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Listen to my 15 minute interview with ‘Critical Hour’ radio on April 15 and the real facts about the Trump 2018 tax act, and how in 2019 it’s becoming increasingly clear that the middle class is paying more, while massive corporate-business-investor taxes are being cut by trillions. Why Supply Side economic theory used to justify tax cuts for corporations and the rich is not backed by empirical evidence. Why the mainstream corporate press, like the Washington Post, simply prints the misrepresentations of data on who’s paying taxes fed to it by the government. And why the massive tax shift underway since the 1980s, is now accelerating under Trump, and driving even greater income inequality.

To Listen Go To:

https://drive.google.com/file/d/178AQQYbWGvyaHa9k1YHIaV_ukRu2RKJJ/view

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In 2016 Trump promised tax cuts for the middle class. Now it’s clear Trump’s 2018 tax cut is making the middle class pay for corporations, businesses, investors and the wealthiest 1% households historic tax cuts totaling no less than $4.5 trillion over the next decade.

A massive redistribution of income favoring the capitalist class–at the expense of everyone else–is underway. Only now approaching April 15 ‘tax day’ in the US are the dimensions becoming apparent.

Polls show 80% of the 170 million taxpayers in the US are saying they’re paying much more this year.

And 17% indicate they used to get refunds in the past but are now writing the IRS checks for $ thousands more this year. That’s 17% of 170M, or almost 30 million households no longer getting refunds! And 136 million saying they’re paying more! So that’s a middle class tax cut?

$4.5 Trillion to Capital Incomes

Conversely, capital incomes are getting a tax cut of no less than $4.5 trillion, under the Trump 2018 tax cut. Their big payday is due largely to cuts in corporate tax rates, the new 20% off the top business pass through deduction, the elimination of the Alternative Minimum Tax for corporations and reduction of the AMT for individuals, the halving of the Estate Tax, favorable changes in personal income tax brackets, levels and rates, more credits for private school tuition and child care costs, no upper limits on itemized deductions, and many other measures.

But the biggest tax break of all,more than $2 trillion over the next decade goes to US multinational corporations: the foreign profits tax and all territorial offshore taxation for US multinational corporations are now eliminated altogether. And if they repatriate their $4 trillion in profits held offshore they can bring it back at a 10% one time corporate tax rate instead of the prior 35%. The big beneficiaries of the $2 trillion tax cut for multinationals are the tech, banking, oil & energy, big pharmaceutical, and telecom companies. (See my blog, jackrasmus.com, postings during early 2018 where I previously documented these details of how much capital incomes will gain from the Trump tax cut).

The Ideological Cover-Up of 2018

The corporate press and media throughout 2018 refused to accurately report the $4.5 trillion historic income transfer. Instead, they fed the public the phony calculation that the cost of the Trump 2018 tax cut was ‘only’ $1.5 trillion over the coming decade. That calculation was made based on ignoring the $4.5 trillion in reporting, and the $1.5 trillion tax hike on the middle class, and estimating that the tax cuts would generate 3-4% economic growth annually for the next decade every year. And thus there would be no recession for another decade! The $4.5 trillion in this manner got reduced to the official, press reported $1.5 trillion. ($4.5 trillion for business and investors minus $1.5 trillion tax hike on middle class minus the phony growth assumption of $1.5 trillion more tax revenue = the phony $1.5 trillion hit to the US budget deficit and claim the Trump tax cut was only $1.5 trillion!)

In true supply side phony economic ideology, by giving investors and corporations trillions of dollars more, academic hacks for business argued corporations would invest it in the US, creating more jobs and production from which more government tax revenue would follow. This neoliberal argument has been used to justify tax cuts for corporations and rich investors since Reagan. And its been wrong ever since. There’s no shred of empirical evidence showing a direct causal relationship between business-investor tax cuts and economic growth or jobs. For example, in 2018 real investment (in plant, structures, equipment, etc.) in the US in 2018, after the introduction of the Trump tax cut in January, continued to decline over the course of 2018 by more than two-thirds, reaching a low point at the end of the year.

Instead of corporations investing in the US and creating jobs after receiving the tax cuts, the Trump tax cuts produced a windfall profits gain to their bottom line. How much?

The Trump tax cuts, it has been estimated, account for 22% of the 27% profits gain by the Fortune 500 companies alone.

The $1.5 Trillion Tax Hike on the Rest of Us

So where is the $4.5 trillion go in 2018? It didn’t go to the US Treasury. Corporate tax revenues alone are off by several hundred billions of dollars so far. The hundreds of billions tax windfall for corporate America instead has been diverted into financial markets, into merger & acquisitions of other companies, into offshore expansion by US multinational corporations and into speculation in foreign currencies, stocks, dollarized bonds, and derivatives markets. Or just hoarded on corporate balance sheets in anticipation of the next recession, now around the corner.

And how is the $1.5 trillion tax hike on the middle class occurring? Unlike the manner change in provisions benefiting capital incomes by hundreds of billions in 2018 (continuing to provide $4.5 trillion over the coming decade), middle class taxpayers are now seeing how much more taxes they are beginning to pay (to make up the $1.5 trillion over the decade).

The main changes and provisions that are now ‘whacking’ the middle class include ending the personal exemptions ($16,200 for family of four), eliminating more than a dozen deductions for those who itemize their taxes, changing the tax brackets and levels of the personal income tax, making singles pay more for the AMT, ending or phasing out at lower thresholds various tax credits, and so on.

So the middle class now finds itself writing larger checks to the IRS than they had in the past, much larger! Meanwhile, corporations, businesses, investors, and the wealthiest households enjoy a massive reduction in their tax.

While the Trump government, Congress, and media focus on the ‘Great Distractions’ (Trump on immigrants as cause of our problems; Democrat leaders on Russia intervention in US elections–neither of which the average American gives a damn about), Trump continues to ‘pick their pockets’–big time.

(For more discussion on this topic, listen to my April 12, 2019 radio show, Alternative Visions, on the Progressive Radio Network, where I discuss the dimensions of the greatest single redistribution of income to the rich from the rest in American history.

TO LISTEN GO TO:

Alternative Visions – Trump Whacks the Middle Class

OR GO TO:

http://alternativevisions.podbean.com)

RADIO SHOW ANNOUNCEMENT:

Alternative Visions – Trump Whacks the Middle Class

Apr 12th, 2019 by progressiveradionetwork

As Federal tax deadlines near on April 15 it’s becoming increasingly clear the middle class is paying more, not less, under the Trump 2018 tax cuts. Of the roughly 170 million tax households, news is now appearing that tens of thousands fewer are not getting refunds this year and 80% say they’re paying more, per polls. Rasmus explains in detail how the Trump tax cuts provided $4.5 trillion in total tax cuts over the next decade—offset by $1.5 trillion in middle class tax hikes (and making phony estimates of another $1.5 trillion in tax revenues from economic growth due to tax cuts). Rasmus describes how multinational corporations will get $2.1 trillion in tax cuts over the decade and how US corporations, non-corporate businesses, and the wealthiest 1% households and investors will enjoy another $2-2.4$ trillion by reducing the corporate rate from 35% to 21%, by eliminating the corporate AMT, by radically reducing the personal income AMT, by providing a flat 20% deduction for non-corporate businesses, by lowering personal income tax rates and brackets for the wealthy, by exempting most of the Estate tax, and by ending limits on itemized deductions for the rich while adding child care and private school deductions for them. How the middle class will pay another $1.5 trillion over the decade is also described, including ending the personal exemption, by changing personal income tax brackets for the middle class, and by eliminating or reducing middle class itemized deductions. In the bigger picture, it amounts to increasing subsidization of capital incomes—to be paid for by the earned wage incomes of the middle class.

MMT or Modern Money Theory is the rage of some progressive economists of late. Several of my readers have asked what is my view of it? The following is a brief statement in that regard, in reply to a comment by a reader on this blog today. I will provide a thorough follow up critique of the notion in the very near future.

My Preliminary Statement on Modern Money Theory (MMT) to my readers:

My Reply to a Reader: “I will soon provide my critique of MMT (Modern MoneyTheory) that is the latest rage of some progressives in economics. Briefly here, its problem is that it’s essentially a restatement of 18th-19th century classical economics, which focused almost solely on money supply and understood little about money demand and money velocity–largely due to the fact classical economists in the 18th-19th century could estimate money supply but had no way to estimate money demand and therefore paid little attention to it. This disregard and poor understanding of money demand is still a major characteristic of the economics profession today, including the central bank. MMT is thus a throwback theory, to the 19th century and before, adapted to justify fiscal stimulus in the 21st. It is an attempt to turn to monetary policy, restated, as a counter to fiscal austerity policies which have accompanied capitalist policy makers’ elevation of monetary policy as primary in the 21st century. (The exception of course is defense-war spending fiscal policy and business-investor tax cutting fiscal policy). Proponents of MMT attempt to turn monetary policy by capitalist policy makers against itself. MMT is Quantitative Easing, QE, turned on its head. It is an attempt to invert the ideology of QE (the purpose of which is to subsidize capital incomes), and use ‘inverted QE’ (i.e. MMT) to redirect liquidity (money) creation by central banks or their equivalent into government spending to boost household incomes. That is contrary to traditional QE that directs money creation and excess liquidity into subsidizing and expanding capital incomes. MMT is therefore, in a sense, an ‘ideological adaptation’ of the economic ideology that is QE’. Much more on all this later. First I must finish the concluding chapters of my next forthcoming book, ‘The Scourge of Neoliberalism’ (of which QE is a key monetary policy and ideological justification for subsidizing capital incomes). I promise readers thereafter a thorough critique of MMT (as well as its related ideological creations, QE and its economic cousin, public banking).” Dr. Rasmus 4-7-19

Listen to my most recent radio show and my discussion of the global rush into government bonds, driving down rates (many negative in Europe/Japan), flattening and inverting yield curves, and raising red flags of recession growing nearer.

To Listen GO TO:

http://prn.fm/alternative-visions-global-bond-markets-flashing-recession-red/

Or Go To:

http://alternativevisions.podbean.com

SHOW ANNOUNCEMENT

    Rasmus explains how more yield curves have begun flashing warning of imminent recession, resulting in investors and businesses rushing into bonds everywhere as harbinger of recessions on the near horizon. How the latest yield curve for 3 m o. v. 10 year Treasuries has inverted and the Fed interest rate on overnight loans is now the same as the 10 yield T-bond. How the yield curve has accurately predicted the last seven recessions in the US. The recent shift in central bank policies in US and Europe are discussed and how globally 22% of all debt now pays negative interest, up from 13% last year, $10 trillion of bonds now are negative, up from $5.7T in just one year. Rasmus discusses other events, including record stock buybacks now running at $900 billion a year, the renewed crisis in Turkey’s currency, the Lira, US financial imperialism and US special forces now in 143 countries, the new Trump-right wing ideological offensive taking form, the US trade team now in China, Trump’s new attack on the ACA, and the likely scenario for the Mueller Report’s release.

The following article appeared in the February 2019 issue of the European Financial Review. It’s main theme is to show that the Fed, like all central banks, is not independent–of either government or private banking interests pressures–quite contrary to accepted academic economists’ widely held myth. Nor is it true the Fed doesn’t respond to financial markets’ conditions, but only to real economy inflation and employment conditions. Events since last November 2018 clearly reveal that both central bank independence and policy setting apart from financial markets’ performance are just myths.

“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 between October and late December 2018 to assume it was now so weak, in early 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 December 2018, 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

by Jack Rasmus
copyright 2019

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

Ever wonder why US banking is what it is–prone to periodic crashes and crises? How banking evolved in the US from 1781 up to the creation of the central bank, the Fed, in 1913? Why the Federal Reserve was created in 1913, as a product of the big New York and east coast banks, an institution structured and managed directly by those same private banks, and designed to function in their interests?

Or why all the talk today about ‘central bank independence’ is really a myth, an ideological term created after 1945 to obfuscate the continuing influence of the private banking system over the Fed?

Or why the Fed and other central banks are in crisis today and won’t survive, in current form, the next global financial crisis?

For some answers to these questions, take a look at my just published, March 2019 book, ‘Alexander Hamilton and the Origins of the Fed’–now available on Amazon, or from the publisher, Lexington Books, and soon from this blog.

How Hamilton, the current darling of the conservative and capitalist right, a banker, and the father of US capitalism, laid the groundwork for the US banking system and the central bank as the vehicle for periodic banking system bailouts.

    (For more information go to Amazon books at:
    Or go to the publisher website at:

https://rowman.com/isbn/9781498582858

PUBLISHER’S SYNOPSIS

“The US in 1913 was one of the last major economies to establish an institution of a central bank. The book examines, however, the history and evolution of central banking in the US from the perspective of central banking functions—i.e. aggregator of private lending to the federal government, fiscal agent for the government, regulator of money supply, monopoly over currency issuance, banking system supervision, and lender of last resort. The evolution of central banking functions is traced from earliest pre-1987 proposals, through the Constitutional Convention and Congressional debates on Hamilton’s 1st Report on Credit, the rise and fall of the 1st and 2nd Banks of the United States, through the long period of the National Banking System, 1862-1913.

The book describes how US federal governments—often in cooperation with the largest US private banks in New York, Philadelphia, and elsewhere in the northeast—attempted to expand and develop those functions, sometimes successfully sometimes not, from 1781 through the creation of the Federal Reserve Act of 1913. Other themes include how rapid US economic growth, and an expanding, geographically dispersed private banking system, created formidable resistance by banks at the state and local level to the evolution and consolidation of central banking functions at the national level. Whenever central banking functions were dismantled (1810s, 1830s) or were weakened (after 1860s), the consequences were financial instability and severe economic depressions.

The book concludes with a detailed narrative on how, from 1903 to 1913, big eastern banks—leveraging the Panic of 1907, weak economic recovery of 1909-13, and need to expand internationally—allied with Congressional supporters to prevail over state and local banking interests and created the Fed; how the structure of the 1913 Fed clearly favored New York banks while granting concessions to state and local banks to win Congressional approval; and how that compromise central bank structure doomed US monetary policy to fail after 1929.”

BOOK TABLE OF CONTENTS:

Chapter 1: The Evolution of Central Banking in the US

Chapter 2: Hamilton’s Vision

Chapter 3: The 1st Bank of the United States

Chapter 4: The 2nd Bank of the United States

Chapter 5: Jackson Contra Central Banking

Chapter 6: From ‘Free Banking’ to National Banking

Chapter 7: The Legacies of National Banking, 1872-1898

Chapter 8: Panic of 1907 and Treasury’s ‘Last Hurrah’

Chapter 9: The Road to the Fed 1903-1913

Conclusion: Hamilton’s Vision…Hamilton’s Fed?

Postscript: Will Central Banks Survive to Mid-Twenty First Century?