Jack Rasmus

(The following is an interview of Jack Rasmus by Taylaln Tosun, published in the February 15, 2015 issue of TeleSUR English Edition)

Taylan Tosun:

Dr. Jack Rasmus, as you know, there is a strong discourse in the mainstream economy and finance media claiming that US economy is on a sustainable road to recovery. Pundits in the mainstream media claim that main indicators such as non-farm payrolls data, monthly job growths and workers’ hourly wages are all indicating a sustainable recovery for the US economy. Do you think that these claims are true? US economy is on the road to a sustainable recovery at last?

Jack Rasmus:

Every year for the past four years, pundits, media, government officials and even a good number of mainstream economists have said the USA economy is on the path of a sustained recovery—and every year they’ve been proven wrong. They focus on this or that economic indicator that may show a short term surge due to special temporary reasons, and then simply extrapolate from that, calling it a forecast, and predict a recovery. This year it’s the third quarter 2014 GDP growth surge of 5%, which will almost certainly revert back to 2.5% or so in the last quarter of 2014 and, I predict, even less in the current 1st quarter of 2015.

None of the major determinants of that 5% are long term and permanent, however. And that has been the case with these ‘one-off’ temporary surges in single quarter GDP data, which by the way are typically followed by single quarter, temporary collapses in USA GDP which have happened three times now since 2010. So the USA economy shows a pattern of ‘stop-go’, as I call it. It appears to recover with an above average GDP growth for a single quarter that then reverts back to a longer term sub-par historical average of around 2%. Actually, the 2% is less by several tenths of a percentage, when the GDP numbers are adjusted for the redefinition of USA GDP that occurred in 2013 which artificially boosted USA GDP by 0.2% to 0.3% percentage points. It’s even less if one adjusts for the underestimation of USA inflation which always occurs. The lower the inflation rate, the higher the real GDP number. So the USA economy is really growing longer term, at about 1.5%-1.8% on average, which is about half its past normal historical growth rate.

Looking at the 5% specifically, that was the product of a grouping of temporary factors that are now moderating. There’s the shale gas/oil boom that significantly boosted industrial production and related industry and therefore GDP. That boom began to end by late summer 2014 as global oil prices began to collapse. There was the one-time surge in health care spending that boosted US consumption as the Obama health care program sign ups surged for the first time for a full year. That has leveled off now. Falling oil prices in the second half of 2014 resulted in a sharp decline in US imports, which had the effect of increasing the contribution of ‘net exports’ to US GDP. Oil prices appear now to have stabilized somewhat. There was the increase in business inventory spending in anticipation of consumer spending escalating during the fourth quarter holiday season. But consumer spending was flat or well below predictions. All the hype int he press and by economists about lower oil and therefore gasoline prices resulting in more consumer spending simply didn’t materialize. Consumers mostly pocketed the savings, which I predicted would be the case. Spending on autos did increase in 2014, in part due to the lower oil prices, but that too is coming to a slowdown, I predict, as the auto sector becomes saturated after four years of growth. Then there was the surge in government defense spending in the 3rd quarter, which always occurs right before a national election in the USA, which occurred last November. That too will now slow, unless of course Obama gets his wish to spend another $64 billion on another war in the middle east, this time against ISIL.

So if one looks beneath the surface at the real trends what appears is that several temporary factors converged in the 3rd quarter to generate a temporary boost in GDP, and that GDP is again reverting back to longer term growth trends of 2% or less.

With regard to talk about USA jobs growth and wage growth about to boost consumption and GDP, I’m not impressed with the argument. First of all, much of the job growth is low pay, part time and temp jobs. And the so-called wage growth is really being over-hyped. It’s mostly concentrated at the ‘top’, among managers, professionals, and the higher paid workforce. It’s data reflecting full time employed as well, not the more than 50 million part time-temp workers in the USA today or the median family, whose income has been declining 1%-2% per year now since 2010. And as the recent oil-gasoline price decline shows, an increase in real spendable income does not necessarily translate into more spending and consumption. Given that the vast majority of households in the USA are still overwhelmed by debt, and still fearful of a weak economy, much of any wage-income increase is not spent but saved right now.

What all this suggests is that the USA economy is still on a stop-go trajectory longer term, or what I have called an ‘Epic’ recession, in which there are periods of brief, small recoveries followed by short, shallow downturns. This trajectory for the USA is occurring in the 1%-2% range, due to factors specific to the USA—like defense spending, US dollar as reserve and trading currency, influence over global money supply, and so forth. For Europe and Japan, it is occurring in the -1% to 1% range. But this does not represent a sustained economic growth by any means.

I would add that not only have the temporary factors behind the USA 3rd quarter GDP growth surge begun to dissipate, but that new negative drags on the USA economy are coming in 2015. The US dollar will continue to rise as other economies drive down the value of t heir currencies with QE and defacto currency devaluations. And the USA central back will raise interest rates, which will slow the US economy faster than they think, while driving the dollar still higher and choking off more exports’ contribution to US GDP.

Taylan Tosun:

If the recovery of US economy is not sustainable, that is, if all these indicators show only a temporary improvement which will not last long, what will this mean for the global economy and global recession?

Jack Rasmus:

On the one hand, the rising dollar—which may accelerate even more when the US central bank raises interest rates—will make emerging markets’, Europe’s, and Japan’s currencies more competitive and therefore potentially boost their share of global exports. But there’s a currency war underway now, set off by the big QE programs introduced by Japan and the Eurozone in 2013-2014. So it is likely that the Euro and the Yen will benefit the most from the rising dollar, at the expense of currencies of emerging market economies. Whether the gains in Europe-Japan at the expense of emerging markets has a global net positive effect on global growth remains to be seen. Emerging markets may lose more than Europe-Japan gains. Or the negative effects on the USA economy may more than offset the Europe-Japan export gains. It remains to be seen what the net total effect will be in 2015. But some things are clear: interest rates and the US dollar are going to rise further. That will result in more capital flight from emerging markets to the higher rates of return in the USA, as well as to Europe and Japan stock and capital markets to take advantage of the QE-induced rise in financial asset prices there. So, in net terms, it appears emerging markets will lose the most. I am personally of the view that the projected rise in USA interest rates will have a much greater negative effect on the USA economy than most economists are assuming. I think the elasticities will be great, of a negative impact on growth of a rise in rates. Just as the lowering of rates had virtually no effect on growth since 2010, conversely the rise in rates will have a major effect. The reasons for this apparent anomaly lie in the conditions of debt and fragility in the USA economy, which I won’t go into here but I explain in my forthcoming book, ‘Systemic Fragility in the Global Economy’ that will be available later this spring.

Taylan Tosun:

We know from economic theory that if a recession continues long enough and a sustainable recovery can’t be attained, then sooner or later we will face with a depression. The Euro zone and Japan economies are already in recession, it seems that the slowdown of Chinese economy is not temporary phenomenon, Russia is heading to a serious crisis and emerging markets’ economies (EME’s) are all entering in a period of steady slowdown. Do you think is it probable that these state of affairs will lead to a worldwide depression?

Jack Rasmus:

No, not a depression but rather a long term drift toward stagnation in the global economy, where major economies fluctuate, entering and exiting recessions or growing barely. This is the ‘stop-go’ or epic recession phenomenon that characterizes the current global economy long term: Short shallow recoveries followed by relapses to zero or negative growth (recessions). We see this in Europe and Japan, where last years return to recessions are now apparently transitioning to very low but positive growth of less than 0.5%. The USA is slipping back to its 1.8% average longer term GDP. China is slowing, now probably at around 5% GDP. And emerging markets are going to experience the brunt of the current slowdown, as their currencies collapse, exports continue to slow, and capital reverts back to the north. Both the USA rise in rates and the value of the dollar will suck capital out of the emerging markets. So will QE induced stock and bond market recoveries in Europe and Japan, at least temporarily for 2015. But this all reflects an uneven drift toward global stagnation as a whole. Depressions are precipitated by financial instability events and crashes, that drive the real economy down faster and deeper than normal recessions. We haven’t had that again yet, but will. A period of extended stagnation leads to banks’ growing weaker and more investing shifting to financial assets and speculation, which is occurring. At some point it becomes unsustainable and a financial crisis occurs. When that happens again, and it will, the crash will occur on a much weaker global economy that existed in 2008-09. So the impact will be much more severe. A bona fide depression could occur at that point. But we’re not there yet. We’re in a phase of the global economic crisis where global growth is drifting toward stagnation, disinflation and deflation is occurring, real asset investment is in decline everywhere, incomes are falling for wage earners, and governments’ fiscal and monetary responses are becoming increasingly ineffective in generating sustained economic growth.