Trump’s trap, responding to Trump’s $50 billion of tariffs announcement with its own $50 billion tariffs on 128 US imports to China. This time targeting US agricultural products and especially US soybeans, but also cars, oil and chemicals, aircraft and industrial productions—the production of which is also heavily concentrated in the Midwest US. China noted further it was prepared to announce another $100 billion in tariffs as well if Trump followed through with his threat of imposing $100 billion more tariffs. In less than a month, the character of negotiations had shifted.

In response to the ‘tit for tat’ tariff threats, the US stock markets plummeted during the first week of April. Trump advisors, Larry Kudlow and Steve Mnuchin, intervened publicly to dampen the effect of Trump’s remarks on the markets. Kudlow tried to assure investors, “These are just first proposals…I doubt that there will be any concrete actions for several months”. Kudlow said negotiations were continuing. The stock markets recovered again.

But who were investors supposed to believe—Trump or his advisors? They seemed to be talking in different directions. And how long would investors continue to believe the Kudlows and others that matters (and Trump) were under control, and there would be no trade war? China representatives noted that, contrary to Kudlow’s assurances to US markets and investors, there were no ongoing discussions between the two countries.

By the end of the first week of April, US trade objectives and strategy was becoming increasingly murky: US multinational businesses restated what they wanted was more access to China markets. US defense establishment, NSA and the Pentagon, and the Trump administration ‘hawks’—Lighthizer, John Bolton and Peter Navarro—retorted they wanted an end to strategic technology transfer to China—both from US companies doing business in China and from China companies purchasing or partnering with American companies in the US.
It appeared what Trump himself wanted anything was something to exaggerate and brag about to his domestic political base emphasizing nationalist themes—to keep his popular ratings growing, to ensure Republican retention of seats in Congress in the November elections, and to whip up his base.

So what was the real US priority? Whose trade war was it? The neocons and China hawks aligned with the US military-industrial complex? Midwest agribusiness and manufacturing interests? Or US finance capital wanting to escalate its penetration of China markets?

However, by mid-April it was all still talk, with tariffs actions on paper, and not yet implemented. The next step would be defining the announced tariffs in detail. Announcing tariffs was only like waving a gun, to use a metaphor. Defining the tariffs was like loading a gun, putting the ‘safety’ lock on, but not yet pulling the trigger. Tariff implementation dates were when the shoot-out would really begin.

As of mid-April the negotiations by trade representatives continued in the background, while US capitalists in the Business Roundtable and other prime corporate organizations added their input to the public commentary process that was scheduled to continue in the US until May 22.

US Treasury Secretary, Steve Mnuchin, went to Beijing in the weeks prior to May 22. He returned declaring there was an agreement. Mnuchin kicked Peter Navarro, one of the hawks, from the US trade team. The China hawks and military industrial complex immediately responded, with help of their friends in Congress. They went after China’s ZTE corporation doing business in the US, charging it with technology espionage and transfer. The tech faction on the US trade team took over from Mnuchin. Navarro was put back. Any tentative deal was scuttled.

What happened in the subsequent six months from June to November 2018 was a steady escalation of threats, and subsequent actions, by Trump to raise tariffs, while he simultaneously kept saying his relationship with China president Xi was great and he expected a trade deal at some point: His response to China’s $50 billion tariff announcement—the counter to Trump’s $100 billion more tariffs—was to publicly declare the US should consider an additional $100 billion in tariffs. The additional $100 billion were implemented thereafter.

China again responded tit-for-tat, as its Commerce Ministry spokesman, Gao Feng, declared it would not hesitate to put in place ‘detailed countermeasures’ that didn’t ‘exclude any options’. And, in the most ominous comment to date, it was made clear that should Trump impose the additional $100 billion, ‘China would not negotiate’! And as China Foreign Ministry spokesman, Geng Shuang, following up Gao Feng, indicated in an official news briefing, “The United States with one hand wields the threat of sanctions, and at the same time says they are willing to talk. I’m not sure who the United States is putting on this act for”…Under the current circumstances, both sides even more cannot have talks on these issues”.

Trump’s $150 billion in tariffs on China was played to his domestic political base, in the weeks prior to the November midterm US elections, as evidence of his tough policy of US economic nationalism. Trump further announced reaching an agreement with Mexico and Canada replacing the NAFTA free trade deal—exaggerating and spinning the new terms and conditions as major improvements while, in fact, the details were token much like the prior changes to the US-South Korean free trade agreement. No new tariffs were implemented on Mexican goods imports to the US.

Trump tried desperately to get the Chinese to return to the negotiating table during the months immediately preceding the US elections. However, China refused to be ‘played’ like Mexico and Canada for Trump’s election objectives and refused to return.

Trump threatened to raise tariffs on the second $100 billion implemented, from 10% to 25% and threatened another 25% on an additional $200 billion in China imports. Still no China agreement to negotiate.

By the early fall 2018 it was clear that the China hawks—Lighthizer, the military-industrial complex-the Pentagon & Co.—were in control of Trump trade policy. Regardless of China concessions on reducing the trade deficit or granting 51% access to its markets, their primary demand was slowing (or ideally subverting) China technology develop—stopping tech transfer in China and elsewhere in the US, as well as among US allies. The side-lining of Mnuchin over the summer, the restoration of Navarro to the trade team, and the adding of notorious anti-China hawk, John Bolton, all strengthened the tech development faction, led by Lighthizer, on the US trade team. They were in effect in control as the US midterm elections approached.

In the run-up to the US elections it was also clear Trump was focused on his domestic political base, repeatedly tweeting his ultra- economic nationalist rhetoric. Trump’s nationalist rhetoric also contributed to preventing the relaunch of trade negotiations with China. Part of this threatening rhetoric included Trump public statements that he would implement a third round of $200 billion more 25% tariffs by January 1, 2019 on China. In that environment of escalating threats, anti-China hardliners clearly in control of US policy, and pending US elections, it was virtually impossible China would agree to negotiate.

Following the November US elections, a meeting was now possible. The G20 nations gathering in Buenos Aires scheduled for late November presented the opportunity. Intense maneuvering occurred between the anti-China technology hawks and the Mnuchin bankers-multinational corporations factions. Lighthizer released a new report criticizing China tech policy and appeared to have the upper hand and opposed a meeting between Trump and China president, Xi, at a side venue dinner in Buenos Aires. That reflected a new effort and breakthrough by the Mnuchin faction of big US banks, tech, and aerospace corporations. From mid-October through November the US stock markets began a precipitous fall, which would continue through December, and amount to the worst stock correction since 2008 and even 1931. That financial and the real slowing of the US housing, construction, and auto industries likely shifted Trump administration strategy. The momentum of negotiations strategy began to shift from the Ligthizer faction.

Elements of Trump Trade Strategy

Apart from the three main objectives of Trump China trade policy noted—i.e. China purchases of more US goods, opening markets to 51% ownership for banks and other US corporations, and the nextgen tech development issue—there are various additional objectives behind the strategy.

First, the steel-aluminum tariffs that launched the Trump trade offensive in March 2018 were a signal to US competitors that they should prepare to ‘come to the table’ and renegotiate current trade arrangements, since the US now plans to change the rules of the game again—just as Reagan and Nixon did before in the 1970s and 1980s. But once they ‘came to the table’, the changes in rules of the game with regard to trade relations with US allies did not result in a fundamental restructuring of the US-allies trade relations. The South Korean deal (see Part 1 of this article), the following revised NAFTA treaty, the suspension of negotiations on auto and other tariffs with Europe and Japan, plus the thousands of exemptions to steel and other tariffs allowed by the Trump administration to date all reveal that trade renegotiation with US allies is mostly for show. However, the effort throughout 2018 all made for good campaign speech ‘economic nationalist’ hyperbole in an election year.

Trump has been pursuing a ‘dual track’ trade offensive: a ‘softball’ approach to US allies and an increasingly hard line with China. However, by January 2019 it appears the China hardline track may also fall well short of the threats and hyperbole to date. Trump simply does not have the kind of leverage over China negotiations in 2018-19 that Reagan had over Japan in the 1980s and even Nixon had in the early 1970s with Europe.

A second development impacting Trump trade strategy has to do with the inevitable slowing of the US real economy in 2019-20. The floodgates of fiscal policy have been reopened in 2018 with Trump’s $4.5 trillion corporate and investor tax cuts, plus hundreds of billions $ more in defense and war spending hikes. Annual deficits of more than $1 trillion a year for another decade are now baked into the US budget. The deficits in turn have required the Federal Reserve US central bank to raise interest rates to fund those annual trillion dollar and more deficits and debt. It is becoming increasingly clear that the Trump tax cuts have not stimulated real US economic growth very much. Most of the $4.5 trillion business-investor tax cuts are going toward buying back corporate stock ($590 billion forecast 2018 by Goldman Sachs), paying out more dividends ($400 billion plus forecast), and financing record levels of merger & acquisition deals ($1.2 trillion in 2018)..

In short, rising interest rates, ineffective tax cuts not producing projected real investment and growth, and escalating annual deficits and debt will need a major expansion of US trade exports to offset the rate hikes, deficits, and inevitable slowing US economy by late 2019. Trump needs desperately to get an agreement with China, to avert a trade war, and boost trade as the US economy slows.

Third, Trump trade policy comes as global trade has been slowing. Global commodity prices are in retreat once again. 2017’s much hyped ‘synchronized’ global recovery is falling apart—in Europe, Japan and key emerging market economies as well. Another recession is coming, possibly as early as late 2019 and certainly no later than 2020. So US trade policy is shifting, attempting to ensure that US business interests retain their share of what will likely be a slower growing (or even declining) world trade pie. Trump and US business are repositioning before the global cycle next turns down.

US domestic and global economic objectives are not the only forces influencing Trump’s trade policy. There are just as important US political objectives behind it as well.

The 2018 tariff announcements represent Trump’s leap into his 2020 re-election campaign, a return to intense nationalist themes, and a move to mobilize his domestic political base once again around nationalist appeals. Electoral politics are also in play here, in other words. The steel and aluminum tariffs were announced within 48 hours of Trump’s speaking to the ‘America First’ coalition of ultra-conservative and aggressive capitalist interest groups that were meeting in Washington the same week of the steel-aluminum tariff announcements. The ‘American Firsters’ promised to raise $100 million for his re-election campaign; Trump rewarded them within hours of their meeting and financial commitment to his campaign with his latest bombast on trade. Escalating threats and implementing tariffs on China in 2018 also cannot be separated from Trump efforts to influence the outcomes of the 2018 November midterm elections. Trade policy is about Trump re-election strategy as much as anything else—including trade deficits, market access, and tech transfer.

Less obvious perhaps is Trump’s leveraging of trade policy and nationalist themes as a way to agitate and mobilize his base, in preparation to counter the Mueller investigation once it’s concluded. As a possible Mueller indictment of Trump approaches, Trump has been clearly preparing his base. He is also cleaning house within his administration, surrounding himself with like-minded aggressive conservatives, former Neocons, and various sycophants—in anticipation of the ‘street fight’ he’s preparing for with the traditional liberal elite in the US once he (or his Justice Dept. Secretary) creates a political firestorm by firing Mueller.

What’s Next for US-China Trade?

What Trump is doing is what US capitalists periodically have done throughout the post-1945 period: i.e. change rules of the game in order to ensure US corporate interests are once again firmly in the drivers’ seat of the global economy for at least another decade. Nixon did it in 1971-73 targeting European challengers. Reagan did it in 1985 targeting Japan. Now Trump is replaying a similar scenario, targeting China. But China may prove a more difficult adversary for the US in trade negotiations. The US is relatively weaker today than it was in 1971 and 1985; moreover, China is in a far stronger position today relative to the US than were Europe and Japan earlier.

China is not as economically or politically dependent on the US in 2018 as was Japan in 1985. Nor as fragmented and decentralized as was Europe in 1971. Both Japan and Europe were also politically dependent on the US for their military defense at the time. China today is none of the above. Thus the US lacks important levers in negotiations with China it formerly had with Europe and Japan. Not only is China not economically or politically as dependent, but Trump’s initial $150 billion of US tariffs levied on China represents only 2.4% of all China trade with the world. It will therefore take more than US tariffs, even the $400+ billion of Trump’s total threatened tariffs on China, to get China to capitulate on trade as Japan did in 1985—a capitulation that wrecked its economy and led in part to Japan’s 1991 financial implosion as a consequence.

And there’s the matter of North Korea. If the US expects China’s ‘help’ in getting North Korea to the negotiating table and de-nuclearizing the regime, it certainly won’t get it by provoking a trade war with China.

China has notable cards to play in its economic deck. For one thing, it could significantly slow its purchases of US Treasury bonds. That would require the US central bank to raise rates even further to entice other sources to buy the bonds China would have. That will pressure US interest rates to rise even further, and slow the US economy even more so than otherwise. China could also reverse its policy of keeping the value of its currency, the Yuan, high. A downward drift of the Yuan would raise the value of the dollar and thus make US exports less competitive. It could impose more rules on US corporations in China, give import licenses to European or other competitors, hold up mergers and acquisitions worldwide involving US corporations.

Another response by China might be to raise the requirements of technology transfer for US corporations located in China. There’s a long term strategic race between China and the US over who’ll come to dominate the new technologies—especially Artificial Intelligence, 5G wireless, and cyber security tech. China files about the same number of patents as the US every year, with Germany third and the rest of the world well behind. Who files the most AI, 5G and other patents may prove the winner in future global economic power. AI, 5G, cyber security are the technology that will ensure military dominance for years to come. The US sees China as its biggest threat in this sphere. The US wants to prevent China from capturing these critically strategic technologies. Trump China trade policy is thus inseparable from a US policy of launching a new military Cold War with China.

The outcome of the Trump-Xi Buenos Aires meeting in late November 2018 was an agreement by Trump to suspend raising tariffs on the second $100 billion, from current 10% to 25%, and in addition to impose an additional 25% on the remaining $267 billion of China goods—all by January 1, 2019. Instead it was agreed to continue negotiating again for another 90 days, until March 2. In return, China agreed in Buenos Aires to what it had already ‘put on the table’ during 2018: to open its markets to 51% foreign ownership and buy more US farm products.

Mid-level US-China trade delegations met in Beijing and began negotiations once again. By mid-January China clarified and added further concessions: It publicly declared it would purchase a $1 trillion more in US products over the course of the next six years. That’s apparently in addition to the already several hundred billions of dollars annually it purchases in US goods and services. It began buying US soybeans again, conceded to buy for the first time US GMO farm products, and to increase its purchase of US energy. It announced lower tariffs on US car imports, began awarding companies 51% ownership officially and scheduled to pass a new foreign investment law by January 29. It also has reportedly amended its laws to ban enforced tech transfer in China.
Despite China’s major concessions to date, the Lighthizer-Hawks-Military Industrial Complex faction has continued to push its hard line. With friends in Congress, the US has attacked the China corporation, Huawei, in an escalation greater than the prior attack on China’s ZTE corporation. It has even gotten US allies in Europe and Canada to initiate bans on Huawei as well. The US ally, Canada, arrested Huawei’s co-chairperson, while in Canada and is holding her at a common criminal. These has provoked counter-arrests of Canadians in China in return. The Huawei events likely represent attempts by US trade hardliners to scuttle again any potential agreement between the US and China by March 2. The faction fighting within the US trade factions also continues. US Treasury Secretary, Mnuchin, on January 17, 2019 publicly floated the proposal to lift all US tariffs on China as a concession in the negotiations. This has enraged the Lighthizer-Military faction in the US. The outcome is still uncertain. Lighthizer-Navarro still technically lead the US negotiations and will be the lead negotiators with China’s Vice-Premier for trade, Liu He, who is scheduled to come to Washington on January 30 to begin high level discussions. Whether Mnuchin and US big corporations and bankers can prevail with Trump and get a deal, or whether the Lighthizer faction can convince Trump the tech issue concessions by China are not sufficient for a deal, remains to be determined.

Which faction can succeed with influencing Trump will determine the outcome. The role of Jared Kushner, Trump’s son-in-law and interface between the two factions, may play a decisive role as well. It is highly unlikely a deal will be struck January 30 or soon after. The key will be how far China is willing to go with tech concessions. And whether the wording will satisfy the Lighthizer anti-China hawks who want a Cold War with China. Thus US military policy may be the deciding factor in any US-China trade deal. Negotiations will almost certainly continue up to the March 2, 2019 deadline. They may even be extended. Much will depend on the condition of the US and China economies in the coming months (and the US stock markets which Trump absurdly sees as the key indicator of US economic health).

This writer has predicted, and continues to predict, that a trade deal will be reached between the two, given that the US (and China) and global economies will continue over the long run to slow, and a global recession is on the horizon by 2020 and perhaps earlier by late 2019. The anti-China factor, Lighthizer &Co., do not want a trade deal. They want trade as an issue that pushes US and China toward a new Cold War. Whether US bankers and big business can demand the US and Trump accept China’s significant economic concessions will be determinative of the outcome as well. But such an outcome is in no way assured, given Trump’s instability and the fact he has surrounded himself with neocon advisors and sycophant, lightweight cabinet replacements.

Dr. Jack Rasmus
November 19, 2019
Dr. Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, also by Clarity Press, 2019. He blogs at jackrasmus.com and hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His twitter handle is @drjackrasmus.

posted January 9, 2019
Trump’s Deja Vu China Trade War (Part 1)

Trade War! Trade War! When Trump pre-announced on March 2 his plan to impose tariffs on steel and aluminum imports, the mainstream press immediately began hyping the line that trade war was looming on the horizon. Panicking, investors ran like lemmings over the stock market cliff after the steel tariff announcement; US allies huffed and puffed, promising tit-for-tat tariff responses on US agricultural goods or commercial aircraft; Trump’s traditional elite advisors, like Gary Cohn, former CEO of Goldman Sachs investment bank and head of Trump’s economic council, resigned later that week—no doubt in part due to frustration and disagreement over Trump’s unilaterally announced tariff.

The ‘Stalking Horse’: Steel-Aluminum Tariffs

At week’s end, on March 8, 2018, Trump proposed to implement steel and aluminum tariffs universally, across the board, affecting all importers to the US.: 25% tariffs on steel imports and 10% on Aluminum. The big 5 US steel importers are Canada, Mexico, South Korea, Brazil, and Germany—collectively responsible for $15 billion a year in steel imports. Canada, Russia and the United Arab Emirates are the major aluminum importers. (Worth noting, for 2017 steel imports China is well down the pack, tenth or eleventh on the list, contributing only 2.2% of US steel, importing in the millions of dollars annually—not billion—and mostly semi-finished steel goods used by US manufacturers for fabricating final goods produced in the US.) When announced on March 8, Trump argued there would be no countries exempted from the 25% tariffs on steel and 10% on aluminum.. That quickly changed.

By mid-March, Canada and Mexico were temporarily exempted from the tariffs, even though they were among the top four largest steel importers to the US, with Canada largest and Mexico fourth largest. Thereafter, Brazil (second largest steel importer), Germany, and others steel importers were exempted. And Canada, by far the largest aluminum importer to the US, accounting for 43% of US aluminum imports, was exempted as well.

South Korea, the third largest steel importer last year, was exempted from steel tariffs permanently, as it quickly renegotiated its 2012 free trade deal with the US. Moreover, no other significant tariffs were imposed on South Korea as part of the bilateral treaty revisions. What the US got in the quickly renegotiated US-South Korea free trade deal, was more access for US auto makers into Korea’s auto markets. And quotas on Korean truck imports into the US. Korean auto companies, Kia and Hyundai, had already made significant inroads to the US auto market. US auto makers have become dependent on US truck sales to stay afloat; they didn’t want Korean to challenge them in the truck market as well. Except for these auto agreements, there were no major tariffs or other obstructions to South Korea imports to the US. Not surprising, the South Koreans were ecstatic they got off so easily in the negotiations. Clearly, the US-South Korea deal had nothing to do with Steel or Aluminum. If anything, it was a token adjustment of US-Korea auto trade and little more.

So if the Korean deal was a ‘big nothing’ trade renegotiation, and if virtually all the US major steel and aluminum importers have been exempted worldwide, what’s Trump’s new trade policy aggression all about? US steel and aluminum imports combined make up only $47 billion—a fraction of total US imports of $2.36 trillion in 2017.
Was the steel-aluminum tariffs announcement just another example of Trump bombast, launched via tweets from the second story of the White House at 3am, to be followed by a quick retreat? Was the South Korean agreement a template and a big ‘softball’ for later negotiations with US trade allies—Mexico, Canada, Europe? Was it Trump shooting off his mouth and then retreating following pressure from his advisors and US business interests? Was the tariff announcement a ‘stalking horse’ for something bigger? Perhaps the tariffs were a cover for domestic political objectives—aimed either at agitating and mobilizing Trump’s political base in ‘red state’ America in preparation for midterm US elections in November 2018 or even a Trump decision to fire special investigator counsel Mueller in coming weeks? Playing the ‘economic nationalist’ card and mobilizing his base, by initiating new tariffs and talking of a ‘trade war’, would serve both Trump domestic political objectives.

For polls show Trump’s steel-aluminum tariffs announcement played well in the Midwest, the great plains states and the South; and especially in those steel and mining towns of Michigan, Ohio, West Virginia, Pennsylvania, Minnesota—i.e. those key swing states that gave him the narrow margin of victory in the 2016 elections! Even if he quickly shelved the tariffs, the media hype sent the message Trump wanted to his base: he was doing something about the decades-long loss of steel and mining jobs in those regions since the 1980s. In short, how much of the steel-aluminum tariffs were for domestic political consumption and how much not?

That question applies as well to the subsequent trade actions by the Trump administration. By the end of March, given all the exemptions, it became clear the real target of Trump’s trade offensive was China and not the rest of US allies.

A closer look at Trump administration statements since March 2018 reveals that Trump’s anti-China trade offensive has had less to do with China general imports to the US and more about US next generation technology transfer by US corporations to China. Next gen technologies like Artificial Intelligence (AI), G5 wireless networks, and similar cyber-security and militarily strategic tech now in development.

As Trump’s new chair of his Economic Council, Larry Kudlow, put it in March, “There’s no trade war. All we’re trying to do is protect US technology”. Kudlow added a month later, in early April, “Sometimes you have to use tariffs to bring countries to their senses”. Tariffs are the tactic, not the strategic policy objective. And if trade deficits are not the primiary issue, and tariffs are only the tactic, then what is the strategic objective? It’s technology transfer and domestic politics. Perhaps the US defense sector, in particular the NSA and Trump’s military generals-heavy administration, are playing a greater role in the US-China trade war in the background than is thus far noted by the media. And not enough attention is being given to the role of domestic political events as well.

Put another way, at the level of appearance, the US trade deficit and China imports to the US may be the target for purposes of public opinion. But behind the appearance, it’s more likely that US domestic politics plus US long term military planning are the two more important drivers behind Trump’s emerging trade war. All of Trump’s tariffs and subsequent trade measures are being invoked based on an obscure ‘national security’ clause in US trade legislation. And China is increasingly the target, as tariffs and other measures are suspended and reduced for US trading partners—with the exception of China—as the US pursues a soft trade ‘offensive’ against all its other trading partners. As Trump himself tweeted when the initial steel and aluminum tariffs were announced on March 8, “I have a feeling we’re going to make a deal on Nafta. If we do, there won’t be any tariffs on Canada and there won’t be any on Mexico”.

Even with China, it’s not so much China imports that the US is most concerned about. It’s China’s challenge to US technology development and leadership and the implications of that challenge for US security, defense armament, and US continued dominance in war making capabilities that’s behind even the US-China trade dispute. That technology objective, plus the convenient use of trade in general, and China trade in particular for Trump’s domestic political purposes, are together the real objectives of US trade policy.

The US Plan to Target China

The US focus on China and technology transfer issues as the primary objective was revealed months ago. The US anti-China trade offensive was initiated in 2017 and has been in development for at least a year. The opening of a trade war with China did not begin with some impulsive Trump tweets in March 2018. It has been in the works since at least last August 2017.

In August 2017 Trump formally gave the US Office of Trade (OUST) the task of identifying how China was transferring US technology, “undermining US companies’ control over their technology in China”, as well as seeking to do so by acquiring US companies in the US. On August 18, 2017, the OUST laid out in writing four charges in a formal investigation it was undertaking, accusing China of actions designed to “obtain cutting edge in IP (intellectual property) and generate technology transfer”. All four charges were intensely technology transfer related.

That August 2017 scope of investigation document was then reproduced verbatim on March 22, 2018, with the expected findings and recommendations, in the 58 page 2nd OUST report of March 22, 2018 that publicly launched Trump’s trade offensive against China. China was found ‘guilty’ of aggressively seeking technology transfer at the expense of US corporations, both in China and the US. All four charges of August 2017 were found to have been violated by China.

Based on the OUST report of March 22, 2018, and the report’s recommendations (and its list of 1300 target products),Trump announced plans to impose $50 billion in tariffs on 1300 China general imports, ranging from chemicals to jet parts, industrial equipment, machinery, communication satellites, aircraft parts, medical equipment, trucks, and even helicopters, nuclear equipment, rifles, guns and artillery.. Trump may have appeared in March 2018 to have shifted gears in his trade policy—from a general steel-aluminum tariffs focus to a focus targeting China trade— but China has been the planned primary target.

In other words, China and the specific 1300 tariffs were the target at least from August 2017, and likely in internal planning when Trump first took office in January 2017. Trump just set it all in motion on March 23, 2018. The China trade war was set in motion a year earlier. The prime objective for the US has always been stopping China technology transfer. The OUST list of 1300 tariffs was, and remains, a ‘bargaining chip’ to exchange for what Trump and the US really wants from China: reducing US technology transfer.

A somewhat curious event in the preparation for targeting China occurred only days before the March 23, 2018 OUST report release, when Trump himself tweeted he’d like to see 1$ billion in tariffs on China. How then did the official policy become $50 billion after March 23, 2018? Was Trump initially out of the loop of US elite China trade policy in development? Did the China-US trade war really originate with Trump? Was it being planned by others, with Trump brought on board after seeing the domestic political possibilities for himself? One can only speculate. Nevertheless, on March 23, 2018 the targeting of China-US trade became official Trump policy.

The Phony US Trade War

The Trump administration has been pursuing a ‘dual track’ trade offensive. The soft track targets US allies in Europe, Americas, and select Asian economies; the China hard track is rooted in US military-defense planning. Both serve Trump’s domestic political objectives. The China trade war is real; the trade war with US allies is phony, by which is meant it is only seeks token adjustments to trade relations which Trump intends to hype for domestic political consumption.

That China and technology are the primary objective in Trump’s true trade war does not mean that Trump will not continue to try to renegotiate bilaterally with other US allies to reduce the US’s growing trade deficits worldwide. China-USA total trade in 2017 amounted to $656 billion. But USA-Canada and USA-Mexico total trade was $568 billion and $588 billion, respectively; or $1.16 trillion. That means total NAFTA trade is nearly double total trade of US with China.

Nonetheless, NAFTA trade negotiations, as well as trade renegotiations with South Korea, Europe and Japan have, and will, result in minor adjustments and little reduction in the US overall trade deficit. The South Korea-US deal of 2018 is the template. As in the recent South Korean deal, Trump achieved only token concessions from NAFTA partners—mostly minor changes in auto quotas and agriculture. He then exaggerated and hyped the results to his domestic political base, describing it as some significant big achievement. Like the South Korea deal, however, the NAFTA 2.0 wasn’t.

This ‘dual’ track strategy seems to be working for Trump. Since announcements of tariffs and trade measures beginning in early March, his public opinion approval ratings have risen, according to a consensus of pollsters. And polls taken in his ‘red state’ heartland base show support for his tariff actions, and even if it has meant an initial loss of jobs and business revenues.

Trump’s DejaVu Trade War in Historical Perspective

Periodically, US corporate interests and policy makers launch a major restructuring of US trade relations. This is usually when they deem it necessary to rearrange the rules of the game with trade when US interests are being challenged or when the global economy is weakening and they consider it necessary to protect the US share of a slowing global trade pie.

In 1971 such a restructuring was undertaken by then President Richard Nixon. The US economy had been experiencing a rising rate of inflation in the late 1960s as a result of US excess spending on Vietnam war, the cold war arms race with the USSR, the race to the moon, and expanding social programs associated with the so-called Great Society. Nixon introduced what he called his ‘New Economic Program’ in August 1971.

At the center of Nixon’s NEP was the US abandonment of the 1944 global ‘Bretton Woods’ international monetary system that the US itself had set up at war’s end to ensure its dominance of the new world order in currency, trade flows, and US foreign direct investment worldwide. Under that system the US dollar was pegged to gold at $35 an ounce. Other countries could sell their accumulated dollars in exchange for US gold. Because US inflation was accelerating in the 1960s it was in effect making US goods less competitive. European economies did not want to hold devaluating dollars and were exchanging them for gold. Nixon decided he did not want to sell US gold any longer, even though required under the Bretton Woods systems to do so. So he simply abandoned the 1944 system the US had established. He unilaterally and arbitrarily changed the rules of the game to suit US interests. Immediately the dollar began to devalue, making US businesses more competitive with their European rivals. European currencies rose higher, making them less competitive. To supplement the move, Nixon also imposed tariffs on European imports to the US, while introducing subsidies and tax cuts for US businesses exporting US products. By 1973 the consequences were institutionalized in the so-called Smithsonian Agreement. The US would no longer sell gold. Currency exchange rates would henceforth be stabilized (poorly) by the US and other central banks in Europe buying and selling of currencies to keep them within a range of the dollar. But the 15%-20% dollar devaluation from 1971-73 would remain in place.

The problem of declining US trade competitiveness was the result of US policies. But Nixon’s solution was not to correct US policy errors. Rather it was to make the Europeans correct the problem at their expense by reducing their relative share of global trade. The end of Bretton Woods also meant that central banks would (theoretically) regulate currency exchange rates between countries. In effect this meant that the US central bank, the Federal Reserve, would function as the dominant central bank and the others would have to respond to its initiatives on global interest rate determination. In short, the global trading system was restructured by the US.

A similar development occurred in 1985 under Ronald Reagan. The US experienced double digit inflation in the early 1980s. It then raised domestic interest rates to 18% and began in addition to run $300 billion a year federal budget deficits. This resulted in US businesses raising prices in order to cover the extraordinary rise in rates and costs of borrowing. US products lost their competitiveness to Japanese businesses, which began to import goods to the US at a growing rate. US policies did not bring down rates or inflation significantly by 1985. So the US instead forced Japan to the negotiating table to revise the terms of trade. Japan was forced to inflate its own economy to generate more inflation, to raise the price of their goods and erase their export competitiveness. Once again, a problem caused in the US by US policy was ‘resolved’ by requiring the burden of the resolution to be carried by the trade partner, Japan. The agreement between the US and Japan on trade in 1985 was called the ‘Plaza Accords’. A similar, though less intense, renegotiation with Europe, reached in Paris (Louvre agreements) followed. Once again, when it suited US interests, when challenged by a significant capitalist competitor, the US simply changed the rules of the game.

It is worth also noting that both these trade offensives—Nixon’s and Reagan’s— were launched in the wake of significant expansionary tax cutting and government war spending fiscal policies that produced growing US budget deficits for the US. The subsequent trade offensives were thus designed to expand US exports to supplement domestic US fiscal over-stimulus policies at the time. Nixon’s initiative followed the recession of 1970-71 and his obsession to over-stimulate the US economy by every means to ensure his re-election in 1972. It did, but it simultaneously wrecked the US economy for the remainder of the decade, resulting in domestic stagflation, collapse of real investment, downward pressure on corporate profits and a call from business interests for a fundamental reorientation of US economic policy that would eventually be known as ‘neoliberalism’ and would last until the crisis of 2008-09.

Reagan’s trade offensive followed the recession of 1981-82 and the failure of US policy to address the US’s ballooning budget deficits after 1981 (from tax cuts and spending hikes) and the growing trade deficits as the US dollar rose steadily in the first half of the decade.
The Nixon policy resulted in financial instability in 1973 and failure of several large banks, followed by the worse recession to date in 1973-75 and stagnation for the rest of the decade. Reagan’s policy resulted in even more financial instability in the crash of stock and junk bond markets and housing markets in the latter half of the 1980s, followed by the recession of 1990-91. Europe and Japan fared no better after 1985, with general banking crises in northern Europe and Japan in the early 1990s that were at least in part due to the Plaza and Louvre trade agreements.

A similar pattern is once again emerging under Trump’s trade offensive targeting China. Trump’s current trade offensive follows massive multi-trillion dollar US business-investor tax cutting, which amounted, at minimum, to $4 trillion to businesses, investors, and wealthiest 1% households as result of legislation signed January 2018. Trump’s $4 trillion in tax cuts was quickly followed in March 2018 by a $300 billion two year, 2018-2020, increase in net additional US government spending, mostly defense oriented. By most estimates, trillion dollar a year annual US budget deficits are now on the horizon for another decade.

To pay for the deficits the US central bank, the Federal Reserve, is now having to raise interest rates rapidly and sell record more US Treasury bonds and securities to raise funds to cover the US trillion dollar deficits ahead. However, that central bank policy has had a dampening effect on US economic growth and has led to a significant financial market contraction by year end 2018 that could destabilize growth even further in 2019. The Trump administration is hoping that the fiscal stimulus, supplemented with the benefits of more exports as result of its trade renegotiations, will be able to offset the economic slowdown generated by rising US central bank interest rates.

But this rearranging of fiscal, monetary and trade policies will almost certainly not prove successful—just as similar policy trade offs under Reagan and Nixon ultimately failed as well. The Trump massive business-investor tax cuts have thus far barely ‘trickled’ into the real economy. Most of the tax cuts will be diverted by companies to buying back their stock, paying out dividends to shareholders, used for acquiring competitors (Mergers & Acquisitions), or for paying down corporate debt—just as were US corporate profits diverted and used, from 2009 through 2016 in the US. Trump’s $100 billion a year defense spending will also have less economic stimulus effect—compared to the 1980s and 1970s—since defense spending has become high cost/low job creation in content.

Finally, the trade offensive against China will prove far more difficult for Trump to pull off than Reagan’s trade policies targeting Japan or Nixon’s targeting Europe. The same relationship of forces and relative power simply does not exist for the US today, as it once did in the 1970s and 1980s.

The basis for Trump’s China trade offensive is the 1974 US Trade act, section 301. Invoking it worked against Japan. It forced Japan to reduce its auto exports and build auto plants in the US. It also encouraged Japan to shift from real goods production to financial asset speculation, which led to its crash in 1990-91. But it will prove less effective against China. Some of China’s likely counter-measures and responses have already begun to appear. Among the possibilities are politically targeted tariffs on US exports, devaluing its currency, slowing its purchases of US Treasury bonds, delaying the opening of its financial markets to US banks and investors, launching a nationwide ‘boycott America’ goods program, holding up its approval on global agreements on corporate mergers, and so on.

However, the clearly slowing global economy that became increasingly apparent in the closing months of 2018—including growth both in China and the US—have imposed pressure on both economies to come to a deal in 2019. China’s financial markets have begun contracting as well; its main Shanghai market down nearly 30%. Similarly, the major US markets experienced their worst decline in less than two months, November-December, since 1931. Both real economies, and markets, will slow and decline in 2019, although not without periods of ‘recovery’. Concurrently, Europe’s economy is slowing rapidly, including key economies like Germany, France, and Italy—with a UK Brexit shock also on the horizon. Japan and South Korea, and various emerging market economies also have begun their slide. So economic conditions in 2019 will likely force a China-US trade deal by mid-year 2019.

For what this tentative and likely deal will look like in terms and conditions, Part II of this article follows, addressing the real US-China ‘trade war’—over next generation technology like Artificial Intelligence, 5G wireless, and Cybersecurity. These are not only the next sources of new industries that will drive economic growth for the coming decades, but also the crux of which country dominates militarily in the period ahead. The US and China have been drifting toward a real trade war, are on the brink, but not there yet. That may change in 2019. Should negotiations break down, it will be over technology and not tariffs, trade deficit, or the US demand for more US banker and multinational corporation ‘access’ (read: 51% or more ownership) to China markets. Odds are in favor, however, of a settlement and agreement. Economic conditions are driving both to that conclusion. How the parties structure and publicize any agreement on technology, if they do, will be the key. Most likely, both will agree to generalities and future actions, declare themselves the winner, and move on–with US corporations, bankers, and agribusiness getting their sales and access to China markets. And China buying time to continue its technology policy and development.

Dr. Jack Rasmus
January 9, 2019

posted December 3, 2018
A US-China Trade War ‘Armistice’?–Trump Blinks and Retreats at the G20 Meeting with Xi

The first reports emerging from the G20 meeting in Buenos Aires, December 2, 2018, were that Trump and Xi have agreed to put their trade war on hold, a kind of ‘trade war armistice’, at least for the next 90 days.

Trump entered into his meeting this past weekend with China’s president, Xi, having imposed $50 billion in tariffs at 25% on China goods imports last July, to which another $200 billion was added thereafter. Tariffs on the $200 billion were set at 10%, but were scheduled to rise to 25% on January 1, 2019. Before the US November elections, Trump further threatened to add a further $267 billion if China continued to refuse to meet with the US. But China didn’t take the bait. Trump’s strategy was transparent. His plan was to lure China into negotiations before the US elections so he could act tough for his political base before the US elections.

China refused to be sucked in and refused to come to Washington to be played by Trump. Instead, it agreed to meet at the G20 gathering this weekend, at a more neutral setting and after the US elections.

In the lead up to this weekend’s G20 US-China meeting, Trump sent conflicting signals to the Chinese. On the one hand, Trump praised China’s president Xi personally, while announcing the existing 10% tariff hikes on the $200 billion would rise to 25% next January 2019 and that another $267 billion would follow if China did not meet with him. Meanwhile, China’s counter tariffs on US imports were levied at 25% for its first $50 billion tariffs and set at only 10% on the additional $60 billion on US goods.

However, to date the US-China trade dispute is more like a trade skirmish than a trade war. The initial first $50 billion in tariffs levied by both US and China this past July have been selective. Most have not yet had a significant impact on their respective economies thus far after only four months in 2018. But in 2019 that $50 billion would start to have an impact. Moreover, the $200 billion additional US tariffs, levied at only 10%, have been largely offset by a roughly equivalent 10% decline in the value of China’s currency, the Yuan.

A rise in $200 billion US tariffs, from 10% to 25%, in 2019 would have an impact, however, in 2019. The likely response by China would be to raise its second $60 billion tariffs on US imports by an equal amount, from current 10% to 25%. That could very well mark the start of a true US-China trade war.

China could also add more non-tariff barriers, or slow its purchase of US Treasury bonds, or block approval of mergers of US companies globally with operations in China, or encourage boycotts of US goods in China, or allow its currency to devalue well below the current 10% decline. These are measures that are typical of true trade wars, but which have not been employed as yet by China or the US. Sparring with tariffs are just initial moves, especially when tariff rates are relatively low, selectively applied, and not fully implemented yet.

While the US and China were clearly on the brink of a bona fide trade war, but until the G20 meeting they had not quite taken that last step. Nor is it likely now that they will. The Trump-Xi meeting at the G20 represents a kind of a trade policy ‘rubicon’ which neither has crossed as yet. If the initial reports coming out of the G20 meeting are accurate, then Trump and Xi have so far continued to decide not to cross the river of no return with regard to a war over trade.

The question is why now the apparent ‘armistice’ in the trade war? Why, after months of threats and warnings aimed at China, has Trump decided to back down? For that’s exactly what the agreements with China at the G20 represent: Trump has backed off, making concessions, while the Chinese have only reiterated proposals they publicly offered over the course of the last six months.

The reasons for the Trump retreat lay in the significant changes in economic conditions since last spring. At the time Trump launched his ‘trade war’ last March 2018 the US economy was accelerating due to multi-trillion dollar tax cuts for investors and corporations; the global economy still appeared to be growing nicely; US profits were rising 20%-25% and stock markets booming; and the Fed, the central bank, was still relatively early in its scheduled interest rate hikes. But that’s all changed as of year end 2018.

With growing indications that the global economy is slowing—with another recession in Japan and German and Europe economies contracting and weakening facing the UK Brexit and Italian bank problems—the US and global stock markets in recent months had begun to retreat noticeably. Early signs since October of US economic slowdown in 2019 have begun to emerge, especially in construction and autos. Japan is in recession. Germany’s economy is contracting, with Europe not far behind facing imminent crises as well in the UK’s Brexit next March and growing debt refinancing problems in Italian, Greek and other Euro banks. And more emerging market economies continue to slip into recession.

Faced with these looming economic realities, as well as growing political pressure at home, Trump eagerly sought the meeting with Xi at the G20 gathering despite continued and intensifying in-fighting between the factions on his US trade negotiating team.

Those factions and divisions among the US elite concerning trade center around three issues: first, access by US bankers and multinational corporations to China markets, especially getting China to allow a 51% or more ownership of US corporate operations in China; second, China increasing its purchases of US exports, especially agricultural and energy products; and third, most important, China agreeing to slow its development of nextgen technologies like cybersecurity, artificial intelligence, and 5G wireless—which has assumed the codename in the US of ‘intellectual property’.

Anti-China hardliners—Robert LIghthizer, US office of trade director, Peter Navarro, special advisor on trade, and John Bolton, long time anti-China hawk and national security adviser to Trump—all of whom are closely allied with the Pentagon, military industrial US corporations, and intelligence agencies—have all preferred a trade war with China to achieve US technology objectives. They have been engaged in an internal US faction fight since last April with the two other US factions—i.e. the bankers and multinational corporations whose priority objectives have been to get open markets and majority ownership rights for US businesses, especially banks, in China; and US heartland agricultural and manufacturing exporters, who represent Trump’s red state political base, who want a return and an expansion of China purchases of US exports.

Since this past summer, the Lighthizer-Navarro-Bolton faction have clearly had Trump’s ear and have prevailed ensuring technology transfer is at the top of the list of US trade negotiations priorities. However, with the recent weakening of the US stock markets, indications of economic slowdown coming, and growing US business concerns of a bona fide US-China trade war deepening in 2019, Trump has shifted his position toward a softer line in trade negotiations with China, apparently retreating closer to positions of the other two factions in US-China trade negotiations. That softer line is evident in the G20 meeting tentative agreements announced by Trump and Xi.

Put another way, facing the shift to a bona fide trade war in 2019—in the midst of a slowing global and US economy and a likely steeper correction in US stocks and financial markets—Trump met Xi at the G20 and ‘blinked’, as they say.

That Trump clearly retreated is undeniable in the content of the G20 announcement following his meeting with Xi. Of course a Trump retreat is not the likely ‘spin’ it will be given in the US corporate media this coming week. The agreements will be characterized as a mutual ‘pause’ of some sort in what appeared as an inevitable trade war commencing January 2019.

But a consideration of the substance of the verbal agreement between Trump and Xi released this past weekend shows that Trump clearly backed off while Xi simply reiterated what the China team has already offered Trump and had already put on the table the last several months.

Here’s what was agreed in broad principle, at least according to early reports:

• Trump agreed not to allow the scheduled January 1, 2019 increase in US tariffs on $200 billion of imports from China to rise, from the current 10% tariff rate to the 25%.

• Trump agreed not to move forward with his threat of another $267 billion tariffs on.
These represent two clear concessions by Trump and amount to reversals of prior US positions. What about China’s response? Unlike Trump, there was no clear retreat from previous positions, i.e. concessions.

• China agreed to increase US purchases of agriculture goods (actually a restoration of prior levels) “immediately”, in order to ease the US trade deficit with China and boost US farmers and agribusiness. But China had already publicly offered to buy a further $100 billion in previous months. The joint communique coming out of the meeting only indicates to increase US purchases ‘in accordance with the needs of its domestic market’. The $100 billion is thus more a restoration of previous levels of China purchases of US agricultural and manufacturing exports.

• China agreed to open its markets to US banks and businesses further. But it had already also announced earlier this year it would allow 51% foreign ownership, and suggested it could even go to 100% in coming years. So this too was an ‘offer’ it had already made to the US this past summer.

What about the key tech transfer issue that has split the US elite and the US trade team? That primary demand of the US hard liners, which seemed paramount in preceding months, has been tabled for future discussion. Both US and China have only agreed to discussions for the next 90 days “with respect to forced technology transfers” and related issues. (Reuters report by Roberta Rampton and Michael Martina, 12/2/18, 1:23pm ET). So no agreement on technology. Just a mutual face-saver to meet again and agree “to further exchanges at appropriate times”.

Meanwhile, Trump retreats from raising tariff rates from 10% to 25% and agrees to drop threatening another $267 billion, while Xi simply restates prior offers about more purchases agricultural goods and more US banker access to China markets.

If China’s objective of the Buenos Aires meeting was to get Trump to halt imposing higher and more tariffs—while conceding nothing except further talks on the technology issue—in that objective China has clearly succeeded. Trump will no doubt spin the additional agricultural purchases and more market access as China ‘concessions’. But these were already conceded before the parties met in Buenos Aires.

In contrast, if Trump’s primary objective, driven by his anti-China hard line US faction, was to get China to slow nextgen technology development and tech transfer, and concede on intellectual property issues, then Trump has clearly retreated at the G20.

Nor is it likely, at the end of the 90 day hiatus early next March 2019, that Trump and the hard-liners faction bargaining position will be any stronger. The 90 day ‘armistice’ in the emerging US-China trade war might even result in Trump back-peddling further should economic and political conditions worsen appreciably in the interim.

If the global and US economies continue to weaken and slow, which is highly likely, pressure by the other two US trade factions—the one demanding an agreement with China based on more access to China markets and the other demanding settlement so long as China agrees to more purchase of US goods—will only be stronger.

Political developments related to Trump’s business relations in the US and with Russian Oligarchs eventually forthcoming by the Mueller investigation will also likely weaken Trump’s position with regard to resuming a hard line on further tariffs on China. Japan’s recession may also have deepened further by then. Germany’s current economic contraction may have spread to the rest of Europe, which is also facing a confluence of additional problems involving the UK Brexit and the Italian bank problems next spring 2019.

Since 2008 US economic GDP growth has typically slowed dramatically in the winter quarter, and the first quarter 2019 US GDP is likely to again slow significantly from 2018 GDP growth rates. That will be especially the case if the US central bank, the Fed, continues its interest rate hikes into 2019, which appears likely to do at least through next spring. Trump may also have to focus more on saving his recent US-Mexico-Canada trade deal in Congress. All the above will almost certainly provoke a further decline in US stock and other financial markets as investors grow even more uneasy with Trump policies and increase pressure on Trump to postpone further tariffs on China trade.

More US banker-multinational corporate access to China and more China purchase of US farm goods could supersede US hardline anti-China faction demands for China concessions on tech transfer and nextgen military technology development.

More market access and more China purchases would be easy to ‘spin’ as huge gains by the Trump administration. They’ll just keep talking about technology, while cutting off China companies’ access to mergers, acquisitions and joint ventures in the US and in other US allies’ economies.

Should that occur, the US-China so-called ‘trade war’ will prove as phony as have prior Trump threats to tear up NAFTA, or to fundamentally remake the South Korean-US free trade treaty, or to impose 25% tariffs on German autos and European imports, or Trump’s steel tariffs which are riddled with more than 3000 tariff exemptions. While Trump talked tough, all have turned out to be ‘softball’ trade deals granted by the US.

posted November 18, 2018
Global Oil Deflation 2018 & Beyond (with Addendum on 2014-15)

One of the key characteristics of the 2008-09 crash and its aftermath (i.e. chronic slow recovery in US and double and triple dip recessions in Europe and Japan) was a significant deflation in prices of global oil. After attaining well over $100 a barrel in 2007-08, crude oil prices plummeted, hitting a low of only $27 a barrel in January 2016. They slowly but steadily rose again in 2016-17 and peaked at about $80 a barrel this past summer 2018. Then the retreat started once again, falling to a low of $55 in mid-October. They remain around $56 today, likely to fall further in 2019 now that Japan and Europe appear entering yet another recession and US growth almost certainly slowing significantly in 2019, with the potential for a US recession rising in late 2019.

The question is what is the relationship between global oil price deflation, financial instability and crises, and recession? Is the current rapid retreat of oil prices since August 2018 an indicator of more fundamental forces underway in the global and US economy? What can be learned from the 2008 through 2015 experience?

In my 2016 book, ‘Systemic Fragility in the Global Economy’ (see my website, http://kyklosproductions.com) for reviews of the book, and its chapter on deflation’s role in crises), I explained that oil is not just a commodity but since the 1990s an important financial asset whose price affects other forms of financial assets (stocks, bonds, derivatives, currencies, etc.) and which, in turn, is affected by prices of other financial assets as well. Financial asset price volatility in general (bubbles and deflations) have a greater impact on the real economy than mainstream economists, who generally don’t understand financial markets and cycles, typically think. Their understanding how financial cycles interact with real business cycles is virtually nil in most cases.

What follows in an addendum to this article, in italics, are excerpts from the chapter from the ‘Systemic Fragility’ book that explain the role of global crude oil prices as financial asset prices. It considers oil prices from the crash period of 2008 through 2015 as it dropped to its low point at the end of that year and before oil prices once again began to rise from January 2016 through this past summer 2018.

Oil Price Deflation Revisited 2018

Oil is a commodity whose price is determined by the interaction of supply and demand; but it is also a financial asset the price of which is determined by global finance capitalists’ speculation in oil futures markets and the competition between various forms of financial assets globally. For the new global finance capital elite (also addressed in the book) look at the returns on investment (e.g. profits) from financial asset investing globally—choosing between oil futures, stocks, bonds, derivatives, currencies, real estate on a worldwide basis.
The price of crude oil futures drives the price of crude oil in the short and medium term, as a commodity as speculators bet on oil supply and demand; and the relative price of other types of financial assets in part also determine the demand of oil speculators for oil futures.
What this means is that simply applying supply and demand analysis to determine the direction of crude oil prices globally is not sufficient. Neither supply nor demand has changed since August 2018 by 30% to explain the 30% drop in crude oil to its current mid-$50s range; nor will it explain where oil prices will go in 2019. Nevertheless, that’s what we hear from economists today trying to explain the recent drop or predict the trajectory of global oil price deflation in 2019.

What Mainstream Economists Don’t Understand

Mainstream economists are indoctrinated in the idea that only supply and demand determine prices. It harkens back to the influence of classical economics of the 18th century and Adam Smith. Supply and demand are the appearance of price determination. What matters are the forces behind, beneath and below that cause the changes in supply and demand. Those forces are the real determinants. But mainstream economists typically deal at the surface of appearances, which is why their forecasts of economic directions in the medium and longer term are so poor.

Looking at recent explanations and analyses by mainstream economists, and their echo in the business media, we get the following view:
First, it is clear that there are three major sources of oil supply globally today: US production driven by technology and the shale fracking revolution. Second, Russian production. Third, OPEC, within which Saudi Arabia and its allies, UAE, Kuwait, etc. Each produce about 10-11 million barrels per day, or bpd.

Since this summer, US fracking has resulted in roughly an additional 670,000 barrels a day by October compared to last July 2018. Both Saudi and Russian production has added roughly 700,000 more, each respectively. Offsetting the supply increase, in part, has been a reduction in output by Venezuela and Iran—both driven by US sanctions and, in the case of Venezuela, US longer term efforts to prevent the upgrading and maintenance of Venezuelan production.

The more than 2 million bpd increase in global crude oil supply by the global oil troika of US- Russia-Saudi has, on the surface, appeared as a collapse in global oil prices from $80 to $55, or about 30% in just a few months. Projections are supply increases will drive global oil prices still lower in 2019: US forecasts for 2019 are for an average of 12.06 million bpd; for Russia an average of 11.4 million bpd; and for Saudi an average of 10.6 million bpd. (Sources: EIA and OPEC secretariat).

Demand & Supply as Mere Appearance

So the appearance is that supply will drive global oil prices still lower in 2019. But what about demand? Will the forces behind it drive oil price deflation even further? And what about other financial asset markets’ price deflation? Will declines in stock, bond, derivatives, and currencies prices result in financial capitalist investors increasing their demand for oil futures as they shift investing from the collapse of values in those financial markets to oil? Or will it reduce their investing in oil futures as other financial asset markets prices deflate, as a psychological contagion effect spreads across financial asset markets in general, oil futures included?

While mainstreamers focus on and argue that pure supply considerations will predict the price of oil, my analysis insists that a deeper consideration of forces are necessary. What’s driving, and will continue to drive, oil prices are Politics, other financial markets’ price deflation, and Demand that will be driven by renewed recessions in the major advanced economies (Europe, Japan, then US, and continued GDP slowdown in China).

As global economic growth slows, now clearly underway, more than half of the world’s oil producers will increase oil production. Russia, Venezuela, Iraq, smaller African and Asia producers, are dependent on oil sales to finance much of their government budgets. As real growth slows, and recessions appear or worsen, deficits will rise further requiring more government revenues from oil sales. What these countries can’t generate in revenues from prices they will attempt to generate from more sales volume. Even Saudi Arabia has entered this group, as it seeks to generate more revenue to finance the development of its non-energy based economy plans.

So Russia and much of OPEC for political reasons will increase supply because of slowing economies—i.e. because of Demand originally and Supply only secondarily. As the global economy continues to slow Demand forces trump those of Supply. But the two are clearly mutually determined. It’s just that Demand has now become more determining and will remain so into 2019.

Debt as a Driver of Global Oil Deflation

But what’s ultimately behind the Demand forces at work? In the US it’s technology, the fracking revolution, driving down the cost of oil production and thus its price. It’s also corporate debt, often of the junk quality, that has financed the investment behind the oil production output rise. Drillers are loaded with junk bond debt, often short term, that they must pay for, or soon roll over now at a higher interest rate in 2019 and beyond. They must produce and sell more oil to pay for the new technology driven investment of recent years. And as the price falls they must produce and sell still more to generate the revenue to pay the interest and principal on that debt.
So is it really Supply, or is it more fundamentally the debt and technology that’s driving US shale output, that in turn is adding to downward global price pressures? Is it Supply or is it the way that Supply has been financed by capitalist markets?

Similarly, in the case of Russia and much of OPEC, is it Supply or is it the need of those countries to finance their government growing debt loads (and budgets in general) by generating more sales revenue from more oil output, even as the price of oil falls and thereby threatens that oil revenue stream?

Whether at the corporate or government level, the acceleration of debt in recent years is behind the forces driving excess oil production and Supply that appears the cause of the emerging oil price deflation.

Politics as a Driver of Global Oil Deflation

Domestic and global politics is another related force in some cases. Clearly, Russia is engaged in an increase in its military research and other military-related government expenditures. Its governing elite is convinced the US is preparing to challenge its political independence: NATO penetration of the Baltics and Poland, the US-encouraged coup in the Ukraine, past US ventures in Georgia, etc. has led to Russian acceleration of its military expenditures. To continue its investment as the US attempts to impose further sanctions (designed to cut Russia connections with Europe in particular), and as Russia’s economy slows as it raises its domestic interest rates in order to protect its currency, Russia must produce and sell more oil globally. It thus generates more demand for its oil competitively by lowering its price. Demand for Russian oil increases—but not due to natural economic causes as the world economy slows. It increases because it shifts oil demand from other producers to itself.

Saudi politics are also in part behind its planned production increase. It has stepped up its military expenditures as well, both for its war in Yemen and its plans for a future conflict with Iran. The Saudi government investment in domestic infrastructure also requires it to generate more oil revenue in the short term.

The recent Russian-Saudi(OPEC) agreement to reduce or hold oil production steady has been a phony agreement, as actual and planned oil production numbers clearly reveal.

Not least, there’s the question of global financial asset markets’ in decline with falling asset prices and how that impacts the oil commodity futures financial asset market. Once again, changes in oil supply and demand simply do not fluctuate by 30% in just a couple months. The driver of oil prices since July 2018 must be financial speculation in oil futures.

Here it may be argued that investors are factoring in the slowing global economy, especially in Europe and Japan, in coming months. They may be shifting investment out of oil futures as a speculative price play, and into US currency and even stocks and bonds. Or into financial asset markets in China. Or speculating on returns in select emerging market currencies and stocks that have stabilized in the short term and may rise in value, producing a nice speculative gain in the short run. The new global finance capital elite looks at competitive returns globally, in all financial asset markets. It moves its money around quickly, from one asset play to another, enabled by technology, past removal of controls on global money capital flows, easy borrowing, and ability to move quickly in and out of what is a complex network of highly liquid financial asset markets worldwide. As it sees global demand and politics playing important short term roles in global oil price declines, it shifts investment out of oil futures and into other forms of financial assets elsewhere in the global economy. Less supply of money capital for investing in oil futures reduces the demand for oil futures, which in turn reduces demand for oil and crude oil prices in general.

Conclusion

What this foregoing discussion and analysis suggests is the following:

• Looking at oil supply solely or even primarily is to look at appearances only
• But Supply & Demand analyses of oil prices are also superficial analyses of appearances. They are intermediate causal factors at best.
• What matters are real forces that more fundamentally determine supply and demand
• Politics, technology, and debt financing are more fundamental forces driving supply and demand in the intermediate and longer run.
• Oil is not just a commodity, since the 1990s especially; it has become a financial asset whose price is determined in the short run increasingly by speculative investing shifts by global finance capital elites.
• As financial assets, oil prices are determined in the short run globally by the relative price of other competing financial assets and their prices
• The structure of the global economy in the 21st century is such that a new global finance capital elite has arisen, betting on a wide choice of financial assets available in highly liquid financial asset markets, across which the elite moves investments quickly and easily due to new enabling technologies and past deregulation of cross-country money capital flows

To summarize, as it appears increasingly that politics (domestic budgets and revenue needs, US sanctions, rising military expenditures, trade wars, etc.) and a slowing global economy are causing downward pressure on oil demand and thus oil prices; this price pressure is exacerbated by a corresponding increase in production and supply as a result of rising corporate and government debt and debt-servicing needs. However, in the very short run of weekly and monthly price change, it is global oil speculators betting on further oil price deflation and shifting asset investment returns elsewhere that is the primary driver of global oil deflation.

Global oil prices are in determined by other financial asset market price deflation underway in the short term, and in turn determine in part price deflation in other financial asset markets. Global oil prices cannot be understood apart from understanding what’s happening with other financial asset markets and prices.

Understanding and predicting oil prices is thus not simply an exercise in superficial supply and demand analysis, and even less so an exercise primarily in forecasting announcements of production output plans by the big three troika of US-Russia-Saudi.

ADDENDUM: Oil Deflation 2014-15
(excerpt from book,‘Systemic Fragility in the Global Economy’, Clarity Press, 2016)

As the global economy steadily drifts toward deflation today, a debate has arisen between whether there is ‘good deflation’ and ‘bad deflation’.

An application today of the ‘good deflation’ vs. ‘bad deflation’ debate is the spin given of late by media and some mainstream economists to the recent collapse of world crude oil prices. The collapse of crude oil is argued as representing ‘good deflation’. That is, its net effects will be positive for consumption and therefore economic growth. Consumers’ savings from lower oil prices will be spent on other goods and services. The problem with this view is that it assumes a one to one shift of spending, from oil and gasoline to other products and services. It thus ignores the more likely possibility of consumers using the extra income from lower oil prices to pay down past debt or to save, as they worry about the future of the economy. Some of the oil (gasoline) price reduction is also spent on imports, which produce no net benefit for the growth of the economy in question and in fact net negative for GDP growth. And in oil producing economies, the net effects are clearly negative, as the collapse in oil prices means sharp declines in real investment and therefore jobs and incomes, and in turn consumption, for a broad spectrum of the economy.

The oil deflation is good deflation assertion furthermore ignores the related deflationary effects on both goods and financial assets prices that occur as prices for global oil deflates. For oil is not just a commodity but also a financial asset; and as it collapses its contagion spreads to other financial assets. The good deflation vs. the bad deflation is thus mostly a fantasy, and one of the many propositions that permeate mainstream economic analysis today that qualify as more ideology than science.

It is irrefutable that a major trend in oil and commodities deflation has been well underway in the global economy since 2014 and shows little sign thus far of abating. In 2014 alone, oil commodity prices deflated by more than 50%. A brief, partial recovery in 2015 restored the price decline to about 40%. But in the second half of 2015 oil prices began another further fall, to the low $40 range, equivalent to a roughly two thirds drop from previous peaks. More importantly, the consensus is that oil prices will continue to deflate well into 2016, given slowing global demand and continuing excess supply.

Crude oil futures prices are a kind of financial asset that is traded on global exchanges. As a financial security, deflation has been the case just as have prices for the physical commodity itself.

The global oil glut is often explained as a case of excess supply or declining demand. But supply and demand explanations are not the fundamental causes. These concepts are only ‘intermediary’ explanations and are often employed to obscure the real causes that drive the supply and demand changes. In the case of global oil, these fundamental forces are in part political and part economic, although the politics and economics are inseparable. In 2014 the Saudi-Emirates alliance in the middle east decided to drive down the price of global oil in order to bankrupt and destroy their emerging competition in the US among the fracking shale oil and gas companies is one fundamental force behind the collapse of global oil prices. Technology enabled the rise of competition from US shale producers, which challenged Saudi and friends’ ability to dominate world oil price. The Saudis thus created an excess supply added to the extra supply brought to world markets by US shale producers. So the real cause of the excess supply, and thus falling global oil prices, is the intensification of competition between regional global capitalist forces. To say simply ‘supply’ is thus to obfuscate the real causes behind the supply.

But the demand element, and forces behind it, have also been a major contributory factor in the oil price collapse. Those more fundamental demand side forces include the slowdown in the China economy, and the causes behind that development in turn.
Technology also qualifies as a fundamental force playing a role on the demand side driving down oil prices. Alternative energy like solar and other forms is reducing the demand for oil. It is not so much the actual impact of alternative energy in the immediate period, but the generally accepted prospect by global oil producers that it will soon have a major impact. Politics plays a role here as well, as climate change is becoming an accepted fact within voting electorates.

In short, to understand the dynamics of the current global oil glut and deflation, it is necessary to view it from a broader perspective, one that accounts for inter-capitalist competition in various forms, changing technology, and politics within and between capitalist states. It is not a simple question of supply and demand. That is the mere appearance of the causation of the oil deflation. The essence lies in capitalist technology change, shifting relationships of economic power between the regions, financial structure and policy changes, and political forces as well.

Other commodity price deflation—for copper, iron ore, aluminum, other industrial metals, etc.—is also driven by many of the same forces underlying the global oil deflation: The current slowing of the Chinese economy and therefore demand for industrial commodities. But also the prior overproduction of these commodities that grew in the wake of the China-EME development boom of 2010-2012. The overproduction could not have been possible, however, without the financialization of the global economy that was also occurring, nor without the massive injection of money capital by central banks in the US-UK-EU-Japan that took place as well from 2009 on that debt-financed the expansion. Financialization thus preceded overproduction. And now that overproduction is ‘feeding back’ on the financial side, resulting in financial asset price deflation.

A specific US example of this general process of oil commodity output boom and subsequent financial asset bust has occurred in the case of the expansion of the shale oil-gas fracking industry in the US after 2009. The shale boom could not have happened without US banks and shadow banks providing a mountain of corporate junk bond financing to the drillers and shale producers, amounting to hundreds of billions of dollars of new credit in the last few years. So finance enabled the shale overproduction, which resulted in the oversupply of the oil in the US and globally, which then provoked the Saudi response and further global oil over-supply, at a time when global demand was also weakening. What appears as over-production is thus more fundamentally the consequence of finance capital expansion.
A short list of different commodities shows, according to the Bloomberg Commodities Index covering 22 major commodity classes, that commodities deflation as of August 2015 had declined to its lowest level since 1999, contracting by 40% in just the past three years. The key commodities of copper and iron, have fallen 25% and 45%, respectively. And the rout is accelerating. The S&P GSCI Total Return Index of 24 commodities fell 14% just in July 2015, to levels of 2008.

Commodities deflation has a contagion effect on other financial assets and securities. For example, as commodities prices fall, that decline has the effect of causing the currencies of the countries dependent on commodity exports to fall as well—i.e. further deflate. Commodities deflation also drags down stock market prices in those economies’ stock exchanges. Thereafter, commodities deflation eventually spills over to non-commodity goods prices in turn. The feedback on financial assets then occurs in reverse as well, and stock and bond prices weaken still further. A downward deflationary spiral occurs, with goods, and financial asset price deflation each depressing the other.

At some point the downward deflation spiral leads to a rise in defaults. Defaults lead to bankruptcy, which lead to asset firesales and in turn an acceleration of financial asset deflation and its spread. There is thus a dynamic process of debt-deflation-default that sets in, with defaults feeding back on deflation, exacerbating it further, and real debt rising as well. The tip of the iceberg of this process is evident in the case of the huge global commodities trading company, Glencore, that investors and markets just became aware in September 2015 was on the verge of technical bankruptcy. Having taken on massive debt in its expansion phase before 2014, falling commodities prices and export volumes are resulting in a classic example of collapsing income revenue as its real debt rises. Glencore’s stock price thus collapsed 30% in a single day recently. And there are many ‘Glencores’ out there in the global economy whose CEOs and managers are attempting to cover up their severe debt financing problems.

Another example of how defaults result from the debt-deflation dynamic and in turn feed back on it is the imminent crisis brewing in the junk bond market in the US associated with the shale producers approaching bankruptcy. A spillover in junk bond defaults from shale to the rest of the junk bond market is a likely consequence as well. And how a general junk bond crisis affects other financial markets in the US, and globally, is anyone’s guess.

What global oil and commodities deflation reveals is that it is both real physical product (goods) deflation and simultaneously financial asset deflation. And that financial asset deflation is capable of precipitating and exacerbating a vicious downward spiral of negative interaction between goods and financial asset deflation. Not least, that interaction is capable of spilling over to the rest of the economy as well.

Dr. Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump, Clarity Press, 2019, and the previously published, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity 2017, & ‘Systemic Fragility in the Global Economy’, Clarity 2016.He hosts the radio show, Alternative Visions, and blogs at jackrasmus.com. His twitter handle is @drjackrasmus.

posted November 10, 2018
None Dare Call It Victory: Part 1 US 2018 Election Analysis

For months, the leadership of the Democratic Party hyped the message that a ‘blue wave’ was on its way that would politically engulf Trump and reverse his policies. Well, the wave washed up on shore on November 6, 2018, but Trump barely got his feet wet.

The failure of Democratic Party leaders’ 2018 strategy to deliver as promised in the November 6, 2018 midterm elections should also raise some serious questions about its strategy going forward for 2020. That strategy focused on running women and a few veterans in suburban districts and targeting the independent voter—a Suburbia Strategy—i.e. an approach apparently abandoning the 2008 successful Democratic strategy of targeting millennials, blacks and latinos, and union workers, who since 2012 have been steadily reducing their support for Democrats. But the Dems believe their new Suburbia Strategy works. As former House Speaker, Nancy Pelosi, declared to the media on November 6 after polls closed, the Dems had just won “a great victory”. But was it ‘great’? Or even a ‘victory’?
And is the Suburbia Strategy targeting women and independents in the ‘burbs a formula for winning anything but a couple dozen or so toss up, suburban House districts in off year elections? If not, what is—given the Democrat Party’s abandonment of former strategies that once were successful?

If one listens to the talking heads of pro-Democratic media like MSNBC or anti-Trump CNN, they echoed Pelosi in believing the answer is ‘yes’. The message was the Dems won big time. Center-left periodicals like The Nation magazine declared “We Won!”. Even Democracy Now reported it was an “Historic Midterm”. More mainstream liberal media, like the Washington Post, editorialized the election gave the Dems in 2020 “a path to victory”. Ditto similar spin from the New York Times.

A closer analysis, however, shows if the Dems repeat and run their suburbia-women-independents strategy again two years from now it will be a path to defeat in 2020. And if they then lose again and do not stop Trump again two years from now– for they certainly did not stop Trump this stop around as they promised—it will likely be their end as a major party contender in national politics in the 2020s.

None Dare Call It Victory

True, the Dems won the US House of Representatives, but not by any historic margin. Not like they lost it in 2010. The average historical turnover of House seats in midterms for decades has been about 30. That’s probably the upper limit of what Dems will win in 2018, give or take a few more yet to be decided seats by late vote tallies. And it may be less than 30. A net swing of 30 in the House is just an average recovery of seats for the out party in midterms. That’s not an historic sweep or blue wave by any means. Trump won’t lose sleep over that.

But he will stay up late now tweeting a clear victory for his team in the Senate, where results for 2018 will soon prove strategically devastating for the Dems. Historically in midterm elections the out party is able to swing its way a net gain on average of 4 seats in the Senate. But the Democrats lost four seats, not gained them. That’s an historic defeat. In the Senate, the blue wave predicted to roll in was replaced by the red tide that continued to roll out.

Sad to say, the Dems’ Suburbia Strategy has failed to put any dent into the Trump machine, which deepened its hold on red states America, even if the Dems chipped away at its ragged edge here and there. And that failure has consequences. Here’s just some:
• With the Senate now even more firmly behind Trump, with a majority of 54 Republicans, any possibility of impeachment of Trump by the House is out of the question. Moreover, Trump will now likely get to select a third conservative, pro-business Supreme Court judge. And with a 54 majority, he could nominate Genghis Khan and the ‘in his pocket’ Senate would vote him up.

• A locked in Senate majority also means that Mitch McConnell will now go even more aggressive attacking social security, Medicare, education spending than he’s already signaled. And watch for an even larger flood of highly conservative, mid-level federal court appointments than those that have already been pushed through Congress.

• The Democrats’ Senate debacle will not only solidify the big handouts to businesses and investors in tax cuts and deregulation under Trump’s first two years, but will mean a Senate now firmly in the hands of Republicans and Trump willing to undertake renewed attacks on abortion rights, on immigrants, and workers’ rights for another two years.

• Another immediate consequence is that Trump’s 2018 $4t trillion tax cuts for investors, businesses, and the wealthiest 1% and his sweeping deregulation of business are now firmly entrenched for at least another six years. It’s not surprising that the US stock market surged 545 pts. on November 7, the day after the elections. Investors and the wealthy now know the Trump windfall tax that boosted their profits and capital gains by 20%-25%, and his deregulation policies that lowered costs even more, are now baked in long term.

While Trump’s Republicans expanded their control of the Senate throughout nearly all the rest of ‘red America’, by unseating Democrat Senators in Indiana, Missouri, Florida, and North Dakota, they retained control of strategic governorships in Georgia, Florida, Ohio, and elsewhere. The Republican red state governorships are strategic for several reasons: first, because Florida and Ohio are key swing states in presidential elections. They are also states that have been notorious in the past for manipulating election outcomes (Florida 2000), Ohio (2004) and suppressing voters’ right. Like Florida and Ohio before, in 2018 Georgia appears to be leading the way in voter suppression, as is North Dakota where potentially 30,000 Native Americans’ voting rights were restricted. Both states have been identified for weeks as having undertaken voter suppression measures.

Moreover, Republicans will likely win the governorship in Georgia, where votes are still being contested in a narrow result. And should they win, it will be only because Georgia’s Republican governor candidate, Brian Kemp, as the standing Secretary of State in charge of elections, personally engineered the voter suppression on his own behalf.

Another swing state, North Carolina, also notorious for voter suppression initiatives, has now just passed a ballot measure to allow its legislature to restrict voters rights still further. The Trump voter suppression offensive remains thus well intact and continues to expand its footprint in anticipation of 2020 elections.

What should worry Democrats for 2020 is that all these swing states with long standing voter suppression and gerrymandering histories—i.e. Florida, Ohio, Georgia, North Carolina (add Texas as well)—will remain in the hands of Trump Republican governors come the 2020 elections.

• The Senate and strategic Governorship wins for Trump will now embolden red state right wing radicals to become even more aggressive and organized. Bannon and his billionaire buddies—the Mercers, Adelsons, et. al.—will see to that.

• Not the least significant consequence of the questionable Democratic victory is that Trump is now, in a way, in a stronger position to deal with the Mueller investigation.

He fired his Justice Dept. Secretary, Jeff Sessions, the day after the elections, replacing him with yet another ‘yes man’, Whitaker. Rod Rosenstein, the second in charge at the Department and liaison with Mueller, may likely be next pushed out. That leaves Mueller out on a limb—unless he moves the investigation to the House under the Democrats before getting fired himself. But that shift would make the Mueller investigation look like a partisan Democratic investigation.

• And no one should expect the House Democrats now to seriously pursue Trump impeachment.

The House has authority to raise impeachment but the Senate must conduct the impeachment trial, and that’s just not going to happen now with 54 solid Republican Senators and Trump knows it. So the Dems in the House won’t even try to raise impeachment on the House floor. They’ll do a PR campaign for the media from the perch of House Committee hearings. No matter what Trump does from here on out, no matter what House committee hearings turn up in his tax returns (which will not be shared with the public), and no matter what Mueller reports out, it will all be a ‘smoke and mirrors’ offensive to stop Trump by Pelosi and her Dems in the US House of Representatives.

The Pelosi-Trump Bipartisan ‘Lovefest’

Further mitigating against any Democratic moves against Trump in the House is what appears to be an emerging ‘love fest’ between Trump and Nancy Pelosi. Pelosi repeatedly emphasized in her statement to the press on November 6,, the Democrat party leadership is going to go big on bipartisanship (again!). She signaled to Trump a desire for bipartisanship several times. Trump quickly responded to the overture by calling Pelosi, praising her publicly, and then tweeting that she should be the Speaker of the House now that the Dems have taken it back.

So Obama era Democrat Party bipartisanship is back, and we know what that produced: Obama continually held out the bipartisan offer, the Republican dog continually bit his hand. Mitch McConnell refused and turned down offers to compromise again and again. The result was a failure of an economic recovery for all but bankers and investors. Obama’s 2008 coalition and base thereafter dribbled away and then disappeared altogether in 2016. The Obama 2008 coalition of youth, latinos, blacks and union labor dissolved as fast as it was formed. The result of that was not only the debacle of 2016, but the subsequent conservative conquest of the Supreme Court and virtually the entire federal judiciary under Trump, an across the board wipeout of decades of business regulations, a $4 trillion tax windfall for business, investors and wealthy households, a total retreat on climate change, and a descent into a nasty political culture of emerging ‘white nationalism’ and increasing social violence and polarization. It all began with Obama’s naïve bipartisanship that we now see Democrat Party leaders like Pelosi (and no doubt the corporate moneybags on the DNC) attempting to resurrect once again.
Bipartisanship is a political indicator of a party no longer convinced of its own ability to lead and forge a new direction. Contrast the results of Democratic Party bipartisanship from Obama to Pelosi with Republican party rejection of anything bipartisan. Who prevailed proposing bipartisanship? Who won rejecting it? Yet, here we go again with Obama-like bipartisanship being offered by Pelosi. It will be a set-up for Democratic failure in 2020, just as it was after 2008.

Here’s my prediction why:

A bipartisan approach by the Democrat House will result in Dems getting the short end of the legislative stick once again. Policy areas where Pelosi-Trump may agree include

• infrastructure spending,
• limits on prescription drug price gouging by big Pharma companies,
• token 5% tax cuts for median income family households,
• paid family leave

But Pelosi legislative proposals will then run into a wall of opposition in Mitch McConnell’s Senate that will demand significant cuts to Medicare, Medicaid, Food Stamps, Housing, Education and other programs as a condition of Senate support for passage of their proposals. In addition, to get something passed, the Pelosi Dems will have to agree to watered down versions of their proposals as well. They’ll then get outmaneuvered in House-Senate conference committee, agreeing to the watered down proposals and the least publicly obvious and onerous of McConnell’s cuts to social programs—i.e. just to get something passed. If they don’t agree to McConnell’s compromises, they will appear to be voting against their own proposals. Either way, the Dems again will look ineffective again to their base, as they had throughout 2008-16. They will have walked into the bipartisan trap, and Trump-McConnell will slam the door behind them in 2020.

But we’ve seen that story before—under Jimmy Carter after 1978, in Bill Clinton’s second term, and during Obama’s first.

Dr. Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, by Clarity Press, 2019, and ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression, Clarity Press, August 2017. He hosts the Alternative Visions radio show on the Progressive Radio Network and blogs at jackrasmus.com. His twitter handle is @drjackrasmus. His video, radio and interviews are available for download at his website, http://kyklosproductions.com

posted November 10, 2018
The Unraveling of America: US Conditions on Eve of Midterm Elections

As Americans went to the polls yesterday, November 6, 2018, no doubt some were thinking of the hordes of immigrants we’re told are invading the US southern border. Or they were remembering the pipe bombs, the killings in Pittsburg, or the racist murders occurring almost daily elsewhere that barely get press coverage anymore.

If they’re Millennials, they may be considering whether even to vote or not, since neither wing of the corporate Party of America—aka Republicans or Democrats—have done much for them over the past ten years. Burdened mostly with low paying service jobs and $ trillion dollar student debt payments that consume roughly 37% of their paychecks, with real incomes well below what their parents were earning at their age, and with prospects for the future even more bleak, many Millennials no doubt wonder what’s in it for them by voting for either party’s candidates. Will Millennial youth even bother to turn out to vote? As an editorial in the Financial Times business newspaper recently noted, “Only 28% of Americans aged 18 to 29 say they are certain to vote this November”. Political cynicism has become the dominant characteristic of much of their generation—deepening since the politicians’ promises made in 2008 have failed to materialize under Obama and now Trump.

If they’re Latinos and Hispanics, as they go to the polls they are aware their choice is either Trump Republicans who consider them enemies, criminals and drug pushers; or Democrats who, in the past under Obama, deported their relatives in record numbers and repeatedly abandon programs like DACA (‘Dreamers) as a tactical political necessity, as they say. Who will they trust least? One shouldn’t be surprised if they too largely sit it out, harboring a deep sense of betrayal by Democrats and concern they may soon become the next ‘enemy within’ target of Trump and his White Nationalist shock troops who are being organized and mobilized behind the scenes by Trump’s radical right wing buddy, Steve Bannon, and his billionaire and media friends.

If they’re African Americans, they know from decades of experience that nothing changes with police harassment and murders, regardless which party is in power.

If they’re union workers in the Midwest, they know the Democrats are the party of free trade and job offshoring, while Republicans are the party favoring low minimum wages, elimination of overtime pay, privatization of pensions, and cuts to social security.
All these key swing groups of Millennials, Hispanics, African-Americans, and union workers in the midwest—i.e. those who gave Obama an overwhelming victory in 2008, gave him one more chance in office in 2012 despite failure to deliver, and then gave up on the unfulfilled promises in 2016—will likely not be thinking about the real ‘issues’ as they go to the polls. For the ‘Great Distraction’ is underway like never before.

The Great Distraction

It’s the ‘enemy within’ that’s the problem, we’re told by Trump. And the ‘enemy without’. Or, in the case of the immigrant—it’s both: the enemy without that’s coming in! So put up the barbed wire. Grab their kids when they arrive, as hostage bait. Send the troops to the border right now, to stop the hordes that just crossed into southern Mexico yesterday. Hurry, they’re almost here, rapidly proceeding to the US on foot. (They run fast, you see). They’re in Oaxaca southern Mexico. They’ll be here tomorrow, led by Muslim terrorists, carrying the bubonic plague, and bringing their knapsacks full of cocaine and heroin.

And if the enemy immigrant is not enough is not enemy enough, the ‘enemy within’ is increasingly also us, as Trump adds to his enemies list the ‘mob’ of Americans exercising their 1st amendment rights to assembly and protest against him. And don’t forget all those dangerous Californians who won’t go along with his climate, border incarceration, trade or other policies. Or their 80 year old Senator Diane Feinstein, their ring-leader in insurrection. They’re all the ‘enemy within’ too. The chant ‘lock ‘em up’ no longer means just Hillary. So Trump encourages and turns loose his White Nationalist supporters to confront the horde, the mob, and their liberal financiers like George Soros. If all this is not an unraveling, what is?

Not to be outdone in the competition for the Great Distraction, there’s the Democrats resurrecting their age-old standby ‘enemy without’: the Russians. They’re into our voting machines. Watch out. They’re advancing on Eastern Europe, all the way to the Russian-Latvian border. Quick, send NATO to the Baltics! Arrange a coup partnering with fascists in Ukraine! Install nuclear missiles in Poland! And start deploying barbed wire on the coast of Maine and Massachusetts, just in case.

However, behind all the manufactured fear of immigrants, US demonstrators, and concern about violence- oriented white nationalists whipped up and encouraged by Trump and his political followers—lies a deeper anxiety permeating the American social consciousness today. Much deeper. Whether on the right or left, the unwritten, the unsaid, is a sense that American society is somehow unraveling. And it’s a sense and feeling shared by the left, right, and center alike.

Both sides—Trump, Republicans, Democrats, as well as their respective media machines—sidestep and ignore the deep malaise shared by Americans today. Older Americans shake their heads and mumble ‘this isn’t the country I grew up in’ while the younger ask themselves ‘is this the country I’ll have to raise my kids in’?

There’s a sense that something has gone terribly wrong, and has all the appearance will continue to do so. It’s a crisis, if by that definition means ‘a turning point’. And a crisis of multiple dimensions. A crisis that has been brewing and growing now for at least a quarter century since 1994 and Newt Gingrich’s launching of the new right wing offensive that set out purposely to make US political institutions gridlocked and unworkable until his movement could take over—and succeeded. It’s a crisis that everyone feels in their bones, if not in their heads. The dimensions of the unraveling of America today are many. Here’s just some of the more important:

Growing Sense of Personal Physical Danger

Mass and multiple killings and murders are rampant in America today, and rising. So much so that the media and press consciously avoid reporting much of it unless it involves at minimum dozens or scores of dead. There are more than 33,000 gun killings a year in the US now. 90 people a day are killed by guns. While we hear of the occasional school shooting, the fact is there are 273 school shootings so far just in 2018. That’s one per school day.

The suicide rate in America is also at record levels, with more than 45,000 a year now and escalating. Teen age suicides have risen by 70% in just the last decade. The fastest rate of increase is among 35-64 year olds. People are literally being driven crazy by the culture, the insecurities, the isolation, the lack of meaningful work, the absence of community, and the hopelessness about a bleak future that they’re killing themselves in record numbers.

And let’s not forget the current opioid crisis. The opioid death rate now exceeds more than 50,000 a year. These aren’t folks over-dosing in back alleys and crack houses. These are our relatives, neighbors and friends. And the ‘pushers’ are the big pharmaceutical companies and their salespersons who pushed the Fetanyl and Oxycontin on doctors telling them it was safe—just like the Tobacco companies maintained for decades that cigarettes were ‘safe’ when their tests for decades showed their product produced cancer. Big Pharma knew too. They are the criminals, and their politicians are the paid-for crooked cops looking the other way. All that’s not surprising, however, since Big Pharma is also the biggest lobbyist and campaign contributor industry in the US.

So it’s 33,000 gun killings, 43,000 suicides, and 50,000 opioid deaths a year. Every year. That compares to US deaths during the entire 8 years of Vietnam War of 56,000! That’s a death rate over three years roughly equal to all Americans who died during the three and a half years of World War II! We all got rightly upset over 2500 killed on 9-11 by terrorists. But the NRA and the Pharmaceutical companies are the real terrorists here, and politicians are giving them a complete pass.

Instead of Big Pharma CEOs and leaders of the National Rifle Association (NRA), we’re told the real enemies are the desperate men, women and children willing to walk more than a thousand miles just to get a job or to escape gang violence. Or we’re told it’s the Russians meddling in the 2016 election and threatening our democracy—when the real threat to American democracy is home grown: In recent court-sanctioned gerrymandering; in mass voter suppression underway in Georgia, North Dakota, and elsewhere; in the billions of dollars being spent by billionaires, corporations, and their political action committees this election cycle to ensure their pro-business, pro-wealthy candidates win.

News of these real killing machines goes on every day, creating a sense of personal insecurity that Americans have not felt or sensed perhaps since the frontier settlement period in the 19th century. It’s not the immigrants or the Russians who are responsible for the guns, suicides, and drug overdoses. But they certainly provide a useful distraction from those who are. People feel the danger has penetrated their communities, their neighborhoods, their homes. But politicians have simply and cleverly substituted the real enemies with the immigrant, the mob, and that old standby, the Russians.

Income & Wealth Inequality Accelerating

Another dimension of the sense of unraveling is the economic insecurity that hangs like a ‘death smog’ over public consciousness since the 2008-09 crash. As more and more average American households take on more debt, work more part time jobs or hours, and adjust to a declining standard of living, they are simultaneously aware that the wealthiest 1% or 10% are enjoying income and wealth gains not seen since the ‘gilded age’ of the late 19th century. The share of national pre-tax income garnered by the top 10% has risen from 35% in 1980 to roughly 50% today. That’s 15% more to the top, equivalent to roughly than $3 trillion more in income gains by the top 10% that used to be distributed among the bottom 90%.

How could an America that once shared income gains from economic growth among its classes and across geography from World War II through the 1970s have now allowed this to happen, many ask? And why is it being allowed to get worse?

There are many ways to measure and show this economic unraveling. Whether national income shares for workers and wages falling from 64% to 56% of total national income; or the distribution to the rich of more than a $1 trillion a year every year since 2009 in stock buybacks and dividend payments; or the $15 trillion in tax cuts for investors, businesses, and corporations since 2001; or Trump’s recent $4 trillion tax windfall for the same; or stock market values tripling and quadrupling since 2009; or stagnant real wage gains for the middle class and declining real wages for those below the median.

Whatever dimension or study or statistic, the story is the same. Economic gaps are widening everywhere. And everyone knows it. And except for that noble, modern Don Quixote of American Politics, Bernie Sanders, it appears no one in either party is proposing to reverse it. So the awareness festers below the surface, adding to the realization that something is no longer right in America.

The sense of economic unraveling may have slowed somewhat after 2010, but it continues none the less, as millions of Americans are forced to assume low paying service jobs. Working two or more jobs to make ends meet. Taking Uber and gig work on the side. Going on Medicaid or foregoing health insurance coverage altogether. Moving to lower quality housing and taking on more room-mates. Treading economic water in good times, and sinking and gasping for air during recessions and in the bad times. Just making due. While the wealthy grow unimaginably wealthier by the day.

Never-Ending Wars

The sense of anxiety is exacerbated by the never ending wars of the 21st century. How is it they never end, given the most powerful military and funding of more than $1 trillion a year every year, it is asked?

Newspaper headlines haven’t changed much for 17 years. The war in Afghanistan and elsewhere continues. Change the dates and you can insert the same news copy. With more than 1000 US bases in more than 100 countries, America since 2001 has been, and remains, on a perpetual war footing. All that’s changed since 2000 is that the USA no longer pays for its wars by raising taxes, as it had throughout its history. Today the US Treasury and Federal Reserve simply ‘borrow’ the money from partners in empire elsewhere in the world—while they cut taxes on the rich at the same time.

And the annual war bill is going up, fast. Trump has increased annual spending on ‘defense’ by another $85 billion a year for the past two years. Approaching $150 billion if the notorious US ‘black budget’ spending on new military technology development—not indicated anywhere in print—is added to the amount. And more is still coming in the next few years, to pay for new cybersecurity war preparation, for next generation nuclear weapons, and for Trump’s ‘space force’. Total costs for defense and war—not just the Pentagon—is now well over $1 trillion annually in the US. And with tax cutting for those who might pay for it now accelerating, the only sources to pay for the trillion dollar plus annual US budget deficits coming for the next decade is either to borrow more or cut Social Security, Medicare, education and other social programs. And those cuts are coming too—soon if one believes the public declarations of Senate Republican Majority leader, Mitch McConnell.

Technology Angst

As our streets and neighborhoods become more dangerous, as inequality deepens, as wars, tax cuts for the rich and social program cuts for the rest become the disturbing chronic norm— awareness is growing that technology itself is beginning to tear apart the social fabric as well. Admitted even by visionaries and advocates of technology, the negatives of technology may now be outweighing its benefits.
Studies now show problems of brain development in children over-using hand-held screen devices. Excessive screen viewing, studies show, activates the same areas of the brain associated with other forms of addiction. Social media is encouraging abusive behavior by enabling offenders to hide. What someone would not dare to say or do face to face, they now freely do protected by space and time. Social media is transforming human communications and relations rapidly, and not always positively. It is also enabling the acceleration of the surveillance state. Massive databases of personal information are now accessible to any business, to virtually any governments, and to unscrupulous individuals around the globe intent on blackmail, threats, and worse. Privacy is increasingly a fiction for those participating in it.

And employment is about to become more precarious because of it. Technology is creating and diffusing new business models, destroying the old, and doing so far too rapidly to enable adjustment for tens of millions of people. Amazon. Uber. Gig economy. Wiping out millions of jobs, increasing hours worked, uncertainty of employment, lowering of wages. And next Artificial Intelligence. Projected by McKinsey and other business consultants to eliminate 30% of current jobs by the end of the next decade. Where will my job be in ten years, many now ask themselves? Will I be able to make it to retirement? Will there be anything like retirement any more after 2035?
Unchecked and unregulated accelerating technological change is adding to the sense of social unraveling of key institutions that once provided a sense of personal security, of social stability, of a vision of a future that seemed more related to the present, rather than to an even more anxiety ridden, uncertain, unstable future.

A Culture Increasingly Coarse & Decadent

When the President of the US brags he could shoot someone on the street corner and (his) people would still love him, such statements raise the ghostly spectre of prior decades when the vast majority of German people thought the same of Hitler. And when one of his closest advisers, Rudy Guliani, declares publicly that ‘Truth is not the Truth’, it amounts to an endorsement for an era of lies and gross misrepresentation by public figures. With chronic lying the political norm, what can anyone believe from their elected officials, many now ask? It’s no longer engaging in political spin for one’s particular policy or program. It’s politics itself spinning out of control. Public political discourse consists increasingly to targeting, insulting, vilifying, and threatening one’s political opponents. Trump’s railing against politicians and government itself smacks of Adolph’s constant insulting indictment of democratically elected Weimar German governments and leaders in the 1920s. It leaves the American public with a nervous sense of how much further can and will this targeting, personalizing, and threatening go?

But the political culture is not the only cultural element in decline. A broader cultural decline has become evident as well. Americans flock to view films of dystopia visions of America, of zombies, and ever-intense CGI violence where fictitious super heroes save the world. More of popular music has become overtly misogynous, angry, mean, and violent in both sound and lyrics. And has anyone recently watched how high schoolers now dance, in effect having sex with their pants on?

Collapse of Democratic Institutions

Not least is the sense of unraveling of political institutions and the practice of democracy itself. As a recent study estimated, Democracy is in decline in the US, having dropped in an aggregate score of 94 in 2010 to a low of 86 today—when measured in terms of free and fair elections, citizen participation in politics, protection of civil rights and liberties, and the rule of law. The study by the non-profit, Freedom House, concluded “Democracy is in crisis’ and under assault and in retreat.

In America, the restrictions on civil rights and liberties have been growing and deepening since 2001 and the Patriot Acts, institutionalized in annual NDAA legislation by Congress thereafter. Legislatures have been gerrymandered to protect the incumbents of both wings of the Corporate party of America. The US Supreme Court has expanded its authority to select presidents (Gore v. Bush in 2001), defined corporations as people with the right to spend unlimited money which it defines as free speech (Citizens United), and will likely next decide that Presidents (Trump) can pardon himself if indicted (thus ending the fiction that no one is above the law and endorsing Tyranny itself).

The two wings of the Corporate Party of America meanwhile engage in what is an internecine class war between factions of the American ruling class. More billionaires openly contest for office as it becomes clear millions and billions of dollars are now necessary to get elected.

Voter suppression spreads from state to state to disenfranchise millions, from Georgia to the Dakotas, to Texas and beyond. If one lacks a street number address, or an ID card, or has ever committed a felony, or hasn’t voted recently, or doesn’t sign a ballot according to their birth certificate name, or any other number of technical errors—they are denied their rights as citizens. What was formerly ‘Jim Crow’ for blacks in the South has become a de facto ‘Jim Crow Writ Large’ encompassing even more groups across a growing number of states in America.

A sense of growing political disenfranchisement adds to the feeling that the country is politically unraveling as well—adding to the concurrent fears about growing physical insecurity, worsening economic inequality and declining economic opportunities, and an America mired in never ending wars. An America in which it is evident that political elites are increasingly committed to policies of redistribution of national wealth to the wealthiest. An America where more fear that technology may be taking us too far too fast. An America where the culture grows meaner, nastier and more decadent, where lies are central to the political discourse, and where political institutions no longer serve the general welfare but rather a narrow social and economic elite who have bought and captured those institutions.

And, not least, an America where politicians seem intent on drifting toward a nationalism on behalf of a soon to be minority White America—i.e. politicians who are willing to endorse violence and oppression of the rest in order to opportunistically assume and exercise power by playing upon the fears, anxieties, and insecurities as the unraveling occurs.

(Watch for my follow-on analysis of the 2018 Midterm Elections results, and why now the polarization in the country will deepen and why Democratic Party strategies will lead to disaster in 2020).

Dr. Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, forthcoming 2019 by Clarity Press. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network and blogs at jackrasmus.com. His twitter handle is @drjackrasmus.

posted October 13, 2018
The Coming Post-US Midterm Elections Bombshell

Liberals and the left were shocked by the Kavanaugh confirmation this past weekend. They may experience an even greater shock to their political consciousness should the Democrats fail to take the House in the upcoming midterm elections.

The traditional media has been promoting the message that a ‘blue wave’ will occur on November 6. Polls as evidence are being published. The Democratic Party is pushing the same theme, to turn out the vote. But these are the same sources that in 2016, on the eve of that election, predicted Trump would get only 15% of the popular vote and experience the worse defeat ever in a presidential election! Should we believe their forecasting ability has somehow radically improved this time around?

Anecdotal examples, in New York City and elsewhere in deep Democrat constituencies, are not sufficient evidence of such a ‘wave’. Especially given the apparent successes underway of Republic-Right Wing efforts to suppress voter turnout elsewhere, where House seats must be ‘turned’ for Democrats to achieve a majority in the House once again. (See, for example, Greg Palast’s most recent revelation of voting roll purging going on in Georgia, which is no doubt replicated in many other locales).

Should the Democrats clearly win enough seats to take over control of the US House of Representatives on November 6, liberals and progressives may be further disappointed. Democrat party leaders will most likely talk about impeachment, make some safe committee moves toward it, but do little to actually bring it about in the coming year. What they want is to keep that pot boiling and leverage it for 2020 elections. Such prevarication and timidity, so typical of Democrat leadership in recent decades, will almost certainly have the opposite intended effect on liberal-left voter consciousness. Voters will likely retreat from voting Democrat even more in 2020 should Democrat Party leaders merely ‘talk the talk’ but not walk.

Conversely, should the Dems fail to take the House a month from now, an even deeper awareness will settle in that the Democratic Party is incapable of winning again in 2020. Even fewer still may therefore turn out to vote next time, assisted by an even more aggressive Republican-Trump effort to deny the right to vote than already underway.

In short, a Democrat party failure to recover the US House of Representatives next month will have a debilitating effect on consciousness for the Democrat base that will no doubt reverberate down the road again. So too will a timid, token effort to proceed toward impeachment should the Democrats win next month.

But a takeover of the House by Democrats will result in an even greater, parallel consciousness bombshell—only this time on the right. Bannon, Breitbart, and their billionaire money bags (Mercers et. al.) are already preparing to organize massive grass roots demonstrations and protests to scare the Democrats into inaction so far as impeachment proceedings are concerned. And it won’t take much to achieve that retreat by Democrat party leaders.

The recent Kavanaugh affair is right now being leveraged by Trump and the far right to launch a further attack on civil liberties and 1st amendment rights of assembly and protest. Trump tweets are providing the verbal ‘green light’ to go ahead. Kavanaugh has become an organizational ‘cause celebre’ to mobilize the right to turn out their vote. The plans are then to take that mobilization one step further, however, after the midterm elections.

Plans are in the works for Bannon and friends for a mobilization of the right to continue post November 6, should the Dems take the House. They’re just warming up with the Kavanaugh affair. Demonstrations celebrating Kavanaugh’s Supreme Court win are just a dress rehearsal—first to turn out the vote but then to defend Trump in the streets if the Democrats actually take the House.

The public protests and demonstrations on the right will aim to intimidate House Democrats, should they win, but will also serve as counter demonstrations to attack protestors demonstrating for impeachment.

Either way—should the Republicans retain the House or the Democrats take it—a sea change in US political consciousness will occur once again this November, as it did in November 2016. And should the Democrats take the House, political instability will almost certainly intensify in the US, as the developing political crisis will ‘move to the streets’.

The 2016 election and events of the past two years wrenched the consciousness of many Americans about how the US system works. The myths have fallen by the wayside, one by one in the intervening two years. The belief that somehow the sane leaders appointed to Trump’s initial cabinet would somehow control him or the Republicans in the Senate keep him in check have both dissipated.

Trump has purged them from his administration, or they have dropped out of running for Congress again as the well-financed, pro-Trump, right wing local machine has promoted right wing candidates to run against them. Trump has been successfully reconstituting the Republican party increasingly in his far right image. The myth that Trump will ‘tear up NAFTA’ and bring manufacturing jobs back is now debunked. Or that he will end the wars in the Middle East. The list is long.

Democrats in the meantime have continued to show their strategic ineffectiveness and tactical ineptness in dealing with Trump. Their party leaders have shown more concern, and success, in keeping Bernie Sanders and his supporters at bay, as witnessed by the recent Democrat Party measures that keep their ‘superdelegates’ barrier to party reform in place while giving the chair of the Democratic Party the power to veto any candidate to run on its ticket who may win a primary in the future. Nor have they adopted an effective program to win back the working class, the loss of which in key Midwestern states in 2016 cost them the 2016 election. The latter not surprising, given that the central committee of the party is composed of more than 100 corporate lobbyists and CEOs. Promoting ‘identity politics’ has become the mantra—not programs to restore good jobs, ensure wages, protect retirement, defend union rights, push Medicare for All, and similar class-based demands.

Whether right or ‘left’ prevails in the upcoming November midterms, a few things are certain:

First, political consciousness, both right and left, will likely undergo another major shift, and perhaps on a scale close to that which occurred in 2016.

Second, the midterm elections will be used by the Bannons, Breitbarts, Mercers and others on the far right as an opportunity to mobilize the grass roots into a more centralized right wing movement. Initially for purposes of voter turnout, that organization, centralization, and mobilization will expand into the post-midterm US political landscape.

Third, more intimidation, more threats, and even now confrontations between left and right in the streets is a real possibility in the years to come in Trump’s remaining two years in office. (And the Republicans and the right will now own the police and the courts and will thus have a decided advantage in protests and demonstrations).

Increasingly, US intellectuals, artists, and even experienced old-guard politicians, who were once eye-witnesses in their early years, have begun to see parallels about what’s happening now in the US with past origins of fascist movements. Up to now, however, one especially important element of fascist politics has been missing in the US, although its ugly head has been peering above the horizon since 2016. That element is a grass roots movement of fascist-like supporters, activists and sympathizers, whose main task is to confront, intimidate, and violently discourage demonstrations and protests against their leader (Trump) personally, and in support of democratic rights under attack and the exercise of civil liberties in general.

The emergence of just such a right wing grass roots movement, better organized and well financed, and willing to engage in violent confrontations against other protestors and demonstrators in the streets, may soon be upon us. Should the Democrats win in November and launch impeachment proceedings the phenomenon will quickly appear. But even if Democrats prevaricate (the more likely scenario), the right is preparing to mobilize nonetheless. Their response to the Kavanaugh affair shows how much they’re ‘itching’ to do so. And should the Democrats win the House, their development will become even more evident.

Jack Rasmus
October 8, 2018

Jack is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, as well as ‘Central Bankers at the End of Their Ropes’, Clarity Press, August 2017. He blogs at jackrasmus.com and tweets at @drjackrasmus. His website is: http://kyklosproductions.com

posted October 13, 2018
Trump at the UN: Lies, Damn Lies & Statistics

This past week Donald Trump appeared before the United Nations Assembly in New York. In typical Trump style, he immediately launched into bragging about his accomplishments. Like most of his recent public appearances, it was a campaign speech directed to his political base. He proclaimed to the Assembly he had achieved more in his first two years than had any other president in a like period. The claim elicited laughs from the audience, which Trump would brush off later in a press conference saying ‘We were laughing together, they weren’t laughing at me”. Sure, Donald. That’s what happened!

In the course of his over-the-top, self-congratulatory announcement he said the US economy had grown faster in his first two years at the presidential helm than in any administration before during a like period, he had reduced unemployment to the lowest rate ever in the US, and his policies have produced record wage gains for American workers. The reality, however, is none of the above are true.

What’s somewhat ironic is that Trump’s lies and misrepresentations about the performance of the US economy are buttressed in part by official US statistics. He didn’t have to lie outright. It is often forgotten that statistics are not actual data. They are not numbers and facts that are actually observed, collected and reported in their original form. Statistics are ‘operations’ on and manipulation of the actual data, i.e. the real numbers. Statistics are created numbers. The operations and manipulations are often justified by arguing they improve the data, reveal it more accurately. Sometime this is so. But too often the manipulations are designed to boost the raw data to show the economy is doing better than it actually is (i.e. GDP and growth is better than it really is); or reduce the numbers to show the same effect (i.e. inflation is not as high as it really is); or that wages are rising for everyone when in fact they may not be for most.

In Trump’s UN speech, we therefore find an ironic congruence of typical Trump imagined facts that don’t actually exist and official government statistics that are not lies per se but are nonetheless distortions and misrepresentations created by the many complex, often convoluted operations and manipulations performed on the actual facts.

Who’s lying? There are different ways to lie. Trump does it crudely and blatantly. Official stats often do it cleverly and opaquely. The debunking of Trump claims before the UN about US GDP, US unemployment, and US wages in what follows shows how the crude and the clever often coincide.

Trump’s ‘US GDP Is Growing at Record Rate’ Claim

Let’s take US economic growth or GDP (Gross Domestic Product). Trump claims the last quarter’s GDP growth of 4.2% was the best ever. Apart from the fact that the US economy has grown quarterly faster many times before, the 4.2% is a misrepresentation—even if it’s the official US figure. Here’s why:

GDP is defined as the total goods and services produced in a given year that is sold in that year. So prices are associated with the output of actual goods and services produced. But real growth of the economy should not include prices. Therefore prices are adjusted out from what’s called the ‘nominal GDP’ number. Nominal GDP last quarter was 5.4%. Trump’s ‘real GDP’ number of 4.2% means inflation was 1.2% for the period, according to the ‘GDP Deflator’ price index that’s used to adjust GDP for inflation.

But does anyone really believe inflation was only 1.2%? No one that was paying for double digit hikes in insurance premiums and copays during the quarter, or a dollar plus more for a gallon of gasoline to get to work, or who has had to pay rent hikes by their landlord of 20% or more, or is paying higher local property taxes and fees, or has opened their utility bill envelopes lately. What wage earning household believes inflation is running at only 1.2%? And if inflation is higher than that, then the adjustment for inflation to the 5.4% nominal GDP results in a ‘real GDP’ of far less than Trump’s official 4.2%.

So why is inflation so underestimated, resulting in real GDP being over-estimated at 4.2%?

One reason actual inflation is much higher is that government statisticians arbitrarily assume that consumers are buying more online where goods are cheaper, even though the government itself has said its procedure for estimating online sales is a ‘work in progress’ and at best a guesstimate.

Another reason inflation is underestimated at 1.2% is government bureaucrats at the Commerce Dept. (responsible for estimating GDP) assume that the quality of goods sold today is better than in the past. So they reduce the actual price that households really pay for the product in the marketplace and assign a lower, fictional price when they calculate the 1.2% GDP Deflator.

Or they assume that rents aren’t really rising as fast as they are in fact, because their models definition of rent includes homeowners with mortgages supposedly paying a ‘rent’ to themselves as well. That’s called ‘imputed rents’. Of course it’s nonsense. Homeowners don’t pay themselves rents. But when you assume they do, it means 100 million homeowners pay rents to themselves that barely changes year to year, while true renters keep paying 20% or more. When rents are then ‘averaged out’ for both homeowners and real renters, the actual rent inflation comes out much lower as a contribution to total GDP inflation. There are dozens of other techniques by which the ‘GDP Deflator price index’ is manipulated to come up with only 1.2% inflation—and thus overstate real GDP to 4.2%.

The US has other inflation indexes it could use to adjust for real GDP more accurately, but it doesn’t use them. It prefers the ‘lowball’ GDP Deflator price index. The Consumer Price Index, CPI, is closer to the actual inflation, at 2.7%. If the CPI were used to adjust nominal GDP, the 4.2% real GDP would be only 2.7%. The US Central Bank, the Fed, uses yet another index called the Personal Consumption Expenditure or PCE. That’s at 2.2%, also much higher than 1.2%. If the PCE was used real GDP would be 3.2% not 4.2%. So the most conservative and lowest inflation indicator is used to estimate real GDP. And that’s how Trump gets his phony 4.2% real GDP—i.e. his ‘greatest in history’ US growth number.

But even the CPI, at 2.7%, underestimates inflation. It uses what’s called the ‘chained index’ method for calculating annual inflation rates. That simply takes the actual current year CP inflation and averages, or ‘smooths’, it out with the preceding years of inflation. The resulting ‘averaging of averages’ is a lower than actual annual rate of inflation.

There are other problems with GDP that further reduce the 4.2% assumed real growth rate. Periodically the government changes its definition of what makes up the GDP. The re-definitioning often results in a higher GDP than previous. It’s not a real growth increase, just growth by definition. This redefining GDP is going on globally as well. In Europe for example they now include drug smuggling and services from brothels as contributing to GDP. Of course, to estimate these ‘services’ contributions to total GDP one needs to get a price. Drug peddlers don’t tell the government what they’re selling their heroin or cocaine for. And it’s doubtful that government statisticians stand outside the brothels or interview street walkers to determine the price they charged their ‘johns’. So government statisticians simply make up the numbers and plug them into their GDP calculations. One of the most egregious examples of GDP growth by definition occurred in recent years in India. By redefining GDP it doubled its value overnight. The US engaged in its own form of GDP redefinition a few years back as well, when the economy recovery just couldn’t get off the ground and stagnated in late 2012.

Back in 2013 US GDP was arbitrarily redefined to include categories that had never been included—like the estimation of the value of company logos, trademarks, and intellectual property that never gets sold. What was for decades considered a business cost and not an investment—i.e. research and development—was now added to GDP figures. This change to GDP raised it by $500 billion annually starting in 2013. It’s no doubt higher today. That’s about 0.2% to 0.3% artificial boost to GDP just by redefining it. The point is no one knows the price of new categories like logos, trademarks, and the like. Government bureaucrats simply make them up (like they do ‘imputed rents’) and add them to the GDP totals.

What this all means is that Trump’s boast of his record 4.2% GDP is not really 4.2%, but something far lower, probably around 2%. That’s only a few tenths of one percent higher than under Obama, when GDP averaged around 1.7%-1.8% annually.

Trump’s bragging of historic growth misses another really important problem with GDP: It avoids the question of who benefits from the 4.2% (or 2% in fact). Who gets the income generated from the 4.2%, or 2.7%, or 2%, or whatever. The flip side of the 4.2% GDP is what is called National Income. National Income is what the GDP creates for businesses, investors, wage earners, etc. who make the goods and services that create the National Income. But to whom is the 4.2% national income equivalent of GDP really benefitting? Is it the roughly 130 million wage earners? Or is it the owners of capital, their shareholders and managers, the self-employed? How much do those who make the goods and services—i.e. wage earners—get of the National Income? And is the share of total National Income they are getting distributed more or less equally among the 130 million, or is it skewed to the high end of the wage and salary structure, i.e. the top 10% of wage and salary earners—i.e. the business professionals, tech sector engineers, high paid health professionals, etc.?

Trump’s ‘Wages Are Rising Fast’ Claim

Trump brags that wages are rising at 2.9% a year now. However, that 2.9% is for full time permanent employed workers only. (Read the fine print in the Labor dept. definitions). Excluded are the roughly 50 million part time, temp, on call, under-employed and unemployed. And the wages are rising nicely claim may include extra hours worked—i.e. more overtime for the full time employed and extra part time jobs and gig jobs for the part time and temp employed. Workers’ earnings may thus rise due to more hours worked, not actual wage rate increases. Independent reports show, moreover, that employers are giving raises mostly in lump sum and bonus payments instead of wage rate per hour hikes. That way they can discontinue paying the lump sums and bonuses more easily in the future.

Apart from applying only to full time permanent employed, the 2.9% is a distortion for tens of millions of workers as well because it is an average. It represents those at the top of wages and salary—the best off 10% of tech, healthcare, and select other occupations getting most of the 2.9%. They may be getting 4% and more. Those in the less preferred occupations get far less than 2.9%, or nothing at all in wage hikes. The average is 2.9%. So at least 100 million wage earners are getting far less than 2.9%–which then needs adjusting for a much higher than reported inflation rate. The result is a real wage gain for 100 million or more that is negative, not 2.9%. But Trump doesn’t bother to explain that. The devil is in the details, as they say.

Here’s another problem with the official government wage data reported in the GDP-National Income numbers you probably never heard of. It reduces the share of wages in National Income even more than is reported officially. According to GDP rules, 65% of the profits of unincorporated businesses (i.e. sole proprietorships, partnerships, S-corps, etc.) are considered wages in the National Income data. That’s right. Business Income—aka profits of non-corporate business—is considered ‘wages’ and added to the totals for wages in the GDP-National Income calculations.

The biggest misrepresentation of wage gains, however, is due to the underestimating of true inflation. What matters is ‘real wages’, what wages can actually buy. Trump’s 2.9% wage increase is not adjusted for inflation. It’s not ‘real’. If CPI inflation is 2.7% and nominal wages are rising at 2.9%, then real wages are actually stagnant at best at 0.2%. And if inflation for the more than 100 million primarily wage earning households is really around 3.5%–given recent hikes in oil and gas prices, rents, healthcare costs, utilities costs, local taxes and fees, etc.—then real wages for the 100 million or so are actually falling by 0.6% or more. Just as they have been falling every year since 2009.

Trump’s ‘Unemployment is at an Historic Low 3.9%’ Claim

Like the numbers for GDP, inflation, and wages there are problems associated as well with Trump’s jobs data claim in his UN Speech. The 3.9% unemployment rate Trump declared as ‘the lowest it’s ever been’ refers to the unemployment rate for only former full time permanently employed workers. (The lowest ever rate was 1.9% in 1944, by the way). The 3.9% excludes the 50 million part time, temps, on call, i.e. what’s called the underemployed. If the underemployed are included the unemployment rate rises to about 8%–in other words more than double the 3.9% for full time permanent workers only.

But both the 3.9% and 8% are still underestimates of the true unemployment in the US at present. In the US, someone is considered unemployed only if they are ‘out of work and looked for work in the preceding 4 weeks’. Otherwise, they’re considered part of what’s called the ‘missing labor force’ and not counted in the 3.9% (or 8%). (Note that being unemployed in the US also has nothing at all to do with whether or not you’re getting unemployment benefits).

Another problem with the 3.9% is that it is based in large part on gross and arbitrary assumptions by government statisticians as to the number of new jobs that were created due to ‘new businesses being formed’. The government assumes hundreds of thousands of net new businesses are created every month, each with a number of employees. But the government just makes an assumption of how many businesses and number of employees. It then adds these assumed numbers to the actual numbers of unemployed counted for a recent month. Worse still, this assumed number of new jobs is based on businesses and jobs created nine months prior to the present. For example, assumed new business formations and jobs back in January 2018 are then plugged into current September 2018 job numbers. That boosts the number of jobs in September, to get the lower, 3.9% unemployment rate. And we’re talking about tens and sometimes hundreds of thousands of net jobs from nine months ago being added to current unemployed totals in the present. In short, boosting job numbers (and thus reducing unemployment to 3.9%) from ‘New Business Formation’ assumptions nine months prior is a way of padding the numbers.

Another set of problems in estimating the 3.9% occurs due to how the Labor Dept.’s household surveys are conducted to provide the 3.9% unemployment rate. The government surveys 60,000 households a month by telephone. But not everyone has a telephone or responds to a government call to participate in the survey. Typically refusing to participate in such government surveys are inner city youth, workers ‘working off the books’ and receiving cash instead of wages, most of the 10 million undocumented workers in the US, itinerant workers without cellphones, and others. In other words, how the government surveys to get its estimated 3.9% unemployment rate is not sufficiently accurate either.

There’s an even greater gap in government estimations of unemployment. There’s still millions more who are not counted at all. Millions of workers in recent years have dropped out of the labor force altogether. Remember, if you’re not working or looking actively for work you’re not even in the labor force. Your ‘joblessness’ is therefore not even considered in calculating the unemployment rate. You may be jobless but you’re not unemployed, given the oxymoron US definition of unemployed. And the number of those who have dropped out of the labor force altogether, and thus not considered in calculating the unemployment rate, in the past decade number in the millions!

There’s what’s called the ‘Labor Force Participation Rate’ (LFPR). It is the percentage of the working age population that is employed or else unemployed and actively looking for work. That’s about 58% of the potential working age workforce in the US at present. But before the 2008 crash the percentage or LFPR was 63%. So 5% of the labor force has somehow ‘disappeared’ during the last decade. They’re not factored in the unemployment rate calculations. They may be without jobs, but they’re not considered unemployed. That 5% decline in the LFPR represents 5% of the total civilian labor force, which is about 165 million. So 5% of 165 million is a massive number of another 8.25 million. Having dropped out of the labor force, it is safe to assume most are unemployed or only temporarily or partially employed. About a million of them were able to arrange permanent social security disability benefits.

Mainstream and government economists try to explain away this massive drop out of the labor force by saying it reflects a growing number of retiring baby boomers. But that’s questionable, since the fastest growing numbers of people entering the labor force today (not dropping out) are workers older than 65 and 70, who are returning to work because they cannot afford to retire on the paltry benefits, 401k pensions, and IRAs they have, or the minimal savings they were able to accumulate since the 2008 crash.

To sum up: If to the ranks to the roughly 6.5 million full time permanent unemployed (the 3.9%) are added the 4% or so underemployed and discouraged, there are officially about 8% of the 165 million that are unemployed. That rate is double Trump’s claim of only 3.9%. But add a further 2%–i.e. the ‘hidden’ unemployed not counted in the underground economy, plus the mis-estimation of unemployment due to government survey methods, plus the million or so who have gone on social security disability, plus the 8 million more who have dropped out of the labor force altogether—and the true unemployment rate is somewhere between 15% and 18%, not 3.9%. But you won’t hear that from Trump, or for that matter from government bureaucrats that create the low ball number, or from the media and press that favorably promote the lowest possible number.

Trump’s ‘Stock Markets are at Record Highs’ Claim

In this case Trump is also lying. He claims that he is totally responsible for the current record highs in the Dow, S&P 500, and Nasdaq stock markets in the USA. Record levels in all the three major stock markets are of course fact. That is not the locus of Trump’s lying. The lie is he claims his economic policies, especially tax cuts and military spending and business deregulation are the direct cause of the record stock market levels. While it is true that Trump’s investor-business tax cuts have contributed in 2018 to boosting stocks. The cuts have reduced US budget revenues by more than $300 billion in just the first half of 2018. The tax cuts have thus far provided an artificial windfall to corporate profits of at least 20%, according to numerous studies. Other studies show that 49% of the tax-profits windfall has gone into corporations buying back their stock and paying more dividends to shareholders. Estimates by Goldman Sachs bank research and other sources are that $1.3 trillion will be spent by corporations on buybacks and dividends. That is a major factor why stocks just keep rising this year regardless of concern about trade wars, emerging markets’ currency collapse, Fed raising rates, the spread and deepening of recessions in key global economies, etc. Trump’s lie, however, is his taking credit for the entire stock bubble, when in fact a wall of money has been handed to investors and corporations ever since 2009 by continuous tax cutting under Obama, free low interest money provided by the Federal Reserve for six years, and other forms of subsidization or business by the US government, which is now the hallmark of 21st century capitalism in America.

Trump’s tax cuts and spending may be boosting stock buybacks and dividends—that in turn keep driving stock prices ever higher. But this policy has been going on since 2010. Every year since 2010, buybacks and dividend payouts have on average exceeded $1 trillion a year. Corporate profits have almost tripled. The Fed kept interest rates so low for so long that corporations, like Apple, borrowed billions by issuing new corporate bonds, with which to buy back its stock, increase its dividends, and invest massive sums directly itself in the stock market—even as it hoarded 97% of its $252 billion in cash offshore.

Trump thus lies when he takes full credit for the stock market at record highs. Obama and George W. Bush before him actually are even more responsible than he is.

Jack Rasmus
September 28, 2018

Jack is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming book, ‘The Scourge of Neoliberalism: US policy from Reagan to Trump’, 2019, also by Clarity Press. He blogs at jackrasmus.com, hosts the weekly radio show, Alternative Visions, on the Progressive Radio network, and tweets at @drjackrasmus.

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posted September 26, 2018
Comparing Crises: 1929 with 2008 and the Next

The business and mainstream press this month, September 2018, has been publishing numerous accounts of the 2008 financial crash on its tenth anniversary. This month attention has been focused on the Lehman Brothers investment bank crash that accelerated the general financial system implosion in the US, and worldwide, ten years ago. Next month, October, we’ll no doubt hear more about the crash as it spread to the giant insurance company, AIG, and beyond that to other brokerages (Merrill Lynch), mid-sized banks (Washington Mutual), to the finance arms of the auto companies (GMAC) and big conglomerates (GE Credit), to the ‘too big to fail’ banks like Bank of America and Citigroup and beyond. These ‘reports’ are typically narrative in nature, however, and provide little in the way of deeper historical and theoretical analysis.

Parallels & Comparisons 1929 & 2008

It is often said that the initial months of the 2008-09 crash set the US economy on a trajectory of collapse eerily similar to that of 1929-30. Job losses were occurring at a rate of 1 million a month on average from October 2008 through March 2009. One might therefore think that mainstream economists would look closely at the two time periods—i.e. 1929-30 and 2008-09—to determine with patterns or similar causes were occurring. Or to a deep analysis of the periods immediately preceding 1929 and 2008 to see what similarities prevailed. But they haven’t.

What we got post-2009 from the economic establishment was a declaration simply that the 2008-09 crash was a ‘great recession’, and not a ‘normal’ recession as had been occurring from 1947 to 2007 in the US. But they provide no clarification quantitatively or qualitatively as to what distinguished a ‘great’ from ‘normal’ recession was provided. Paul Krugman coined the term, ‘great’, but then failed to explain how great was different than normal. It was somehow just worse than a normal recession and not as bad as a bonafide depression. But that’s just economic analysis by adverbs.

It would be important to provide a better, more detailed explanation of 1929 vs. 2008, since the 1929-30 crash eventually led to a bona fide great depression as the US economy continued to descend further and deeper from October 1929 through the summer of 1933, driven by a series of four banking crashes from late 1930 through spring 1933 after the initial stock market crash of October 1929. In contrast, the 2008-09 financial crash leveled off after mid-2009.

Another similarity between 1929 and 2008 was the US economy stagnated 1933-34—neither robustly recovering nor collapsing further—and the US economy stagnated as well 2009-12. Upon assuming office in March 1933 President Roosevelt introduced a pro-business recovery program, 1933-34, focused on raising business prices, plus initiated a massive bank bailout. That bailout stopped further financial collapse but didn’t generate much real economic recovery. Similarly, Obama bailed out the banks (actually the Federal Reserve did) in 2009 but his recovery program of 2009-10, much like Roosevelt’s 1933-34, didn’t generate real economic recovery much as well.

After the failed business-focused recoveries, the differences between Roosevelt and Obama begin to show. Roosevelt during the 1934 midterm elections shifted policies to promising, then introducing, the New Deal programs. The economy thereafter sharply recovered 1935-37. In contrast, Obama stayed the course and doubled down on his business focused recovery program in 2010. He provided $800 billion more business tax cuts, paid for by $1 trillion in austerity programs for the rest of us in August 2011.

Not surprising, unlike Roosevelt’s ‘New Deal’, which boosted the economy significantly starting in 1935 after the midterms, Obama’s ‘Phony Deal’ recovery of 2009-11 resulted in the US real economy continuing to stagnate after 2009.

The historical comparisons suggest that both the great depression of 1929-33 (a phase of continuous collapse) and the so-called ‘great’ recession of 2008-09 share interesting similarities. Both the initial period of the 1930s depression—October 1929 through fall of 1930—and the roughly nine month period of October September 2008 through May 2009 appear very similar: A financial crash led in both cases to a dramatic follow on collapse of the real economy and employment.

But the 1929 event continues on, deepening for another four years, while the latter post 2009 event levels off in terms of economic decline. Thereafter, similar pro-business subsidy policies (1933-34) and (2009-11) lead to a similar period of stagnation. Obama continues the pro-business policies and stagnation, while Roosevelt breaks from the business policies and focuses on the New Deal to restore jobs, wages, and family incomes and recovery accelerates. Unlike Roosevelt who stimulates fiscal spending targeting household incomes, Obama focuses on further business tax cutting—i.e. another $1.7 trillion ($800 billion December 2010 plus another $900 billion in extending George W. Bush’s tax cuts for another two years—thereafter cutting social programs by $1 trillion in August 2011 to pay for the business tax cuts of 2010-11.

The policy comparisons associated with the recovery and non-recovery are clearly determinative of the comparative outcomes of 1935-37 and 2010-11, as are the comparisons of the business-focused strategies 1933-34 and 2009-10 that resulted in stagnant recoveries. But the political outcomes of the policy differences are especially divergent and interesting.

No less interesting are the political consequences for the Democratic Party. Roosevelt’s 1934 campaigning on the promise of a New Deal resulted in the Democrats sweeping Congress further than they did even in 1932. They gained seats in 1934 so that by 1935 they could push through the New Deal that Roosevelt proposed despite Republican opposition. In contrast, Obama retained, and even deepened, his pro-business programs before the 2010 midterms which resulted in the Democrats experiencing a massive loss in Congress in the 2010 midterm elections. Thereafter, the Democrats were stymied by a Republican House and Senate that blocked everything. Obama nonetheless kept reaching out and asking for a compromise with Republicans, but the Republican dog bit his hand with every overture.

Obama pleaded with American voters for one more chance in 2012 and they gave it to him. The outcome was more of the same of naïve requests for compromise, rejection, and a continued stagnation of the US economy. Republicans meanwhile also deepened their control of state and local level governorships, legislatures, and local judiciary throughout the Obama period.

The final consequence of all this was Trump in 2016 as the Obama Democrats promised more of the same in the 2016 presidential election. We know what happened after that.

Consequences for US Midterm 2018 Election
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As yet another midterm election approaches, November 2018, we are once again inundated with mainstream media projections of a ‘blue (Democrat) wave’ coming. But they are today the same pollsters of that same media that were proclaiming in October 2016 that Trump had only a 15% chance of winning the 2016 election. What’s changed that we should believe the pollsters, the media, and the Democrats this time around again that Democrats have the big lead?

Granted, there have been a few notable progressive victories in solid, highly urban constituencies But this does not necessarily ensure their optimistic projections. A likely greater voter turnout in these urban Congressional districts must be weighed against the continued Republican-Trump efforts to deny millions of their voting rights, the continued gerrymandered reality of Republican-led governorships and legislatures, and the massive money machine of ultra-right wing billionaires like the Koch brothers, the Mercers, the Adelmans and other radical right billionaire families behind Trump that is now cranking up to provide a wall of money for Trump sycophants running for office. And let’s not forget those millions of phony religious-moral Americans who support Trump regardless of his misogyny, racism, attacks on the press and immigrants, or his obvious disregard for the even limited democratic institutions and precedents that barely still prevail today in the US. Like Germans who loved Hitler, but not necessarily the Nazi philosophy, they will follow him over any cliff.

Will Millenials now turn out to vote in 2018 when they didn’t in 2016? What have Democrats promised to them this time that they will believe? Why should they think Democrats are any different now? Will Latinos and Hispanics turn out this time, when the Democrats promised last February a ‘line in the sand’ for a Dreamers bill or no approval of the US debt ceiling extension—and then caved in once again? Women and professionals (independents) tired of Trump’s antics and misogyny may come back to vote for the Dems. Maybe some union workers in the Midwest this time, who abandoned Hillary in 2016, as well. But will that be enough?

What will the public think and feel should Trump and his now converted radical Republican party maintain control of the House and Senate for another two years? They’ve been told of the coming ‘blue wave’. But what if that wave dissipates on the reactionary shore that has been deepening in America now for decades? What will the anti-Trump camp do? Say ‘Ok, let’s try again in 2020’? And go away further demoralized?

The opposite outcome in November—a defeat for Trump in the House—will have a similar ‘shock’ to public consciousness, only this time on the right. What will the far right do should it appear that the Dems win the House and announce Trump impeachment proceedings? Trump’s 30% of the electorate are beholden to him only—and not to the remaining, limited democratic institutions of America. He can do no wrong, even if it means dismantling the vestiges of democracy in America.

Should Trump lose the House and face the threat of impeachment, or even an indictment by special prosecutor Mueller, the radical right will mobilize at the grass roots. Bannon at his ilk, fueled by the money of the Mercers et. al., may well shift to popular right wing mass protests and demonstrations. They will want to ‘warn’ the Dems and others to proceed with caution toward impeachment or face the advent of a proto-civil war in the country. A threat of such, if not actual.

The linking of Trump, his wealthy backers, and releasing grass roots Trump supporters into a real street movement will mean yet another step toward a US fascist-like phenomenon. We are not there yet. Trump is not a fascist. To throw around the charge, as a part of the progressive left does, is like crying ‘wolf’ before it actually appears’. If and when it does appear, what should the real wolf then be called?

If Trump is not a fascist he clearly has proclivities toward tyranny and dictatorship: he obviously considers himself above the law (definition of Tyrant), as he has already declared he would pardon himself if indicted. And he clearly identifies with, and is fond of other, authoritarian strong men like Kim, Duterte, and others who rule by dictate. A crisis period Trump administration might be expected to ‘rule by executive order’, with the permission of Congress perhaps. But he is not yet a fascist (as so many progressives mistakenly declare). For that he needs a movement in the streets. Bannon, the Mercers and friends may yet give him that should he be actually impeached.

That street movement may be sufficient to scare the timid liberals and Democrats in Congress from proceeding with impeachment in all but talk should they win the House in November. The leadership of the Democrats will likely back off, once again, should Trump-Bannon turn to the streets. Therefore Democrats, should they win the House, will be all talk and no action. We’ll hear instead the real message, the real strategy: “complete the anti-Trump change by electing a Democrat president in 2020.” Once again, as Trump and the right leverage grass roots movements, the Dems try to funnel all discontent into their re-elections. Trump spends most of his time at rallies in the field. Obama sat on his butt in the White House and was rarely seen or heard.

But hasn’t that been the problem of the last several decades? Republicans link up with the Teaparty, go for the juggler, release the political demons in America always simmering below the surface, mobilize right wing money bags, pervert what remains of democratic institutions, block and thwart all progressive legislation, and ‘kick ass and take names’ of the Democrats—who respond timidly, try to play by the old rules, mouth bipartisanship ad infinitum, and continually retreat in the face of the right wing onslaught

With more than 100 of its Democrat National Committee, DNC, composed of business CEOs and business lobbyists, there’s little chance the Democratic Party will really directly confront Trump and his minions. Should the Democrats even win the House in November, it will be mostly talk of impeachment and token moves for the media, while re-directing discontent to electing still more Dems in 2020 as the real strategy. Meanwhile, Trump and the radical right will continue to mobilize in defense—legislatively, financially, and at the grass roots in increasingly confrontational ways.

To sum up: 1929 gave us Roosevelt and the ‘New Deal’. 2008 gave us Obama and a ‘Phony Deal’. The 2018 midterm elections and the next financial crisis, which is no more than 2-3 years away, may give us Trump’s ‘Final Deal’.

Whether Trump survives November, and his now transformed in-his- image Republican party continues to shield him and allow him to deepen his radical policies, or whether the Democrats take the House and commence talking impeachment proceedings—the result in either case will be a shattering of public consciousness from its prevailing mode once again, as occurred in November 2016. Either way, the next two years will undoubtedly prove more politically unsettling and economically destabilizing than the last.

The Next Crisis

The next financial crisis—and subsequent severe contraction of the real economy once again—is inevitable. And it is closer than many think, mesmerized by all the talk of a robust US economy that is benefiting the top 10% and not the rest. Why so soon?

The answer to that question will not be provided by mainstream economics. They are too busy heralding the current US economic expansion—which is being grossly over-estimated by GDP and other data and which fails to capture the fundamental forces underlying the US and global economy today, a global economy that is growing more fragile and thus prone to another major financial instability event.

The forces which led to the 2008 banking crash were associated with property bubbles (US and global) and the derivatives markets which allowed the bubbles to expand to unsustainable levels, derivatives which then propagated and accelerated the contagion across financial markets in general once the property bubbles began to collapse.

The 2008 crash was thus not simply a subprime housing crisis, as most economists declare. It was just as much, perhaps more so, a derivatives financial asset (MBS, CMBs, CDOs, CDSs, etc.) crisis.

More fundamentally than the appearance of a collapse in prices of subprime mortgages, and even derivatives thereafter, 2008 was a crisis of excess credit and debt that enabled the boom in subprimes and derivatives to escalate to bubble proportions.

But subprimes and derivatives were still the appearance, the symptoms of the crisis. Even more fundamentally causative, the 2008 crash had its most basic origins in the massive liquidity injections by the central banks, led by the US Fed, that has occurred from the mid-1980s to the present. The massive liquidity provided the cheap credit that fueled the excess debt that flowed into subprimes and derivatives by 2008. (And before than into tech stocks in 1998-2000, and before that into Asian currencies (1996-97), and into Japanese banks and financial markets and US junk bonds and savings & loans in the 1980s, and so forth).

Excessive debt accumulation is not the sole cause of financial crises, however. It is an enabling precondition. Enabling the debt in the first place is the excess liquidity and credit. That liquidity-credit-debt buildup is what occurred in the 1920s decade leading up to the October 1929 stock crash. It’s what occurred in the decades preceding 2008, especially accelerating after the escalation of financial derivatives in the 1990s.

Excessive debt creates the preconditions for the crisis, but the collapse of financial asset prices is what precipitates the crisis, as the excessive debt built up cannot be repaid (i.e. principal and interest payments ‘serviced). So if liquidity provides the debt fuel for the crisis, what sets off the conflagration is the collapse of prices that lights the flame.

The collapse of stock prices in October 1929 precipitated the subsequent four banking crashes of 1930-33. The collapse of property prices (residential subprime and also commercial) in 2006-07 precipitated the collapse of investment banks in 2008, thereafter quickly spilling over to other financial institutions (brokerages, insurance companies, mutual funds, auto finance companies, etc.) after the collapse of Lehman Brothers investment bank in September 2008.

Today in 2018 we have had a continued debt acceleration since 2008. As estimated by the Bank of International Settlements (BIS) in Geneva, Switzerland, total US debt has risen from roughly $50 trillion in 2008 to $70 trillion at end of 2017. The majority of this is business debt, and especially non-financial business debt. That’s different from 2008 when it was centered on mortgage debt. It is also potentially more dangerous.

The US government since 2008 has also increased its federal debt by trillions, as it continued to borrow from investors worldwide in order to ‘finance’ and cut business-investor taxes and continue escalation of war spending since 2008. US household debt also rose further after 2008, as the lack of real wage and income growth over the post-2008 decade has resulted in $1.5 trillion student debt, $1 trillion plus in auto and in credit card debt, and $7-$8 trillion more in mortgage debt. Globally, according to the BIS, non-financial business debt has also been the major element responsible for accelerating global debt levels—especially borrowing in dollars from US banks and investors (i.e. dollarized debt) by emerging market economies, as well as business debt in China issued to maintain state owned enterprises and to finance local building construction.

So the debt driver has continued unabated as a problem since 2008, and has even accelerated. Financial asset bubbles have appeared worldwide as a result—not least of which is the current bubble in US stocks. This time it’s not real estate mortgages. It’s non-financial business and corporate debt that is the likely locus of the next crisis, whether in the US or globally or both.

Since 2008 US and global debt bubbles have been fueled once again—as in the 1920s and after 1985 by the excess liquidity provided by the US central bank, and other advanced economy central banks. The central bank, the Fed, alone has subsidized US banks and investors to the tune of $6 trillion from 2009 to 2016, as a consequence of its QE and near zero interest rate policies.

Since 2008, excessive and sustained low interest rates for investors and business have resulted in at least $1 trillion a year in corporate debt buildup, as corporate bond issues have accelerated due to ultra cheap Fed money. The easy money has allowed countless ‘junk’ grade US companies to survive the past decade, as they piled debt on debt to service old debt. Cheap money has also fueled corporate stock buybacks and dividend payouts to investors, which have been re-funneled back into stock prices and bubbles. So has the doubling and tripling of corporate profits from 2008 to 2017 enabled record buybacks and dividend distributions to shareholders.

Most recently, in 2017-18 the subsidization locus has shifted to Trump tax cuts that have artificially boosted US profits by a further 20% and more. As data has begun showing in 2018, most of that is now being re-plowed back into stock buybacks and dividend payouts—this year totaling more than $1.4 trillion, after six years of already $1 trillion a year in buybacks and payouts. That’s more than $7 trillion in distribution by corporate America in buybacks and dividends to its wealthy shareholders.

Where’s the mountain of money provided investors all gone? Certainly not in raising wages for workers. Certainly not in paying more taxes to government. It’s been diverted into financial markets in the US and globally—stocks, bonds, derivatives, currency, property, etc.—into mergers & acquisitions in the US, or just hoarded on balance sheets in anticipation of the next crisis approaching. Or sent into emerging markets (financial markets, mergers & acquisitions, joint ventures, expanding production, etc.) when they were booming 2010-2016.

So where will the financial asset prices start collapsing in the many bubbles that have been created globally and in the US so far—and thus precipitating once again the next financial crisis? The BIS has been warning to watch US corporate junk bonds and leveraged loan markets. Watch out for the new derivatives replacing the old ‘subprimes’ and CDSs—i.e. the Exchange Traded Funds, ETFs, passive index funds, dark pools, etc. Watch also the US stock markets responding to US political events, to a real trade war with China perhaps in 2019, a continuing collapse of emerging market economies and currencies, to a crisis in repayment of non-performing bank loans in Italy, India and elsewhere, or a tanking of the British economy in the wake of a ‘hard’ Brexit next spring, or Asian economies contracting in response to China slowing or its currency devaluing, or to any yet unseen development. Collapsing prices in any of the above may be the origin of the next financial asset contraction that will spread by contagion of derivatives across global markets. And the even larger debt magnitudes built up since 2008 may make the eventual price deflation even more rapid and deeper. And the new derivatives may accelerate the contagion across markets even faster.

The financial kindling is there. All it now takes is a spark to set it off. The next financial crisis is coming. The last decade, 2008-18, is eerily similar to the periods 1921-1929 and 1996-2007.

Only now it will come with the US challenging foreign competitors and former allies alike as it tries to retain its share of slowing global trade; with a US economy having devastated households economically for a decade; with a massive US federal debt now $21 trillion and going to $33 trillion due to Trump tax cuts; with a US crisis in retirement income, healthcare access and costs, and a crumbling education system; with an economy having created only low pay and mostly contingent service jobs; with a virtually destroyed union movement; with a big Pharma initiated opioid crisis killing more Americans per year than lost during the entire 9 year Vietnam war; with a culture allowing 40,000 of its citizens a year killed by guns and doing nothing; with an internal transformation and retreat of the two established political parties; and with a Trump and right wing radical movement ascendant and poised to move to the streets to defend itself.

Jack Rasmus
September 24, 2018

Dr. Rasmus is author of the forthcoming book ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, 2019. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. (For a more detailed analysis of the similarities and differences between 1929 and 2008, and how Roosevelt and Obama treated the crisis differently, read the except from Dr. Rasmus’s 2010 book, ‘Epic Recession: Prelude to Global Depression’, Plutobooks, now posted on his website, http://kyklosproductions.com).

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