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Is the chronically stagnant US economic recovery since 2009 (predicted in my 2010 book, ‘Epic Recession: Prelude to Global Depression’), the result of insufficient income growth for most households—that is then necessary to stimulate consumption demand that, in turn would result in real investment that would create jobs? Or has the escalation of financial asset prices since 2009—itself the consequence of $10-$15 trillion of Fed and central bank liquidity injections— resulted in lower real investment in the US and thus the failure of job and income growth?

To restate more simply: does the lack of wage and income growth determine real asset investment; or are the expanding opportunities for more profitable financial asset speculative profits globally driving the decline of US real asset investment (and thus jobs, wages, and income growth)?

Which is the more primary causal relationship? If one believes lack of income is the primary cause of declining real investment today in the USA, then the solution is simply to raise wages and income of households that typically spend by whatever means—tax cuts, subsidies, etc. The problem is simply an insufficient level of income.

But what if, alternatively, it is not income that determines real investment, but rather the addiction of investors to financial asset speculation and investing that is the main determinant of slowing real asset investment?

If the latter is primary, then simply raising wages and incomes alone will not necessarily ensure real investment returning to historical levels in the US economy. That is, the determinants of real asset investment lay just not with inadequate income growth in the US, but with the expanding and more profitable financial investment opportunities in a 21st century finance capital world in which investors are increasingly addicted to financial asset speculation forms of investment.

This is a critical distinction that mainstream economists fail to understand (and some ‘left’ economists only partly understand). It is important because merely boosting wages and incomes of median and below households will not, by itself, generate sustained real investment and recovery in the US economy. That’s a Krugman-Reich-Stiglitz notion. It is also a classical ‘underconsumptionist’ argument that those who follow Marx should know Marx himself rejected unequivocally.

Sustained recovery requires direct investment, not just a rise in consumption income that hopefully might convince capitalists to again reinvest in the US (or not convince). So the problem is not merely a lack of income growth to stimulate investment. US capitalists are investing–just not in real asset investment and not in the US. They are investing in emerging markets, and even more so in financial asset markets globally (which are now more numerous, liquid, and available than ever before due to the creation of an unregulated global shadow banking system). That’s where the Fed’s $15 trillion money injection is going (some of which is also just being hoarded on balance sheets, of course).

The more fundamental problem is that finance capital has changed. Raising incomes of workers and middle class Americans will help recovery somewhat, but not all that much. It will not result in sustained economic recovery any longer. It is therefore not the main solution to the long term economic stagnation that the US has been experiencing since 2009. Capitalist profit opportunities are simply greater offshore in EMs, and in financial asset markets, than they are from making goods and services in the US, even if US workers were able to buy those real goods and services if they had more income.

Neither mainstream liberal economists, nor even many US Marxist economists, understand the differences, or the important mutual causal relationships between financial asset investment and real asset investment, which is key to understanding today’s long run global economic stagnation trends in the US, Europe, and Japan ‘heartland’ of the global capitalist economy.

To argue simply for wage and income growth as the solution to a chronic stagnant US economic recovery—as Krugman and colleagues do for example—is to assume that capitalist enterprise will redirect itself from more lucrative profit opportunities from financial speculation and in offshore markets, back to less profitable real production of goods and services in the US. They won’t to any significant extent, since rates of return in the latter are significantly less than in the former.

The only real solution to a sustained US recovery is for massive public government investment, that then subsequently creates income. Investment precedes income creation, it does not necessarily follow it any longer in a world of 2st century global finance capital. Just calling for income growth (via minimum wage hikes, more low pay contingent job creation, tax cuts, or whatever) will not necessarily result in a rise in US-based investment if Capitalists continue to shift to more profitable financial speculation offshore; public investment on a major scale must therefore occur prior to income growth in order to generate a sustained recovery.

Krugman and his neo-Keynesian colleagues don’t understand this essential error in their analysis. They simply believe all forms of consumer demand stimulation are the same. Only the aggregate amount matters. (which, by the way, Keynes himself did not maintain, so they aren’t even really Keynesians at all).

Neo-Marxists should beware of this idea that ‘simply raising wages and incomes is the solution to economic recovery’. They should understand that the financial bubbles being created again around the world are not a consequence of declining real asset investment but are a cause of it. They should beware of slipping into an argument of promoting dead-end underconsumptionism in its many variant forms.

In today’s world of 21st Century Global Finance Capital, don’t expect capitalists to invest in real production and thus jobs and income in the US economy as they did decades ago. They are too busy making greater profits offshore and in financial asset speculation, leveraging the trillions of dollars of free money and credit created for them by the Federal Reserve. If real investment in the US economy is ever to return, it will have to come via major public investment initiatives. And if not, expect chronic real economic stagnation to continue, as has been the case since 2010.

Dr. Jack Rasmus
Green Shadow Cabinet Federal Reserve Chair
July 26, 2014

by Dr. Jack Rasmus, copyright July 2014
Source: teleSUR English
July 14, 2014
(Written for teleSUR English, which will launch on July 24)

“As the military crisis in the Ukraine has intensified with the fall of key rebel cities, like Slavyansk and Kramatagorsk, and as new decisive conflicts for the capitols of Donetsk and Lugansk regions are about to take place, in the West some are beginning to ask why Putin has not more directly intervened on behalf of the rebels in the eastern breakaway regions? After initially having mustered Russian forces on the eastern border of Ukraine late last winter, why has Putin pulled back and ordered them to ‘stand down’?

When the Ukraine crisis entered a new stage last February 2014, the question of the day five months ago was ‘would Putin and Russia’ directly intervene militarily’? Today the key question has become ‘why hasn’t Putin intervened’ and ‘why does it appear increasingly that he will not’?

Over the past decade, the USA built up its support among proto-fascist elements on the ground in the Ukraine, funding these forces to the tune of a US admitted $5 billion. It then elbowed aside EU negotiators and intervened directly last February, when it appeared the European Union was about to strike an economic deal that was not politically aggressive enough in the USA view.

The USA has clearly wanted political regime change all along, not just a favorable economic deal with Ukraine. The so-called ‘Orange Revolution’ initiated a decade ago had succeeded only in part in breaking the Ukraine from the Russian economic and political orbit. The Ukrainian crisis of 2013 offered a new opportunity to complete the unfinished political task of the Orange Revolution. But the Europeans, mired in their own economic problems, were not interested in taking the lead.

In her publicly much quoted statement. ‘fuck the EU’, made last February on the eve of the coup by the USA’s leading diplomat on the ground at the time, Virginia Nuland, the USA clearly assumed direct control of the Ukrainian intervention from the Europeans. The European Union, together with the European-led IMF, would henceforth be left to negotiate the economic bailout with the Ukraine. But the USA would now drive the political policy.

The dichotomy between the USA and the EU that erupted into full view with the February 2014 coup in Kiev, when the USA took charge ‘on the ground’ is still evident today: Since the May 2014 Ukrainian parliamentary elections the USA has continued to push for harsher economic sanctions against Russia while directing the new Ukrainian Poroshenko government to undertake more aggressive military action in the eastern regions of the Ukraine. In recent months, moreover, it has become further clear that USA military, CIA , and no doubt USA special forces advisors have been calling the shots on the ground militarily for the Poroshenko government. USA advisors have been flowing steadily into the Ukraine since last May. And shifts concerning Ukrainian military tactics and strategy against the eastern regions in recent months have almost always coincided with high ranking US politicians and USA-NATO military personnel visits to the Ukraine.

In contrast, the EU governments have been trying to keep the economic sanctions against Russia limited to select individuals instead of entire economic sectors in Russia, as the USA has proposed, while calling for a ceasefire and immediate negotiations between the parties.

Given the aggressive USA political policy toward the Ukraine today, the question is: ‘ Why has Putin not responded more aggressively to the threat of the now potential severing of the Ukraine from Russian economic and political interests’? Why has Russia not militarily intervened to date and appears, with every passing week, even less likely to do so?

The possible answers to Russia’s cautious, measured response to USA aggressive political and military policies in the Ukraine are several:

(For the remainder of this article, go to the author’s website, at

http://www.kyklosproductions.com/articles.html

Alternative Visions Radio Show – New York City Railroad Workers & the Future of American Labor – 07/12/14

Jul 12th, 2014 by progressiveradionetwork.see the urls for download of this show below:

SHOW ANNOUNCEMENT:

“Jack Rasmus invites guest, Chris Silvera, Secretary-Treasurer of Teamsters Local 808 in New York City, to discuss the current struggle of New York City’s Long Island railroad (LIRR) workers for decent wages and benefits and their possible strike on July 20 that could shut down New York City, stranding 700,000 commuters into the city from the Long Island and the ‘Metro North’ rail-lines. Jack comments how the LIRR negotiations today are a microcosm of management’s successful anti-labor core bargaining strategy of the past 20 years: i.e. a strategy in which previously hired workers are given token wage increases just sufficient to pay for rising health care premiums, deductibles and copays—while new hires and younger workers’ wages are reduced and their healthcare cost contributions are raised. Chris explains management’s latest proposal to LIRR workers—who haven’t had a wage increase in 5 years—is a 2% annual wage increase for current hires, to pay for their rising out of pocket healthcare costs, while new hires will have wages cut 4% and their benefit contributions increased another 4%. LIRR unions and workers vow to break the 20 year pattern of making new, younger workers pay for existing members token wage gains and benefits maintenance, in what promises to be an important effort to break from the past. Meanwhile, railroad workers appeals to Democratic Party politicians in the city, to New York governor, Cuomo, and to Democrats in Congress to intervene are being ignored, as politicians run the other way revealing the ‘dead end’ of labor’s political strategy of recent decades.

In the second half of the show, Chris and Jack discuss how the LIRR negotiations represent a bigger picture of the growing ineffectiveness of traditional union strategies—both bargaining and political. Chris notes a new kind of ‘McCarthyism’ prevailing in unions today, where militant and radical rank and file workers no longer run local unions and have been replaced by what he calls ‘staffism and intellectuals’. Jack discusses the ‘legal web’ that has arisen in recent decades that has given national and regional union leaders excessive legal and political intervention power over local unions, and how the power and independence of local unions must be restored and raise if change is to occur. Jack concludes that restoration will require,however, structural change and new organizational forms at the local union level.

To access and download this radio show, go to:

http://prn.fm/shows/alternative-visions/

or to:

http://www.alternativevisions.podbean.com

First published by http://www.telesurtv.net/english

“Since late 2012 the global economy has been in the process of a long term economic slowdown—in terms of real productive investment, global trade, productivity, as well as other key economic indicators. That slowdown appears irregular over the short run, with some months and quarters up and some down, but a longer term slowing trend is evident nonetheless.

Concurrent with the long term real economy slowing, conditions for a new round of financial instability and a new financial crisis have continued to build globally as well.

Moreover, both the slowing global real economy, and the forces building toward yet another global financial crisis, appear increasingly concentrated in the emerging markets sector of the global economy.

In the following Part 1 of the two-part series on the growing economic problems and instability in emerging market economies, the analysis focuses on how the advanced economies of the USA and Europe are in the process since 2013 of ‘exporting’ their failed economic recoveries to emerging market economies. In Part 2 of the series to follow, analysis will focus on the causes behind the rapidly rising debt and financial instability in the emerging markets economies, including China.

Since the financial crash of 2008 and the global great recession that followed, the global economy has evolved through several stages or phases. The first stage or phase was the general financial crash and deep real economic contraction that occurred worldwide during 2008-09. That crash was centered in the economies of the advanced economies (AEs)—US, Europe, and Japan. The AE-centered crash initially dragged down all the major economic sectors of the world economy in its wake, including initially China and Emerging Market Economies (EMEs).

The second phase, from 2010 to early 2013, was characterized by a dual condition: China and EMEs recovered quickly and robustly beginning 2010, while the AEs either slipped back into multiple recessions or more or less stagnant economic growth.

In the second, 2010-12 phase of the global economy, China and the EMEs economic trajectories differed from the US and AEs due to several factors: first, they were not at the center of the financial crash and they were able to significantly stimulate their economies fiscally to produce real productive investment; second, money and credit was quickly made available from both internal and external sources to enable their real investment, expansion, and recovery. China and EME’s therefore experienced a ‘V-shape’ rapid recovery between 2010-12. China and several major EME economies grew at double digit annual GDP rates, and most other major EMEs in the 5%-10% GDP range during the second phase period.

During the same period, however, Europe experienced a bona fide double dip recession in its real economy. Japan fared even worse, experiencing a triple dip recession from 2010 to 2013. Meanwhile the USA economy experienced weak economic growth, which included three bouts of ‘economic relapses’, defined as a single quarter collapse in GDP to zero growth or less.

Relapses occurred in early 2011 and late 2012 in the USA, which narrowly averted slipping into double and triple dip recessions similar to that which impacted Europe and Japan from 2010-13.

This second 2010-2012 phase—characterized by the AEs slipping in and out of recession and near recession while China and EMEs experienced a robust recovery—reflected a global capitalist economy that did not fully or fundamentally recover from the crash of 2008-09. The sharp crash and contraction of 2008-09 merely morphed into a new form during 2010-12, i.e. of continuing long term economic stagnation in the AEs amidst robust growth in China and the EMEs.

Beginning mid-2013, however, the ‘dual’ character of the second phase began to reverse, with China and the EMEs dramatically slowing in terms of real economic growth, as the AEs recovered from recession in early 2013 in both Europe and Japan and began to grow moderately at 1%-2%, and as the USA 1.7% average GDP growth since 2010 rose to a 3% plus GDP rate in the second half of 2013.

In contrast, China’s growth rate began slowing in 2012, from double digit 12%-13% GDP rates to an official 7% in 2014, which many economists consider overestimated and really at 6% or even slightly less. China’s economy has slowed to 7% or less, moreover, despite two rounds of fiscal stimulus in early 2013 and again early 2014. Other EMEs like India, Brazil, Mexico and others— growing well beyond 5% annual rates in the second phase—now slipped beginning 2013 to low single digits percentages at best, while South Africa, Russia, and other EMEs slipped into mild recessions.

There is thus, beginning circa mid-2013, a distinct reversal underway in the global capitalist economy. Once rapidly growing EMEs are now slowing, and once stagnant and declining AEs now stabilizing or even growing at low annual rates instead of experiencing recessions or stagnation. The net result, however, is a still further slowing global economy.

This can be seen in the data for global trade, which declined significantly by late 2013 and even more in 2014. Compared to the first quarter of 2013, world trade in early 2014 rose a mere 1.5% compared with the year earlier. Similarly, global business spending trends show that the 1% decline in global capital spending by corporations in 2013 is projected to continue to decline another 0.5% at least in 2014. As the ‘reversal’ occurs and the third phase of the global economic crisis emerges, the overall global real economy will continue to slow as well.

It is important to understand why this second 2010-2013 phase dual growth scenario has ‘shifted’ or reversed as the global economy now enters a third stage? And also to understand why modest growth in the AEs is about to occur at the expense of a slowing of growth in the EMEs?

Here’s a brief summary answer to these two important points:

When the financial crash and deep contraction of the first phase of the global crisis occurred 2008-09, the US central bank (the Federal Reserve) and the Bank of England quickly injected tens of trillions of dollars and pounds into the global banking system to stem a deeper and more profound collapse. That injection occurred in the form of special auctions, setting private bank borrowing rates at near zero, and by the central banks buying up bad investments from banks and private investors by printing money, a program called ‘quantitative easing’ (QE).

Together these various central bank measures injected conservatively somewhere between $10-$20 trillion in virtually free money into the private banks, both commercial and ‘shadow’ banks. The massive money-liquidity injection effectively ‘bailed them out’. Meanwhile, Congress and the UK Parliament injected further stimulus into nonfinancial corporations by means of tax cuts, subsidies, and other measures. The former bank bailout was supposed to stimulate bank lending to businesses and consumers in order to stimulate the real economy in turn. The legislative measures were supposed to stimulate business and consumer spending. Neither had the intended effect. The AE economies consequently stagnated.

What happened instead was the massive liquidity injections, targeted to both bank and non-bank corporations, were either hoarded as cash on AE bank balance sheets, or invested offshore in EMEs commodity and infrastructure expansion projects, or invested in financial bond, stock, foreign exchange currency, and other securities markets offshore in the EMEs.

In other words, instead of stimulating the AE economies, massive money capital flows went offshore from the AEs to the EMEs stimulating business investment in EMEs in commodities, infrastructure, and other goods producing sectors, as well as in the financial markets of the EMEs. At the same time, as China introduced its own massive 15% of GDP fiscal stimulus package in 2009, thereby boosting its own growth to double digit levels, China demand for EME commodity exports and goods exports escalated as well. The combined money in-flows to EMEs and demand for their products by China and other EMEs, resulted in the robust double digit growth of EMEs in the second phase, 2010-13.

As quantitative evidence of this process, whereas money capital flows into EMEs before 2010 never exceed a cumulative $400 billion, beginning in 2009 money capital inflows to EMEs escalated quickly to $1.5 trillion by 2011 and to $2.5 trillion by 2013. EMEs benefited doubly by developments in the second phase of the global crisis: from the massive money inflows and investments from the central banks, private banks, and investors in the AEs, on the one hand, and from China’s stimulus of 15% of GDP in 2009-10 that resulted in its own record double digit growth and therefore demand for EME exports.

But by 2013 this had all begun to fundamentally change, i.e. to shift and reverse. In the late spring of 2013 it became clear to AE central banks, the Federal Reserve and the Bank of England especially (and to the European Central Bank and Bank of Japan which initiated their own ‘liquidity injection’ policies later in 2012 and 2013, respectively), that massive money capital injections saved their private banking systems—but that same multi-trillions of dollars of liquidity injections did not stimulate their real economies.

Moreover, central bankers were becoming increasingly aware that the tens of trillions of dollars of their liquidity injections from 2009 through 2013 were stimulating financial asset bubbles in their own AE economies—especially in stocks, junk bonds, housing once again, leveraged loans, and CLOs and other derivatives. It also became increasingly clear to AE central bank policy makers that it was not necessary any longer to pump more money capital into their banks. It was perhaps more effective to ‘recall’ the money and liquidity that had previously been provided to AE banks, but had in turn been diverted by those same banks to EMEs and offshore economies, offshore financial markets, and offshore tax havens by AE investors and businesses.

The decision by the Federal Reserve was therefore in early summer 2013 to announce it would soon reduce its QE money injections and consider raising interest rates. Just the announcement that it would consider such action resulted immediately in reverse money flows from the EMEs back to the AE economies.

Capital flight starting flowing out of the EMEs in the summer of 2013 at an alarming rate. EME currencies began to rapidly decline as a result. Investment in-flows into EMEs began drying up. EME stocks and bonds plummeted. Exports slowed. And inflation in imported goods into EMEs rose.

In response to growing capital flight, falling currencies, and declining foreign investment, the EMEs quickly raised their domestic interest rates to stem all the above. It helped some. However, the response of higher domestic interest rates resulted in a slowing of their own domestic economies. And slower EME growth translated into slower global economic growth, as prior referenced data on global trade and capital investment showed.

The capital flows back to the AEs, however, meant a new source of demand for AE stock and bond markets. Foreign reverse cash inflows boosted US and UK stock markets, junk bond markets, and foreign exchange trading in particular to new heights. Money returning also flowed into housing and real estate markets, which experienced a brief modest recovery in the US in 2012-13 and a more rapid growth in the UK, in London property markets in particular.

Somewhat ironically, AE central banks’ 2013 decisions to reduce direct money injections via reducing QE actually served to increase liquidity in the AEs. Pulling back money capital from the EMEs to the AE economies actually stimulated select sectors of AE economies, like real estate. But that same reversal of money capital flows also served to reduce economic activity and growth in the EMEs as well. Growth would be stimulated in the AEs, but at the expense of growth in the EMEs.

However, the process proved initially too disruptive in the early summer of 2013, when the Federal Reserve first mentioned plans to reduce QE and later raise rates as well. The contraction and disruption in the EME economies was occurring too rapidly. The USA Federal Reserve therefore announced quickly a turnabout in July 2013, indicating that it was not really planning to raise rates or reduce QE. The EMEs crisis abated: capital flight slowed, currencies recovered lost value, and EME economies stabilized as well.

The Fed then announced once again in late summer 2013 that it planned to slow its QE injections; EME instability returned. The Fed retreated a second time temporarily in the fall of 2013 as the US Congress’s government shutdown and risks of government bond defaults rose as a possibility. Fed monetary policy and QE was sidelined. After having passed, by year end 2013 thereafter the Fed began its policy of reducing QE injections slowly over coming months. EME instability was on again. And so it has gone ever since over the course of the past year, off and on, on and off, as monetary policy of AE central banks continues to shift and reverse.

What is clear is that the long run policy direction in the AEs, in particular the USA and UK, is to ‘recall’ capital from the EMEs in order to re-stimulate its own inadequate economic recoveries to date. The initial liquidity injections since 2009 have served their purpose: they have more than bailed out the AE banks, commercial and shadow banks alike. They have sent AE stock and bond markets to record heights and profitability for investors. They provided the massive infusion of money capital into EMEs that produced historic offshore investment and profit opportunities for AE multinational companies.

In recalling and bringing money capital back to the economies of the US, UK, Europe and, most recently, Japan the global money capital flow reversals are simultaneously slowing the growth of the EME economies. This long term process is not occurring uni-linearly. It is occurring with stops and starts, temporary reversals, and tactical delays designed to dampen the negative impact too quickly on the EMEs.

But the longer term direction is clear: led by their central banks, the AEs are in the process of ‘exporting’ their own five year long stagnant and low growth to the EMEs. As the central banks tighten monetary policy (reduce QE, raise rates, etc.) the EMEs will now grow more slowly as a consequence of capital flight, currency decline, slowing foreign direct investment into their economies, rising inflation, and slowing exports.
EMEs that are especially dependent on exports for growth will be more quickly and more severely impacted by the emerging reversal in global capitalist policy, as the global economy enters its ‘third’ phase or stage more completely in 2014-15. The locus and weak link in the global capitalist economy is thus shifting—from Europe, Japan, and even the USA—to the EMEs. More future volatility in EME financial stock, bonds, currency, and other financial markets will be another outcome.

(Next: In Part 2, how rapidly rising debt in EMEs is also raising financial fragility and instability in EMEs and their financial markets, shifting the likely locus of a future financial instability event and possible financial crash to the emerging markets as well).

~ Dr. Jack Rasmus serves as Chair of the Federal Reserve on the Economy Branch of the Green Shadow Cabinet.

Alternative Visions Radio Show, June 28, 2014

Dr. Jack Rasmus continues his analysis of the growing influence and instability in the global shadow banking system, including a look at the major role being played by shadow banks in China today.

Rasmus explains how shadow banks have been behind the historic $5 trillion in China municipal and provincial real estate (commercial, residential, industrial) debt boom since 2008 and China currency speculation.

Rasmus provides a deeper historical analysis of shadow banks in US depressions since the 1830s, and the parallels with China today. Continuing a key point from last week, its not just the shadow banks as institutions, but the ultra high net worth investors globally—the new financial global elite—that are behind the new financial instability building in the global financial system again. Shadow banks + Ultras + proliferating liquid financial asset markets and securities traded in these markets are at the heart of the next debt-deflation-default nexus.

Rasmus argues that money capital flows in a capitalist system cannot be effectively regulated long term, and that’s why financial crises keep returning. The bigger the liquidity explosion, the greater the debt and financial speculation, and the more frequent and greater magnitude the financial crises.

Dr. Rasmus concludes the show with an indepth look at the composition of the just announced -2.9% decline in first quarter US GDP, and debunks the mainstream view that the -2.9% was due to the ‘weather’ and that the US economy and GDP will soon ‘snap back’ with a 4%-5% GDP growth rate, as now touted in the mainstream business press. Jack shows how business inventories, net exports, and consumer spending will continue to fare poorly, or modestly at best, in coming quarters—and that the US economy will continue its ‘stop-go’ economic trajectory that is characteristic of an epic recession and its aftermath.

Access the archive of this radio show at:

http://www.alternativevisions.podbean.com

or at:

http://prn.fm/alternative-visions-us-grass-roots-anti-war-protests-syrian-war-062814/

NOTE: Disregard the incorrect title posted for the show (Not on Syrian War but on Shadow Banks and GDP). The announcement and content are correct–on shadow banks in China and US GDP

Final revisions to US GDP released June 25, 2014 show the US economy contracted this past January-March 2014 by -2.9%. Does the much larger than predicted decline reflect the beginning of new recession? A -2.9% contraction for the quarter is just about the average quarter decline during the 2007-09 last recession. Or is the -2.9% an indication of a continuing stagnation, with a moderate recovery in GDP to occur in the second quarter 2014? Or perhaps it was just an aberration, due to bad winter weather, as many mainstream economists and press pundits are now saying, with a robust recovery of 4%-5% GDP growth coming in the second half of 2014?

The larger than expected -2.9% contraction was a further significant reduction from the government’s GDP estimate of a -1.0% GDP decline for the quarter that was reported by the government in May; and an even bigger 3% ‘swing’ from the initial +0.1% GDP estimate reported in April.

The record-setting ‘swing’ of 3% represents the largest such adjustment in nearly four decades, raising a question of why the government’s initial GDP estimate of 0.1% was so far off the mark in the first place? It also raises a question of just how accurate are estimates of GDP in today’s post-2008 ‘great’ recession restructured US and global economy? Is estimation becoming more a game of ‘guestimation’?

The record 3.0% swing and final GDP revision should finally silence those forecasters who have been spinning the message for months now that the US economy’s first quarter poor performance was due mostly to ‘weather’ factors. As this writer has been saying in several prior published commentaries since March, based on a closer look at the composition and magnitude of the GDP decline in the first quarter it is impossible to attribute the huge -2.9% decline to weather factors. A -2.9% drop would have taken the onset of a virtual new mini ice-age—and not just ‘bad winter weather’. Something more fundamental is going on perhaps in the US economy that official government estimates of GDP aren’t initially recognizing, or even picking up.

The closer look at the composition of elements of GDP responsible for the -2.9% drop were unrelated to bad weather—as this writer previously pointed out in a prior article, ‘The Real ‘Real’ GDP’, on June 3, 2014, and in a prior piece, ‘False Positives: Analyzing Recent US GDP and Jobs Reports’, November 11, 2013, both available on the writer’s blog at jackrasmus.com. The major factors behind the first quarter major -2.9% GDP decline were:

• a big pull back of business inventory investment during the quarter, after a buildup of the same in the third quarter of 2013 in anticipation of a surge in end of year consumer spending that did not materialize;

• a similar major drop in US net exports in the first quarter that reflected a slowing global economy.

Final revisions to GDP just reported this week now show clearly that the inventory adjustment reduced 1st quarter GDP by a whopping -1.7 percentage points, and the decline in net exports by another -1.5%. A weakening of Net exports reflects a gradual and progressively slowing global economy. The business inventory slowdown represents business stocking up for a consumer spending surge that nonetheless repeatedly fails to materialize. Neither of these developments can be attributed significantly to ‘weather factors’

In addition, the final GDP revision reported on June 25, 2014 showed a third important element underlying the -2.9% GDP decline in general, and the big ‘swing’ from -1.0% to -2.9% in the final revision: Consumer spending the first quarter was initially grossly overestimated in both April and May GDP reports. A growth in consumer spending of 3.3% was actually only 1%. What was first thought as healthcare spending surge generated by sign ups to the Affordable Care Act, boosting consumer spending, turned out not to be the case. The ACA boost to consumer spending was minimal, not significant.

None of these major determinants of first quarter GDP can be attributed to ‘bad weather’. Weather does not impact inventory accumulation or exports. Both inventories and exports are sold and ‘booked’, and thus added to GDP, before transported to warehouses or shipped. Moreover, consumer spending on ACA sign ups occurs mostly via phone or online, and not by going to a government or insurance company office purportedly postponed due to bad weather.

Estimates of the ‘bad weather’ impact are at best responsible for only 0.5% of the GDP decline in the quarter. That leaves more than 2.4% of the decline to be determined by real causes, not weather. Weak inventory spending, slowing net exports, and stagnating consumer spending are more fundamental conditions that are due to the aftermath of a fragile ‘epic’ recession characterized by lack of disposable income generation by most of consumer households and minimal debt reduction for most since 2009 despite claims of economy recovery by politicians.

Consumer spending weakness in particular reflects the lack of real wage and income growth for the vast majority of households. Slowing inventory investment is a lagged consequence of the same. And net exports weakness is a reflection of a slowing global demand and/or currency exchange rate shifts. But none of the above is weather related. Nonetheless, many economists and politicians are still sticking to the ‘bad weather’ metaphor for the huge -2.9% drop. And now argue to corollary, that the end of bad weather will mean a robust 4%-5% recovery in GDP in the months ahead.

The key question now, therefore, is whether the above factors behind the big first quarter 2014 contraction (i.e. inventory investment slowdown, net exports slowing, consumer spending stagnation) will continue into the current April-June, second quarter 2014? Will those factors be offset perhaps by growth in other sectors of the US economy in the second quarter and the rest of the 2014 year—like residential housing, government spending, or business equipment investment? Will the long awaited sustained consumer spending recovery that has been predicted, but has not occurred since 2010, finally appear?

Or will the ‘recovery’ from winter ‘bad weather’ once again in the second quarter 2014—as in previous years—prove far weaker than official government, mainstream economists’, and politicians’ current predictions?

1st Quarter 2014 GDP: Even Worse Than Reported

The US economy has been on a ‘stop-go’ trajectory ever since the official end of the 2007-09 recession in June 2009, now a full five years ago during which the US economy has grown at best one half to two thirds the normal recovery rate at this stage following recession. During the best quarters of economic performance since 2009, the US economy has grown at a sub-par 3% or so, followed by what this writer calls economic ‘relapses’ back to zero or below zero GDP growth on several occasions—three to be exact.

After only 18 months of economic growth following June 2009, for example, the US economy experienced a negative GDP again in the first quarter of 2011. It thereafter’ relapsed’ again, falling into virtual zero growth in the fourth quarter of 2012. The latest, third ‘relapse’ has occurred now, resulting in an even more dramatic -2.9% growth in the first quarter of 2014.

But this past quarter 2014’s -2.9% is actually even worse in fact than reported. It comes after last summer 2013’s redefinition of US GDP that added $500 billion more annually to GDP by declaring certain business expenses involving research & development and other ‘intangibles’ were thereafter to be included in GDP numbers. (see my ‘The Real ‘Real’ GDP’ article explanation). That redefinition added at minimum another 0.3% to US GDP. Adjust for that ‘GDP growth by redefinition’ and the first quarter’s GDP decline was actually an even worse -3.2%. But that’s not all.

An even greater GDP overestimation effect derives from how the US ‘adjusts’ GDP for inflation. The US uses a conservative estimator called the ‘GDP Deflator’ that grossly underestimates the role of price changes on the economy. The smaller the estimated inflation, the larger the real GDP. If the government adjusted inflation using the Consumer Price Index (CPI), or even the Personal Consumption Expenditures (PCE) index, both of which better estimate inflation, then the real GDP for the first quarter 2014 (and previous quarters) would be less than reported—i.e. at least 0.5% lower than actually estimated. The US government’s ‘GDP Deflator’ estimates US inflation at well less than 1.5%. In contrast, both the CPI price index and the PCE price index register inflation today at around 2% or more, and rising.

Together just these two changes—the redefinition of GDP that artificially raises it and the failure to fully adjust GDP to real GDP—means first quarter GDP declined by -3.7% and not the -2.9%.

From ‘Bad Weather’ to ‘Second Half’ Hype: A Continuing Pattern

‘Bad weather’ metaphors have been repeatedly trotted out as explanations whenever the US economy weakens—as has been the case since 2011—in turn followed by claims that the second half of the year will finally bring sustained recovery.

For example, US GDP contracted in the first quarter 2011—i.e. the first ‘economic relapse’ following the formal ending of the 2007-09 recession. That ‘relapse’ was predicted by this writer in his book, ‘Epic Recession’ written late 2009. As is the case today in 2014, that 2011 GDP contraction was blamed on bad weather, and was followed up by economists and forecasters assuring a second half 2011 would result in sustained recovery. But it didn’t. The pattern was again repeated in the fourth quarter 2012 when the economy initially contracted again by 0.1% despite the year-end 2012 holiday spending season, and winter weather was blamed again. Once more a robust recovery was predicted that didn’t happen.

First quarter 2011, fourth quarter 2012, and now once again first quarter 2014—it’s the same old story: it’s the bad weather that’s responsible for periodic GDP contraction; and the ‘second half of the year’ will bring a sustained recovery. Whether that pattern changes in the second half of 2014 remains to be seen, although it appears economists and forecasters are now ‘doubling down’ and betting on an enormous 4%-5% second half US GDP explosion—a growth that hasn’t been seen in any quarter since the onset of the recession in 2007!

(For the rest of this article on 1st quarter GDP by Dr. Rasmus, further analysis of 2nd quarter US GDP, and full year 2014 GDP, go his website at:

http://www.kyklosproductions.com/articles.html

My latest 15 minute interview on the subject of the super rich (Ultra High Net Worth Individuals) and their shadow banks is available at:

http://voiceofrussia.com/us/news/2014_06_25/Super-Rich-and-Their-Shadow-Banks-a-Growing-Threat-to-Economic-Stability-6134/

The following is a short introduction to the interview posted on the Voice of Russia Radio US Edition station:

Super Rich and Their Shadow Banks: a Growing Threat to Economic Stability

By David Kerans

WASHINGTON (VR)— Unregulated financial institutions or “shadow banks” which cater to the world’s super rich are becoming so potent as to present serious threats to economic stability around the globe, as even the mainstream financial press is now acknowledging.

However, the agility of the shadow banking sector (think investment banks, private equity funds, money market funds, REITs, etc.) more or less precludes effective scrutiny from government regulators, let alone proper control. Moreover, the relative weight of the shadow banks is growing quickly, thanks to the spiraling concentration of wealth among the super-rich. In the US alone, for example, high net worth individuals (with tens of millions of investment capital each) shot from $24 trillion in 2009 to $46 trillion in 2013.

Huge and expanding liquidity pools in the shadow banking system create booms and busts around the globe or in certain investment categories, by flooding attractive investment targets and then evacuating them, leaving governments, central banks, and taxpayers to pick up the pieces.

The upshot, as economist and St. Mary’s College Professor Jack Rasmus insists, is a serious and growing threat to economic stability, a threat that central banks can do little to control. Of course central banks can still exercise some control over the money supply and economic stability by setting prime interest rates and enforcing capital controls over traditional banks. But central bank infusions of liquidity since the recession began in 2008 have fueled rapid growth in the shadow banking sector, and made the world financial system increasingly less stable (traditional banks deployed the easy credit with shadow banks, where their returns were best).

The danger from the flourishing shadow banking sector is all the more serious, points out Rasmus, because these institutions are so lopsided in deploying their capital towards short-term, speculative ends. Investment in real productive assets has therefore languished, making the economy all the more susceptible to a crash when the speculative money retreats.

The retreat is not far off, according to Rasmus: “We’re going to find, I predict, when the Fed starts raising interest rates, if the Bank of England doesn’t start doing it first, we’re going to see this phenomenon within the next year, I think, with so much debt and short-term investing out there, as rates rise, it may precipitate defaults quicker than people think. I think it won’t take much of an interest rate increase to destabilize the financial investment structure once again.”

Solutions to the hypertrophy of the shadow banking sector are within reach of policy makers. Rasmus advocates establishing a public banking system that can loan money to productive, real economy enterprises, at the cost of capital (as per the successful North Dakota model, for instance, which Green Party candidate for California State Treasurer Ellen Brown explained to Radio VR in a recent interview). Real economic growth would then pull some of the speculative capital into productive use.

The odds Washington or London will pursue such sensible policies are approximately zero, however.
Read more: http://voiceofrussia.com/us/news/2014_06_25/Super-Rich-and-Their-Shadow-Banks-a-Growing-Threat-to-Economic-Stability-6134/

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