Jack Rasmus

copyright 2014
by Jack Rasmus

The Omnibus spending bill just passed by Congress indicates clearly that the Republican Legislative Offensive is being rolled out faster than otherwise might have been predicted.

In the recent November 2014 midterm elections, Republicans assumed majority control of the U.S. Congress. They deepened their previous control of the U.S. House of Representatives and swept the U.S. Senate. They now have solid, nearly veto proof majorities in both houses of Congress. They may even have enough votes to override Obama’s rumored plans to govern by executive action, should he go that route in 2015 (which, except for an occasional token effort in that regard, is unlikely).
The past six years of Congressional gridlock is therefore about to end in 2015—but on terms highly favorable to Corporate America and, simultaneously, at the direct expense of American workers, their unions, and middle class households in general.

The Republicans new, pro-Corporate anti-worker, initiatives were outlined in a previous article by this writer published by teleSUR on November 27, 2014 (‘The U.S. Republican Congress’ New Agenda’). Technically, the Republican legislative offensive should not begin until the new Republican majorities are sworn into office in late January 2015. However, it now appears those initiatives—i.e. the Republicans’ new legislative offensive—are not on hold until the new Congress is officially seated in January 2015. With the help of many of the Democrats they defeated, the Republicans’ new legislative offensive is now already being rolled out.
In early December 2014, the U.S. Congress passed a 1600 page so-called ‘Omnibus’ spending bill. In an Omnibus bill, all kinds of unrelated legislative proposals are thrown together into one large pot, i.e. one bill. That makes it difficult to vote against any particular proposal. To oppose, to vote against, a particular proposal, one would have to vote against other proposals one supports. For example, to vote against a big tax cut for business might mean necessarily voting against an extension of unemployment insurance as well. So one ends up voting for a big corporate tax cut when actually opposed to it. The ‘Omnibus’ bill is a legislative tactic that was employed typically under prior Republican dominated Congresses, especially during the George W. Bush regime between 2001-2006.

The Omnibus bill just passed by the U.S. Congress, in which the Democrats still had majority control of the U.S. Senate this December, includes numerous pro-banker, pro-corporate proposals that will soon become law. Senate Democrats have gone along with their Republican counterparts in passing ‘Omnibus’.

Senate Democrats’ excuse, their political cover, for voting Republican is that if they voted against the bill, when Republicans officially take control in January the bill would be ‘even worse’ than voting on the December proposal.

That argument and excuse is just typical politician double-talk to give them—Democrats— a CYA (cover your ass) excuse. What will now happen, in actual fact, is that Republicans, welcoming Democrat Senators’ concessions and their voting support in passing the current Omnibus bill, will follow up in January 2015 anyway with the even worse, more aggressive pro-corporate, anti-worker legislation. Democrats will have gained nothing, except providing themselves convenient political cover.

The Omnibus bill passed last week provides $1.1 trillion in spending by the U.S. government for the coming fiscal year, through September 2015. Among its many provisions, however, are several very big benefits for Corporate America.

Corporate Benefit #1: Banking Deregulation Returns

First, the bill—supported by Obama and quickly signed into law—means the beginning of the end of efforts to regulate the big banks in order to prevent another repeat of the 2008-09 banking crash.

A bill enacted in 2010, called the Dodd-Frank Banking Regulation Act, will now be fundamentally gutted by the Omnibus bill. Dodd-Frank was passed in 2010, but was conveniently (for bankers) left largely undefined at the time. Definition of bank regulation was to be implemented piece meal in the next four years, between 2010-2014, by regulators, according to the Act. During the interim years since 2010, banker lobbyists fought furiously to prevent the implementation of many of the Dodd-Frank Act’s provisions. In many cases they succeeded in ‘defanging’ it. But not completely. However, the Omnibus bill’s provisions will complete what bank lobbyists have not yet achieved in terms of rolling back Dodd-Frank. The Omnibus bill’s several provisions addressing banking regulation are designed to stop bank regulation in its tracks, blocking bank regulatory efforts that bank lobbyists were not able to achieve themselves.

For example, Dodd-Frank contained a particular provision that prohibited banks from trading potentially highly financially destabilizing derivatives, especially the high risk so-called ‘credit default swaps’ (CDS), by banks’ commercial units that also took average Americans’ deposits. Bank units taking deposits from U.S. households were units that were also insured by the U.S. Government’s Federal Deposit Insurance Corporation, FDIC. High risk CDS trading, and other derivatives’ losses by the banks, could technically in the event of another financial crash wipe out average households deposits in the banks. That would require the U.S. government, and taxpayer, to bail out banks that mixed CDS losses with household depositors savings and checking accounts. Bankers and their shareholders would reap the profits from highly risky and volatile derivatives trading; but U.S. household depositors and U.S. taxpayers would pay the
bill for derivatives trading in the event of a bust.

That’s exactly what happened in 2008-09. Big banks like Citigroup and others mixed deposits with derivatives and, when the latter crashed in 2008, it threatened the loss of general depositors’ savings. The government had to step in and bail out the banks, which it did, including Citigroup, a massive financial conglomerate that technically went bankrupt in 2009 but was bailed out by a $300 billion guarantee by the U.S. government. Dodd-Frank provisions in the 2010 Act were supposed to prevent this from happening again, by requiring banks to trade derivatives, like CDSs, in bank business units that were separated from bank units holding depositors’ savings accounts. But bankers like the idea of using depositors money to invest in derivatives like CDSs. So they lobbied hard since 2010 to eliminate the Dodd-Frank provision. Reportedly in the business press, Citigroup actually wrote the language on exempting derivatives that was passed by the U.S. House version this past summer. Lobbying by Citigroup and other big U.S. banks then intensified over the summer. It paid off in the Omnibus bill just passed.
The derivatives exemption passed the U.S. House version of the bill without even a recording of the vote. It passed the U.S. Senate by a 56-40 vote in the Omnibus bill, with more Democrats (31) voting for the bill than even Republicans (24). Less than half of the Democrats in the U.S. Senate (only 21) voted against the spending bill and its derivatives deregulation.

One Senator, Elizabeth Warren of Massachusetts, publicly described the Omnibus, and specifically the derivatives provision, as follows: “Congress proved tonight that if you’re a Wall Street bank, Washington works great for you”—which is not exactly a recent revelation to most Americans since 2008. Nor is Warren’s recognition that the stripping out of the derivatives provision will result more money for the bankers. So ‘Chalk up’ one big one for big banks in the Omnibus bill just passed by the U.S. Congress, a Christmas gift by Senate Democrats to their Republican counterparts even before the latter take control!

Corporate Benefit #2: Corporate Tax Cut Machine Leaves the Station

Another big win for Corporate America in the Omnibus is big business tax cuts, of which there are many in the 1600 page bill. Too many to list and describe here. But to note just a few:

Special tax cuts for big health insurers, Blue Cross and Blue Shield, which were to be eliminated by the Affordable Care Act (aka Obamacare), were conveniently deleted by the Omnibus bill just passed.

The Omnibus provides another $41 billion in what is called ‘tax extenders’ tax cuts, many of which are corporate related cuts already in effect, for yet another year through 2014. Just three corporate tax cut extensions—for multinational companies offshore income, business expensing, and business research & development—amount to $18 billion. Conspicuously excluded from the ‘extenders’, however, were previous tax cuts for workers in the form of costs due to loss of a job as a result of free trade and health care costs tax cut eligibility.

Much of the debate on taxes in the Omnibus bill concluded, by both parties, that a major tax code overhaul is high on the agenda of the 2015 Congress. No doubt even more corporate tax cuts are in the works.

Corporate Benefit #3: Gutting the Environmental Protection Agency

The Omnibus bill signals the beginning of a major rollback of environmental initiatives in the U.S. once again, providing significant benefits to the dirtiest polluting industries in the U.S.—i.e. oil, coal, utilities, agribusiness, transport, chemicals, etc. The major means by which these rollbacks have been accomplished in the past, under George Bush and Ronald Reagan, has been to gut the funding of the Environmental Protection Agency (EPA). The bill returns to this process by reducing the EPA’s budget for 2015 by a further $60 million—a budget which has already been reduced by 21% below its 2010 levels.

The Coal Industry in addition got a provision that reduces U.S. government limits on coal-fired power plants. The Clean Water Act’s regulatory scope was reduced, exempting ponds and irrigation systems. Big farm and cattle ranch companies were excluded from reporting greenhouse gas emissions from methane. And in a direct attack on work environments, the Omnibus bill eliminates previous rules for U.S. truck drivers, whose maximum workweek was set at 70 hours; truck drivers may now be required by their employers to work as much as 82 hours a week—i.e. and 11 hour day, seven days a week!

Corporate Benefit #4: Defense Corporations ‘Pig-Out’ Again

Another major benefit for big business is the Omnibus bill’s authorization for at minimum half of the $1.1 trillion bill, at least $554 billion, to be spent on national defense, much of that for jet aircraft, missiles and submarines. That includes $94 billion to big military equipment manufacturers like Lockheed and Boeing. $64 billion for new military research & development. Another $64 billion earmarked for more spending to fund Syrian rebels and for offensives against ISIS forces in Iraq. Plus an immediate $175 million minimum for emergency military equipment and aid to Ukraine’s new pro-U.S. government in its fight against separatists in its eastern regions, another $810 million for new rapid deployment forces in east Europe and the Baltics, as well as unknown further bailout funds for Ukraine’s collapsing economy.

More defense spending, and therefore profits, for U.S. war contractors is still to come, however. The Omnibus specifically left out spending for ‘Homeland Security’ beyond January 2014 in the Omnibus. That will be taken up by Congress in another bill in February 2015 again. It will mean still further military spending, now targeted for the U.S. itself, financing still more surveillance of U.S. citizens, more use of drones, electronic spying, military-police equipment, training, and cooperation, and no doubt other nefarious domestic control initiatives in the works.

Corporate Benefit #5: More Corporate Money for Political Parties

During the Obama years, the U.S. Supreme Court rendered decisions that essentially allowed, contrary to prior U.S. laws since the 1970s, individuals and corporations to spend as much money as they pleased on U.S. elections. U.S. corporations were declared ‘persons’ and spending money in elections was determined to be ‘free speech’.

Not satisfied with this massive corruption of American democracy and voting processes, both Republicans and Democrats in passing the Omnibus bill opened the corporate money spigot still wider—allowing wealthy political donors to give more money to political parties and not just to individual candidates, as per the Supreme Court’s decisions. A previous maximum limit of $97,200 a year donation by an individual to a political party was raised to $777,000 a year.

Robert Weissman, president of Public Citizen, a research and advocacy group, concluded that the political money provisions of the Omnibus bill essentially wipes out one of the few remaining campaign contribution limits for corporations and the wealthy in the U.S.. Weissman added, “This is only about the parties’ ability to solicit donations from the super-rich”. Despite efforts by numerous citizens groups to ask Obama to veto the Omnibus bill’s “most corrupt campaign finance provisions ever enacted”, Obama White House spokesman, Josh Earnest, publicly replied “the president made a tactical decision to go ahead and support this piece of legislation”. Some sources report that the political money provisions were actually drafted by Democrats and added to the bill, in order to allow the Democratic Party’s National Committee to pay for its $20 million debt that remains from last November’s elections.

Workers’ Benefits Rollback #1: Cutting Private Pension Plan Payments

In sharp contrast to the many benefits and funding increases for big businesses, bankers, and investors in the Omnibus bill, American workers are forced to give back benefits; specifically their wages they deferred over decades in order to fund their pensions after retirement.
An important provision of the Omnibus bill will allow companies and their pension fund administrators, for the first time ever, to unilaterally cut their pension benefits. More than 10 million American workers in construction, retail, trucking and manufacturing industries will be negatively impacted by reductions in their monthly pensions.

Despite record business profits since 2010, many employers have continued to refuse to make payments to their union pension funds. Many have dropped out of what are called ‘multiemployer pension plans’. Deficits in these plans have consequently risen from $8.3 billion to $42.4 billion in just the past year. Even though the pension plans still have enough to fund pensions for another 15-20 years, according to business press sources, the Omnibus bill gives employers and fund managers the authority to start reducing pension payouts now for retired workers less than 80 years old.

This action by the U.S. Congress toward workers’ pension funds, which are a financial institution, contrasts dramatically with the more than $14 trillion in U.S. government and Federal Reserve Bank bailouts of big banks, mutual funds, hedge funds and other financial institutions since 2010 where the wealthy keep their investments and income. A more blatant, crass discrimination against workers in the U.S. has not been seen in many years.

Equally disturbing is that the Omnibus, joint Republican-Democrat, bill’s clear authorization for employers to start the process of a final destruction of workers’ multiemployer pension plans established a clear precedent and signal for other private sector employers with ‘single’ private pension plans to start planning to do the same. In addition to the 10 million workers covered by multiemployer pensions in the U.S., there are an additional 31 million covered still by single employer plans.

As Karen Friedman, executive vice-president of the Pension Rights Center, noted in the wake of the Omnibus bill’s passage, the bill will almost certainly encourage similar cutbacks in state and local government pension benefit payments. Friedman added, thereafter possibly even Social Security and Medicare.

The politicians and employers are thus now taking aim at all that remains of collective pension plans in the U.S.. More than 50 million workers’ deferred wages (i.e. pension benefit payments) are thus now coming under direct attack. And if the practice of pension cutbacks expands to Social Security retirement benefits, that’s another 58 million retirees, spouses, and disabled workers and their families.

The Omnibus spending bill just passed by Congress indicates clearly that the Republican Legislative Offensive is being rolled out faster than otherwise might have been predicted. The rollout is made possible, moreover, by wide Democrat support for many of the initiatives, in both Houses of the U.S. Congress, as well as from the Obama White House as well. The bill is no doubt a harbinger for more pro-Corporate and anti-worker legislation to come.

Jack Rasmus is the author of the forthcoming book, ‘Transitions to Global Depression’, Clarity Press, 2015; and Epic Recession: Prelude to Global Depression and Obama’s Economy, both by Pluto Press, 2010 and 2012. His blog is jackrasmus.com and website http://www.kyklosproductions.com.

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Copyright 2014, by Jack Rasmus

“With Ukraine’s economy sinking faster into depression by the month, since November 2014 the IMF, European Commission, and USA have been intensifying their demands that Ukraine’s Poroshenko government expand and accelerate the IMF’s April 2014 plan to ‘restructure’ the Ukrainian economy.

In October, the World Bank forecast that Ukraine’s 2014 GDP will fall by at least -8%. That now appears to be a floor for the decline, as the economy has continued to further deteriorate rapidly. As year-end 2014 approaches, the situation has become dire. Ukraine’s central bank foreign currency reserves are now equal to less than one month. Meanwhile Ukraine’s own currency continues to decline in value, its export earnings fall, and credit is quickly drying up.

Various public and private estimates being floated in the western press in recent weeks are that Ukraine will soon need an additional $15 billion loan in 2015. That likely additional funding was confirmed by a USA White House spokesperson recently who, in response to a press query, admitted a new package was coming and that the USA would participate. The IMF is therefore, in recent weeks, in the process of implementing its ‘Plan B’ for restructuring Ukraine’s economy. In anticipation of providing more money, Plan B means “front-loaded implementation of reforms”, as the IMF’s December 13, 2014 press release noted. That in turn means more aggressive restructuring and even more direct control of Ukraine’s economy.

In the past, the IMF has allowed a host country to implement the plans and restructuring details it defines as necessary. The IMF lays out the program; the host country implements—under the direction of the IMF mission team of technocrats. However, this time it appears the IMF—and the European and American interests behind it—are demanding that its own more ‘reliable’ western managers directly manage the IMF program implementation.

After a flurry of IMF missions back and forth to Ukraine in November, on December 2 the Poroshenko government therefore agreed and appointed two western shadow bankers—one from the USA and one from Europe—to its two key economic positions of Minister of Finance and Economics Minister—to ensure that restructuring now occurs more rapidly, more aggressively, and to the fullest benefit of western economic interests.

In an unprecedented move, Natalie Jaresko, a USA citizen and current private equity firm, Horizon Capital, CEO was appointed Ukraine Finance Minister; and Aivaras Abramavicius, a Lithuanian with past employment ties to Swedish and German investment banks and, like Jaresko, educated in the USA, was appointed Ukraine Economics Minister.

Who is Natalia Jaresko?

Jaresko is not just a shadow banker, the CEO of the USA, Chicago based, private equity firm, Horizon Capital. She began as a former official of the US State Department, a chief of the economic section of the US Embassy in the Ukraine in the early 1990s. Jaresko was, as they say, ‘in the right place at the right time’, when President Bill Clinton in 1995 set up the USA government funded, ‘Western NIS Enterprise Fund’ (WNISEF), a USAID $150m fund to promote USA and western investments into the then newly created Ukraine after the Soviet Union breakup. WNISEF specifically targeted the Ukraine and Moldova for western investors. Clinton appointed Jaresko to the WNISEF, along with several other ‘private’ bankers who together would operate WNISEF on behalf of the US State Department. Jaresko became WNISEF’s president and CEO in 2001.

As a new Clinton-appointed director of WNISEF in 1995, Jaresko lost no time in quickly leveraging WNISEF to create her own private equity firm targeting investments into Ukraine and other former East European Soviet republics. In 1995, according to Bloomberg News, at the same time WNISEF was established, Jaresko and two other Chicago investors, Jeffrey Neal and Mark Iwashko, together founded Horizon Capital, a US private equity firm. Horizon Capital thereafter managed WNISEF, extracting millions in fees over the years since 1995.
Around the time of the ‘orange revolution’ in 2005, Jaresko and Horizon subsequently set up another fund within Horizon, called the ‘Emerging Group Growth Fund’(EGGF). Today Horizon, WNISEF, and EGGF coordinate their investment activities throughout the Ukraine-Moldova and beyond, including Belarus.
In her current role as Finance Minister, Jaresko is thus in a unique position to indirectly funnel the most lucrative Ukraine investment opportunities and Ukraine company acquisitions to her Horizon Capital private equity firm.

Who is Horizon Capital?

Horizon Capital, like all private equity firms, not only seeks deals on its own, but also functions as a conduit to other big investors and shadow banks. Horizon will arrange and broker the ‘deals’ for big USA finance capitalists to purchase Ukrainian companies, in return for fees and for sharing spin-offs and sell-offs in the future.
Who Horizon will likely benefit is suggested by its Board of Directors’ many other USA corporate connections. The board members have interests and ownership in scores, perhaps hundreds, of other companies in the USA. It will be easy for them to put these companies in touch with Horizon’s Kiev, Ukraine offices which in turn no doubt will be in constant contact with Jaresko. She apparently plans to retain her position as CEO of Horizon even as she functions as Finance Minister. Jaresko and Horizon need not consider any of this a ‘conflict of interest’. Horizon need not directly invest or acquire companies; it will be the enabler-broker for the real investors back in Chicago and the USA. Jaresko will suggest the relationships, Horizon set them up, collect fees, and put the right USA capitalists in touch with the ‘right’ Ukraine businesses.

A closer look at Horizon’s Board of Directors reveals the likely USA companies, banks and investors who may directly benefit from their Horizon Capital-Jaresko connection:

Board director Patrick Arbor has long time connections with Chicago banks, USA commodity producers, options and futures traders. Director Whitney Macmillan with the giant USA agribusiness firm, Cargill. Directors Robert Cotton and Richard Arthur with USA defense companies, like Hughes Electronics and Lockheed-Martin’s naval and submarine electronics divisions. Horizon co-founder, Jeffrey Neal, held long time CEO and senior positions with global investment banks and Merill-Lynch, now a subsidiary of Bank of America. The other Horizon co-founder, Mark Iwashko, co-founder with Jaresko in EGGF, now independent, has extensive holdings and connections in mortgage banking and industrial manufacturing. He is also chairman of the Ukraine real estate firm, Dragon Ukraine properties PLC’.

Not coincidentally, agribusiness, naval construction, finance & banking, construction, and defense sales to Ukraine will prove among the ‘hot Ukraine investment opportunities’ as the USA deepens its economic and political penetration of the Ukraine in the months ahead. Horizon and its investor connections in the USA are thus well-positioned to benefit from Jaresko’s key role as Finance Minister.

Poroshenko’s other ‘foreign’ appointment of Aivaras Abramavicius, a Lithuanian with similar deep connections to German and Swedish west European hedge funds and bankers. He’ll serve a similar role of ‘conduit’ no doubt, on behalf of western European economic exporters and importers.

Together, Jaresko and Abramavicius will function much like western ‘economic viceroys’ (in the British 19th century imperialist tradition), determining who gets the IMF money, who gets connected with western bankers and investors, who gets investments and acquisitions from western corporations—in short who benefits (and who doesn’t) from new western economic ties now being deeply forged in Ukraine.

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This Alternative Visions radio show presentation is available for download and listening at:

http://prn.fm/alternative-visions-oil-deflation-russias-recession-ukraines-depression-12-20-14/

or at:
http://www.alternativevisions.podbean.com

SHOW ANNOUNCEMENT

Jack Rasmus reviews the continuing collapse of global oil prices and its effect on the emerging recession in Russia, continuing economic stagnation in Europe, and the deepening Depression in the Ukraine economy. Rasmus discusses how the global oil price collapse may be entering a second phase soon, further impacting not only the major oil commodity producers (Russia, Venezuela, Nigeria, Norway, Mexico, etc.), but now, increasingly, the economies of other non-oil commodity producers (Brazil, Indonesia, India, Turkey, and others). Additional pressures appear to be building as well on global financial asset markets, especially US and European corporate junk bonds. How this is related to last week’s US Federal Reserve decision to put off raising US interest rates another 2-3 months, and the subsequent latest surge in the US stock market, is explained. Jack then discusses developments in the Russian economy as it clearly enters recession; the feedback effects of Russia’s recession on Germany and other eastern European economies; and the further feedback effects of both in turn on the deepening Depression in the Ukraine. Jack concludes with a detailed review of the negative effects of the IMF bailout on Ukraine, the recent installation of US and EU citizens as economics and finance ministers in Ukraine’s new government, Poroshenko and Yatsenyuk’s pleading for more aid from the west, and latest hard nose demands by the IMF and G7 for Ukraine to impose even more austerity on its people if it wants more loans in 2015.

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Despite Abenomics 1.0’s abysmal record for the majority of Japanese households, Japan voters elected Abe for another four years. Moreover, his Liberal Democratic Party (LDP) captured 290 of 475 seats this past week in the lower house of Japan’s Parliament as well. With its coalition partners’ additional 35 seats, Abe’s LDP controls more than two-thirds majority in Japan’s national legislature, which enables it to pass legislation without recourse to the upper house of the Parliament, according to Japan’s political system. In short, Abe can now get whatever policies he wants passed, including his ‘3rd arrow’ however he defines it, and that means more austerity measures.

So why would Japan voters re-elect Abe again, and give his party a safe majority in the legislature? The answer to this question reveals important broader political trends at work in the global capitalist economy—trends that not only ensure continuation of austerity policies but the likely intensification of such policies.

Abe’s re-election was hardly an endorsement of his failed policies by Japan voters. Barely half the eligible voters turned out to vote last week, down from a 70% turnout in 2009. What Abe’s re-election represents is a collapse of centrist parties now underway everywhere in the advanced economies and a rejection of their policies by the voting public—i.e. policies which have largely failed to generate economic recovery for all but investors, bankers, and big corporations since the 2008-09 global crash. That collapse is making possible a return of even more aggressive, pro-capitalist parties and policies.

Japan voters saw nothing to vote for in the now discredited Democratic Party (DP) of Japan, a mostly center-right party that was in power between 2009-2012 and that failed miserably to achieve any real economic recovery for any but wealthy investors, bankers and multinational companies. So Japan voters stayed home or else voted against the DP by voting for the LDP as a protest.

The dissolution of Japan’s DP as a political force began in 2012 and accelerated this past election, with the DP winning only 73 seats out of 475, well below its projected 100 seats. Today it remains in disarray, divided, without effective leadership or any new ideas as to how to pull Japan out of its current, latest recession.

A similar dissolution is now beginning with the Democratic Party of Obama in the USA in the wake of its recent November election debacle. It too is in disarray, increasingly divided internally, lacking in effective leadership and bereft of new ideas as to how to bring recovery to the rest of the populace .

Like the 20 percentage point collapse in Japan voter turnout last week, in the recent USA midterm November 2014 elections a similar record low turnout resulted in deep losses for Barack Obama and Democrats. Obama and Democrats lost by landslides in both the US House and US Senate in November 2014, largely because key working class constituencies refused to turn out and vote for them after Obama and Democrats failed to deliver in a so-called economic recovery after 2009 that largely left them, and continues to leave them, behind.

Constituencies like immigrant workers, union workers, and youth everywhere in the USA—potential tens of millions of voters—abandoned the Democrats and Obama in USA midterm elections last month. They simply did not turn out to vote. Their major, historic losses in the US House and US Senate in November 2014 have left the USA Democratic Party today fissuring, if not yet fracturing, along several lines; floundering and dividing into a continuing and still dominant pro-corporate wing, on the one hand, and a small, growing vociferous ‘populist’ wing on the other.

In other words, both Japan and USA recent elections reveal the same basic trend: Centrist parties and their policies are now perceived as having failed by most voters, especially those of working class backgrounds. In response, those voters are now refusing to vote and/or voting against those failed centrist parties and policies as a protest.

The political dynamic that accompanies the continuing global economic crisis is thus similar in Japan and the USA, though not exactly. Both reflect a system dominated by two political parties—the one unapologetically pro-business (i.e. Abe’s party and the USA Republican Party) and the other dominated by business interests but harboring wishful thinking but misguided populist elements (i.e the Democratic Parties in both Japan and USA).

The now deeply entrenched political party dynamic in the key capitalist sectors of the USA and Japan goes something like this:
The former conservative parties—LDP and Republican—ensure their investor-capitalist constituencies get rich even though they wreck the economy in the process; the latter centrist Democrat Parties then win elections and ensure those same constituencies get further rich while failing to generate general recovery for all. When the center-right parties fail to bail out the broad populace from the economic crisis, that populace itself in turn ‘bails out’ of the political system and does not vote. That allows the unabashedly pro-business conservative (Japan) and republican (USA) parties to take advantage of low turnout and return again to office. The cycle then repeats itself: the conservative-republicans proceed once again to wreck the economy further while making their wealthy friends still wealthier, and so on.

In Europe the political dynamic is a variation on this trend of growing dissolution of center-right political parties. Due to its more open Parliamentary systems and histories, as social-democratic centrist parties in Europe decline and give way to dominant pro-Business parties after they fail to generate economic recovery, the dissolution of centrist parties stimulate the growth of smaller 3rd parties on both the left and the right. The case of France today and the collapse of the Socialist Party and rise of the National Front is perhaps the most notable case. But similar developments are also underway in Greece with the rise of the Syriza party, with Podemos in Spain, with UKIP in the UK, and perhaps even ‘Die Linke’ in Germany. Other less developed trends are also occurring in Italy, Netherlands and elsewhere.

What’s similar in Europe is that center-right parties are in decline there as well as in Japan and the USA. What’s different in Europe is that the collapse of the center does not necessarily result in the return of the unapologetic pro-business conservative party—i.e. Abe’s LDP in Japan and Republican-Teaparty in the USA. The ability of pro-business parties in Europe to impose structural and labor market reforms—i.e. new labor market forms of austerity—is therefore more unstable and less assured.

How the current efforts to push ‘structural’ and labor market reforms in Europe plays out remains to be seen in 2015. Political maneuvering by pro-business parties and elements in Europe to impose Abenomic 2.0-like and USA Republican Congress-like further labor market forms of austerity has begun. But unlike the USA and Japan, the outcome is less clear.
Meanwhile, as the global economy slows, the push for still more and newer forms of austerity continues worldwide—with Abenomics 2.0 in Japan, with the new pro-corporate/anti-worker initiatives of the USA’s newly elected Republican Congress, with France’s Socialist government’s new labor market reform proposals for 2015, with similar efforts by Italy’s Renzi government, and with Germany’s Merkel conservatives proposing to restrict bargaining and strikes of workers there. Austerity is far from dead; it is simply morphing into new forms with a new global capitalist offensive to expand it about to occur.

Dr. Jack Rasmus
copyright 2014

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This past week Japan re-elected its prime minister, Shinzo Abe, for an additional four years despite his previous policies having precipitated a deep recession in Japan that began this past April 2014—Japan’s 4th recession since 2008.

The central elements of Abe’s policies during his first two years in office, 2012-2014, included massive central bank money liquidity injections, first introduced in 2013, and a major sales tax hike for consumers that followed in 2014. A so-called ‘3rd arrow’ of ‘Abenomics 1.0’, proposals for structural economic reforms, was also announced in 2013 but has yet to be fully defined or implemented. That 3rd arrow of structural reforms to Japan’s economy is now at the top of the political agenda in Japan. It will be defined in the coming weeks and launched in a package of new policies in 2015—i.e. ‘Abenomics 2.0’.

‘Abenomics 2.0’ in 2015 will consist of new forms of austerity measures, contained under the cover of the softer code word of structural reforms—i.e. Abe’s former ‘3rd arrow’. Much like calls for structural reform now also occurring in Europe today in France, Italy, Spain and elsewhere, ‘structural’ refers mostly to further capitalist reordering of labor markets—i.e. ‘labor market reforms’. That means changes to how workers are paid, new ways to compress wages, limits on benefits workers will be allowed to receive, and new restrictions on unions and collective bargaining.

As Abenomics 2.0 is defined in the coming weeks and months, Japan wage earning households will therefore soon face even more austerity and even more wage and income compression. While another sales tax hike and still more QE money injections by Japan’s central bank—i.e. ‘arrows’ one and two—are still possible in 2015-16, the primary focus for 2.0 will be on structural, and especially labor market, reforms and related austerity measures.

Abenomics 1.0

Abe’s 1st arrow of liquidity injection—introduced in 2013 in the form of a ‘quantitative easing’ (QE) program—consisted of Bank of Japan direct buying of $530 billion of bonds held by private investors and bankers. Abe’s ‘2nd arrow’, a major increase in the national sales tax, raised Japan’s sales tax from 5% to a new 8% level this past April 2014.

Like all QE programs introduced to date in the USA, UK and elsewhere, Abe’s $530 billion QE produced a doubling of Japan stock prices-in the case of Japan in just one year—and a corresponding consequent surge in banks and investors’ profits and capital incomes. Japanese multinational companies also benefited as their foreign currency earnings rose in value, as a result of QE’s reducing Japan’s currency (Yen) exchange rate. The lower Yen also boosted Japan export sales for Japanese non-financial companies. The currency earnings and export sales in turn drove up stock prices and returns on financial assets still further.

In contrast, the 3% additional sales tax hike—Abe’s ‘2nd arrow’—directly reduced the real incomes of Japan wage earning households. The sales tax hike was not the only factor reducing wage earners’ real incomes. The QE money injection, by reducing Japan’s currency exchange rate, also raised the price of imports and therefore inflation for Japanese households. That inflation in turn reduced real wages and real household incomes even further, in addition to the sales tax hike. Another negative effect of QE was to divert the massive$530 billion monetary injection into mostly financial asset investment. Japanese investors, now flush with $530 billion extra in cash, invested the money injection largely in stocks, bonds, derivatives, and other financial instruments, instead of into real production in the Japan homeland economy that might otherwise have led to real investment, real jobs, and real incomes for Japanese workers. Or, alternatively, they invested a good part of the $530 billion abroad, thus also denying Japan wage earning households of any sharing of the benefits of QE.

According to the business press, Japan businesses reportedly are now sitting on $2.65 trillion in uncommitted cash. That’s equal to more than 60% of Japan’s annual GDP. In other words, Japan companies, shareholders, and investors benefited nicely from Abe’s ‘1st arrow’ of QE injections. On the other hand, they have been especially reluctant to share it in the form of wages with their workers. Real wages of Japan workers declined by 3% in 2013, in the first year of QE. They are projected for a further fall of 2%-3% this year, 2014, as well.

Given the downward pressure on wage earner incomes, consumption in Japan fell steadily throughout 2013 as QE was being introduced, except for the last three months as consumers stocked up on goods in anticipation of a coming 2014 sales tax hike. But once the sales tax was raised in April 2014, the floor collapsed on Japanese consumption spending, falling by almost 20% in just one quarter, April-June 2014.
And with that consumption collapse came the deep contraction of Japan GDP in the spring 2014 quarter, during which it fell by -7.3%. That was followed in the July-September 2014 period by another -1.9% GDP decline. Japan today finds itself mired in yet another deep recession, with no recovery light in sight at the end of the latest recession tunnel.

Abenomics 2.0: The ‘3rd Arrow’

Abenomics 2.0 promises even more of the same trends. The outlines of Abenomics 2.0 and new forms of austerity are now just beginning to emerge in Japan. Measures reportedly being considered include: major changes to Japan’s social security retirement system that will reduce benefits. That means a cut in what amounts to ‘deferred’ wages. Japan’s joining the USA led negotiations to establish a trans-pacific free trade zone, called the Transpacific Partnership (TPP), which will mean downward compression on wages as a result of free trade arrangements. Still undefined measures to increase business productivity, which almost always means jobs displaced by technology and workers working harder and longer for little or no more pay.

Following ‘labor market reform’ initiatives now emerging in Europe, Abe will also reportedly propose changes to make it easier for businesses to hire and fire full time workers. That will likely lead to an even greater shift to contingent employment, i.e. more part time and temporary job hiring as businesses lay off full time and replace with part time and temp workers. That too will also result in downward wage compression. Meanwhile, as a cover to all these real measures, Abe will continue to ‘talk’ to businesses, urging them to raise wages for their employees, even when both understand such talk is only for public consumption.

Wage compression forms of austerity will most likely also be accompanied by more traditional austerity forms as Abenomics 2.0 is rolled out. Despite having raised sales taxes to 8% on wage earning households, and still considering raising them further to 10%, Abe has called for further cuts in corporate taxes from the current tax rate of 36% to 30% or less to help boost business earnings, adding further to their $2.65 trillion still un-invested cash hoard. And government spending will likely also be cut further. With government spending essentially flat over the past two years in Japan despite its recession, and with the current recession reducing government tax revenues further, Japan’s government debt of 240% of GDP—one of the largest in the world—will likely lead to government spending decreases under Abenomics 2.0.

So Abenomics 2.0 will mean continuation of traditional forms of austerity , combined with the newer forms comprised of a new emphasis on structural and labor market reforms.
Given the clear failure of Abenomics 1.0 to generate sustained economic growth and economic recovery for all but investors, bankers and big corporations in Japan since 2012, plus the strong likelihood that Abenomics 2.0 will prove little different in that regard, why then did Japan voters this past week vote to return Abe and his Liberal Democratic Party back into office? What’s going on? And is this apparent anomaly strictly a Japanese phenomenon? Or does it represent political changes occurring in some similar fashion throughout the advanced economies of Europe-USA-Japan, as the global capitalist economy continues to slowly weaken and slide into another general recession?

Dr. Jack Rasmus
copyright 2014

The Political Bases for Continued Austerity

(for the rest of this article, go to Dr. Rasmus’ website at:

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

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TO LISTEN TO MY HOUR LONG PRESENTATION ON THIS TOPIC, ON MY ‘ALTERNATIVE VISIONS’ RADIO SHOW, DECEMBER 13, 2014, ACCESS EITHER OF THE ARCHIVED PODCASTS BELOW:

http://prn.fm/alternative-visions-global-oil-price-crash-consequences-12-13-14/

or at:

http://alternativevisions.podbean.com/

SHOW ANNOUNCEMENT:

“Dr. Jack Rasmus discusses the current global oil price deflation that began in earnest last June and is now accelerating, driving global oil from a prior 2014 high of $115/barrel to a recent low of $59. Jack explains how the net effect on the global economy will likely prove to b significantly negative overall, and that the price decline could fall as low as $40/barrel in coming months. The impact on Emerging Market Economies, already seriously slowing or in recession, will also prove significant—causing their currencies to collapse even further and in turn generating capital flight, declining credit availability, slowing investment, rising inflation, and inability of emerging market businesses and governments to finance previous incurred debt. Oil price deflation will almost certainly push Europe and Japan into general deflation and further recession, and toward more QE money injections that will further generate asset price bubbles. Rasmus predicts China’s current economic slowdown will continue in turn as Europe, Japan and Emerging markets slow their purchases of China exports. The contrary popular USA notion that lower oil prices mean lower gasoline prices and therefore more spending by USA consumers and businesses is challenged. In conclusion, Jack discusses how oil deflation globally could set off another round of financial instability worldwide, and how it will likely mean the ‘shale gas/oil fracking’ boom in the USA will now stall and could potentially set off a ‘junk bond market’ crisis in the USA similar to the subprime market real estate bust of 2007-09. Will the global oil glut and deflation lead to another ‘Asian Meltdown’, this time even more geographically dispersed; and, in the USA, will it lead to another ‘oil patch’ crash that occurred in the US southwest in the 1980s—this time affecting North Dakota-Wyoming, Alaska, and Pennsylvania as well as Texas and the southwest? (Read Dr. Rasmus recent posting on his website, http://www.kyklosproductions.com, ‘The Economic Consequences of Global Oil Deflation’, for further analyses).”

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by Dr. Jack Rasmus, copyright 2014

A new wild card has just been introduced into an already increasingly unstable global economy: a growing world glut of oil and consequent oil price deflation.

Since June 2014, the price of high grade (ICE Brent) crude oil has fallen more than 40%, declining from around $115 a barrel, in January 2014, to just $67 a barrel at the end of November. That’s the lowest since the bottom of the 2009 recession. The price decline has not only been deeper than expected in a normal cyclical correction, but also appears more than just a temporary event. Some predict global oil prices will fall below $60 a barrel in 2015, and could potentially fall as low as the $40 a barrel collapse that occurred during the 2008-09 recession.

What effect a deep and sustained oil price deflation will have on the global economy—which is already drifting toward stagnation and, simultaneously, rising financial instability—is hardly being discussed at all in the western business press. Instead, oil deflation is reported as a positive economic development, both for the advanced economies (AEs) and for emerging market economies (EMEs), as well as the global economy in general.

Economists, the business press, and governments in the advanced economies are all giving a ‘positive spin’ to falling oil prices, claiming it will mean lower costs to both businesses and consumers in the AEs. Lower oil prices mean lower gasoline prices and thus more for consumer households to spend elsewhere. Lower oil costs will stimulate business investment and spending, it is argued, and thus also boost economic growth. But this simplistic view may prove incorrect, not only for the AEs but for emerging market economies in particular and for the global economy in general. The combined negative effects of deep and sustained oil price deflation may well outweigh their positive effects.

There are at least three major potential impacts on global economic instability that will likely follow in the wake of global oil price deflation, some of which have already begun to appear:
First, a more rapid appreciation of the US dollar, and the corresponding relative decline in the currencies of a number of emerging market economies (EMEs)—in particular those dependent on commodity exports and especially those for whom oil exports make up a significant percent of total exports. There is a long, historical and documented relationship between falling oil prices and a rising US dollar. So global oil deflation means a rising US dollar.

A second destabilizing impact from falling oil prices will be to contribute toward general deflation in Europe and Japan. Economies there have already entered recession. Despite trillions of dollars of liquidity injections by their central banks in recent months, price levels have still fallen to zero or less. Oil deflation will add significantly to a general deflationary drift in both Europe and Japan. That in turn will likely lead to even more liquidity injections by their central banks, in the form of more quantitative easing (QE), further feeding stock market and bond asset bubbles.

Third, decline in financial assets tied to oil could increase the tendency toward global financial instability. Oil deflation may lead to widespread bankruptcies and defaults for various non-financial companies, which will in turn precipitate financial instability events in banks tied to those companies. The collapse of financial assets associated with oil could also have a further ‘chain effect’ on other forms of financial assets, thus spreading the financial instability to other credit markets.

The positive impacts of falling oil prices on economies, including the USA, are generally over-rated. Oil price declines may not have as much positive impact on consumer spending and business investment that many in the AEs now assume. The total net effect on the global economy will therefore likely prove more negative than positive.

1. Oil Deflation’s Potential Impact on EMEs

The continued collapse of world oil prices since June has already been having a devastating effect on emerging market economies, especially those dependent on commodity exports—like Brazil, Chile, Argentina and South Africa, and even Australia and a number of economies in southeast Asia. Oil deflation has had an even more severe impact on those EMEs highly dependent on oil exports as a large percentage of their commodities mix—like Venezuela, Russia, Nigeria.

The initial transmission mechanism by which global oil deflation negatively impacts EMEs is falling currency exchange rates. Oil price deflation is generally associated with a corresponding rise in value of the US dollar relative to other currencies. A rising dollar in turn means falling currency values for other countries.

Since the collapse of global oil prices began in earnest last June, the Russian Ruble has fallen approximately 38%. The Venezuelan currency, the Bolivar, by around 45%. Nigeria’s currency, the Naira, has declined 12% just since mid-October. Even the currency of developed oil exporting countries, like Norway’s Krone, has fallen 17%. After having remained stable for several years, the US dollar clearly began to rise last June, as global oil prices commenced their freefall that same month. So falling oil prices drive the dollar up and in turn depress EME currencies, and especially depress the currency of oil exporting economies. And the more dependent the economy is on oil exports, the greater the EME currency decline.

In other words, it’s not sanctions on Russia by the west that are responsible for the lion’s share of the ruble’s recent decline. Nor is it Venezuelan domestic economic policies that are contributing most to the decline in the value of the Venezuelan Bolivar. It is the collapse of global oil prices that is the main culprit.

All commodities, not just oil, take a major hit when sustained oil deflation sets in. A sharp and sustained decline in oil is generally associated with declining sales and prices of other commodities. The entire global commodities sector may be impacted negatively. That has already begun to happen with commodities like copper, gold, and other industrial metals, that have begun to fall as well in the wake of the current oil price decline. The Bloomberg Index of 22 basic commodities, for example, has recently fallen to its lowest level since 2009.

Even non-oil, but commodity heavy, exporting EMEs have experienced significant currency declines relative to the US dollar since global oil prices began to fall more rapidly last June. In recent months Brazil’s Real has fallen 15.5% and Australia’s dollar by 12%–and in both cases despite their central banks’ interventions in currency markets to prevent even further currency declines.

Declining EME currency values sets in motion a number of critical economic developments that cause EME economic growth to slow sharply, and even precipitate recessions.

For example, sharp declines in currency values lead to capital flight from the EME. Both domestic and foreign investors dump those currencies, buy dollars, and send capital out of the country to buy US assets—typically US bonds and stocks and other assets that may be attractive as well, like real estate. The EME capital flight is then reflected in EME stock market declines and a rise in EME government bond interest rates. Former flows of foreign direct investment into the EME also slow. Money capital in general dries up. Credit becomes scarce. Falling currency values also lead to higher cost of imported goods for consumers and consequent decline in consumer real incomes and spending. Business exports also decline. All the above translate into slowing real economic growth in the EME, and even recession. And all because of rising dollar—the global trading and reserve currency—and the decline in the EME’s currency exchange rate that sets the process in motion.

This very process has already been going on, in a muted form, for the past year for EMEs. Talk by the US central bank, the Federal Reserve, of its plans to raise interest rates in 2015 has provoked a number of the trends above already. Note that just the talk of rising rates has resulted in an ‘on again/off again’ destabilization of a number of EMEs during the past year. Some EMEs have been able to partially and temporarily offset the effects of possible rising US dollar—that is, for now. However, should the US Federal Reserve actually raise rates, the effects on EME currency depreciation, capital flight, and so on will certainly grow worse.

But even before that ‘worse’ may occur, the rapid drop of oil prices since last June is having the very same effect right now, in the present, that the US Federal Reserve’s policy shift may also have in the near future: that is, it is causing the US dollar to rise and EME currencies to fall, thus setting in motion the aforementioned destabilizing effects on their economies. It is just that the oil deflation-rising US dollar effect is impacting the oil and commodity export dependent EMEs first and most severely at the moment. A more general negative impact may soon follow, and most certainly will sometime in 2015.

2. Oil Deflation’s Potential Impact on the Eurozone and Japan

In the cases of the Eurozone and Japan economies the main risk from global oil price deflation is that falling oil prices will further push already near zero general inflation rates into deflationary levels. Already the Eurozone’s general inflation is a mere 0.2% and Japan’s less than 0.8%. The central banks of both have a public inflation target of at least 2%, but are moving in the opposite direction from that goal, despite trillions of dollar equivalents of Euros and Yen injected into their economies by their central banks in recent years. Their general price levels have continued to fall.

Should oil deflation push their economies over the cliff into general deflation, it will no doubt be an excuse to inject even more trillions of dollars into their economies, in the false ideological notion that, in today’s economy, more money raises the general price level. History has shown this view to be nonsense, of course. Massive central bank liquidity injections result in financial asset inflation, but not in general inflation for goods and services in the real economy. In fact, liquidity injections lead to financial asset bubbles. But oil price deflation will be the excuse, nonetheless, for still more ‘QE’ money injections in both Japan and Eurozone in 2015. Should further liquidity injections occur, that will contribute even more to financial asset bubbles and instability.

The argument by Euro policy makers—as by their USA cousins—is that lower oil costs will free up income for households to spend on other consumption, as well as add income to businesses which they will subsequently invest. But both premises may prove incorrect.

Deflation produces a negative consumer and business psychological effect, a ‘deflationary expectations’ psychology. Falling prices, i.e. general price deflation, may lead consumers to expect prices to fall still further, and thus cause them to freeze up immediate spending. The same goes for business investment activity.

Uncertain about how far prices for their products my fall by the time they bring them to market at some future date, business uncertainty may instead lead them to forego additional investment even though they have additional income with which to invest as a result of oil cost declines. In other words, deflation is perverse. Deflation in general prices, made possible by oil deflation, may actually result in less consumer spending and less business investment—not serve as a stimulus to both.

3. Oil Deflation & Global Financial Instability

Oil is not only a physical commodity bought, sold and traded on global markets; it has also become an important financial asset since the USA and the world began liberalized trading of oil commodity futures (i.e. a financial security) in the late 1990s on a global scale.

Just as declines in oil spills over to declines of other physical commodities (e.g. copper, iron ore, gold, etc.), oil financial securities (i.e. oil commodity futures) price deflation can also ‘spill over’ to other financial assets, causing their decline as well, in a ‘chain like’ effect.

That chain like effect is not dissimilar to what happened with the housing crash in 2006-08. At that time the deep contraction in the global housing sector ( a physical asset) not only ‘spilled over’ to other sectors of the real economy, but to mortgage bonds (i.e. financial assets representing housing and commercial construction), and derivatives based upon those bonds, also crashed. The effect was to ‘spill over’ to other forms of financial assets that set off a chain reaction of financial asset deflation.

The same ‘financial asset chain effect’ could arise if oil prices continued to decline below $60 a barrel. That would represent a nearly 50% deflation in oil prices that could potentially set in motion a more generalized global financial instability event, possibly associated with a collapse of the corporate junk bond market in the USA that has fueled much of USA shale production.

Is the USA Economy an Exception?

(For the remainder of this article, go to Dr. Rasmus’ website,

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

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published teleSUR English Edition, Nov. 27, 2014

For a print published version of this topic on the Republic Congress’ new aganda (updating the podcast on the Alternative Visions radio show available below on this blog)…

go to Jack Rasmus’s website, http://www.kyklosproductions.com/articles.html. The website is also accessible from the sidebar on this blog.

DESCRIPTION OF ARTICLE:

‘The USA Republican Congress’ New Agenda’

‘In the wake of the recent midterm elections, Dr. Rasmus describes how the new Republican controlled Congress has begun to develop new policies on behalf of Corporate America, many of which represent a resurrection of past policies of the Bush administration—i.e. old wine in new bottles. Rasmus briefly describes the major pro-corporate policies introduced and passed by Congress during the Obama administration, 2009-2014. He then identifies the new pro-Corporate agenda for the next two years, 2015-2016: more corporate tax cuts, accelerated push for free trade for pacific rim countries and europe, immigration reform defined as more policing and fences, rollbacks of environmental protection initiatives (XL pipeline, industrial plant emissions, public lands fracking, EPA funding, international CO2 limits), Affordable Care Act revisions (more business exemptions, cost shifting to consumers, limits on Medicaid), limits on financial regulation under the Dodd-Frank Act, more aggressive foreign policy action (green light for conflicts and funding of proxies in Syria, US troops to Iraq again, Ukraine (US advisers, special ops, money), NATO push into east Europe (Ukraine, Moldova, Georgia), more freedom of action for NSA spying on US citizens and limits on free speech and assembly. Rasmus predicts the Democrats and Obama will agree with a number of the legislative policies that will soon be proposed by the new Republican majority in Congress.’

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The following ALTERNATIVE VISIONS radio show is available for listening and download at:

http://prn.fm/alternative-visions-japans-recession-contradictions-global-capital-11-29-14/

or at:

http://www.alternativevisions.podbean.com

SHOW ANNOUNCEMENT:

Dr. Jack Rasmus describes Japan’s latest 2014 recession as yet another example of growing global Capitalist economic contradictions. With its stock markets booming, exports rising, unemployment at a 16 year low, interest rates at zero and massive money injections by its central bank—how is it that Japan’s economy has plunged again the last six months into a severe recession once again? Is it that it has introduced QE monetary policies too ‘late’, as one wing of mainstream economists argue (i.e. ‘retro classicalists’)? Or is it because it has not introduced fiscal stimulus government spending, as another wing of economists argue (i.e. ‘hybrid keynesians’)? Jack challenges both explanations. Real wages and real household income continues to decline, and consumption falter in turn, Jack argues, because job growth has been largely ‘contingent’(part time/temp), because Japan QE/monetary policy has depressed its currency by 35% and raise the cost of consumer imports that reduces real wages still further, and because Japan fiscal policy raised consumer taxes and reduced household income still further in turn. Jack argues Japan is yet another ‘model’ and example of how capitalist monetary policies driving the world economy today bail out wealthy investors, bankers, and multinational companies first and quickly, but result in a failure to boost real investment, jobs and average consumer incomes as well in the process. With little household demand for real goods and services, businesses cut labor costs (wages) instead to boost profit margins and then hoard their cash, or invest it offshore, or divert it to financial asset speculation globally. Capitalist monetary policies bail out the rich, but simultaneously cause the rest of the global economy to gradually grind to a halt—Japan being but the latest, and most extreme, example of the growing contradictions of global capital today.

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On April 30, 2014 the International Monetary Fund (IMF) provided Ukraine a two year, $17.1 billion standby loan, justified at the time as necessary to stem the country’s accelerating economic decline. In exchange, Ukraine turned over the macro-management, restructuring, and the future of its economy to the IMF.

Today, six months later, it is reasonable to ask how Ukraine’s economy has fared in the interim? How has the IMF plan performed thus far? And what are the prospects for Ukraine’s economy in the months immediately ahead under continuing IMF management?

For the six quarters (18 months) prior to April 30, 2014 Ukraine’s economy declined 1%-3% every quarter except one. In the first three months of 2014 its GDP fell another -1.1%. But since the IMF deal was signed in April, the decline has accelerated: In the April-June 2014 period Ukraine’s GDP fell a more rapid -4.6%. GDP figures are not yet available for the most recent, July-September 2014 period, but it appears very likely the economy is now deteriorating even faster.

For example, according to World Bank data, while industrial production fell -5.8% in the first half of 2014, in July and August its decline accelerated to -12.1% and -20.1%, respectively. Other key indicators of the economy reveal a deterioration from January through August, especially business investment (-25.6%), construction (-15.6%), trade (-13.8%), exports (-14.4%) and imports (-21.2%). Those figures do not yet include the two most recent, and no doubt even worse, performing months of September-October.

During the same January-August period, inflation also rose by 20%, Ukraine’s currency plummeted by 36% (the most globally of any economy), and Ukraine central bank’s foreign currency reserves—needed to stem its currency collapse, to finance desperately needed exports & imports, and to provide essential credit to its increasingly fragile private banking system—began evaporating. Foreign reserves fell $4 billion in October alone, to a nine year low of barely $12 billion. With currency, reserves, and credit all collapsing, capital flight continues to intensify, recently prompting Ukraine’s government in desperation to impose a $200/day limit on withdrawals.

Last April the IMF assured its initial $17.1 program would result in only a -5% fall in Ukraine’s GDP this year, with a return to 2% positive growth in 2015.

However, an IMF preliminary review in mid-July of the program’s progress concluded that while “all performance criteria and benchmarks were being met” nonetheless, along a number of fronts the economy was deteriorating rapidly. The IMF therefore raised its GDP decline estimate to -6.5%.

In August, as the economy continued to further deteriorate, the IMF revised its April estimate again, predicting a -7.3% decline in 2014 and this time a -4.6% in 2015 instead of 2% growth.

An indication of just how fast the economy has been deteriorating, just last month, in early October, the World Bank raised that number to an -8.0% GDP drop for 2014. The Bank noted an even worse scenario was likely, if gas prices continued to rise in 2014(which they will with the onset of weather and the recent Ukraine-Russia gas deal) and if military conflict continues in the eastern regions (which has been intensifying anew). The only growth sector of the Ukraine economy is government military spending, as it battles separatists in its eastern Donetsk-Luhansk regions.

Many economists considered the IMF’s initial April estimates for Ukraine absurdly optimistic, this writer included, who predicted last March that Ukraine’s GDP would collapse at least -10% to -15% in the coming twelve months; furthermore, Ukraine would need a $50 billion bail-out in the next two years, not the IMF’s $17 billion. That 8% GDP drop so far amounts to $14 billion reduction in Ukraine’s 2013 GDP of $177 billion.
To date, the IMF has only distributed to Ukraine $4.5 billion of the $17 billion. But that $4.5 billion disbursement has had little positive impact on Ukraine’s real economy and provides essentially no ‘offset’ to the $14 billion real decline to date.

A significant percentage of that $4.5 billion has already been paid by the IMF to itself and to western bankers for debt previously incurred. In fact, according to Bloomberg business, Ukraine has more than $15 billion in payments coming due between now and the end of 2015. One could logically argue that the IMF’s initial $17.1 billion will be used to pay back $15 billion.

Another part of the IMF’s paltry $4.5 billion disbursement to date is directed to Ukraine’s central bank, in order to try to stabilize Ukraine’s currency, the hryvnia, that has been in freefall for months. And yet another $2.7 billion disbursement, scheduled for later in 2014, will likely be used by Ukraine’s state owned gas company, Naftogaz, to pay Russia for natural gas through next winter, and for payments owed for past gas deliveries, both as part of an agreement recently reached with Russia’s Gazprom.

Concerning the impact of IMF policies involving natural gas, gas prices have already risen 50% for many consumers, devastating incomes and depressing consumption. But the other foot will fall after January 1, when subsidies to households, now covering up to 7/8ths of the cost for gas, will start being discontinued.

So most of the $17.1 billion original IMF deal has had, and will have, little positive impact on Ukraine’s real economy. The lion’s share of the $17.1 billion goes to service past debts to creditors outside the country. And what remains in funding, i.e. what doesn’t go to creditors, goes mostly to Ukraine’s central bank—i.e. to try to stabilize its currency, to finance external trade (exports-imports), and to replenish evaporating foreign exchange reserves. Meanwhile, gas policies, as well as government spending cuts, tax hikes on consumers, and other ‘fiscal’ measures in the IMF plan directly impact both household consumption and government spending.

The IMF’s $17.1 billion April loan is classic IMF strategy, designed to take over an economy and manage it in the interests of western banking and multinational corporate interests. IMF lending is foremost about ensuring interest and principal payments are made on schedule. The first priority is to provide loans to ensure repayments. Bankers get paid first, along with the IMF. Second priority is to provide the country’s central bank funds necessary to stabilize its currency. A stable currency is needed to encourage western foreign direct investment into the country, i.e. to buy up and take over its domestic industry. Third priority is to enable indigenous businesses and consumers to purchase exports to the country from the west.

Thereafter the IMF plan is to fundamentally restructure the economy so that social spending programs are cut massively and wage pressures are reduced on business as layoffs take place as part of restructuring to make business more ‘efficient’. Social program cuts and layoffs tame the working classes to accept lower wages and to work harder, increasing productivity, if they want to keep their jobs. Finally, the classic IMF intervention program aims to reduce the size of the government and the public sector, so that it doesn’t compete with private businesses for credit or directly in markets. Reducing government spending and deficits also creates more budget room for business and investor tax reduction. That model is precisely what occurred in Greece, Portugal and elsewhere in recent years. And it’s being implemented today in Ukraine.

Contrary to IMF assurances last April, nearly everywhere since April the Ukraine economy is declining at double digits rates—industrial production, investment, consumption, trade, currency values, foreign exchange, and now GDP itself. So the Ukraine economy is currently spinning out of control—not stabilizing as the IMF April 2014 plan and deal originally assured—heading toward the 10%-15% GDP collapse and the need for $50 billion in bailout.

The IMF itself has recently recognized the seriousness of the situation, indicating it may have to add another $19 billion in bailout. But that doesn’t mean it will provide it. Western Europe is descending into a third recession in five years and is in no mood to give more. And the USA is preoccupied with ISIL, Iran, and domestic politics.

Ukraine’s President Poroshenko recently toured European capitals and Washington with his ‘hat in hand’. He reportedly “gave the speech of his life and got $53 million. That funds the cost of the war in the East for 9 days”, to quote the USA newspaper, The Washington Post.

The IMF’s cover for the failure of its program in the Ukraine is to blame the accelerating decline on the continuing military conflict in the East and on the natural gas crisis, escalating prices, and growing Naftogaz debt. While military conflict has contributed, the scope and magnitude of the Ukraine economic collapse now underway is attributable to various economic forces well beyond the military conflict—not least of which is the IMF program itself.

The fact that the IMF continues to revise its economic estimates downward, almost monthly, and that it is raising the possibility of the need to provide as much as $19 billion more in bailout, is ample testimony of the failure of the program.

Meanwhile, Ukraine’s real economy and its citizens suffer severely as a result, with all indications that the economic crisis there will get worse, perhaps much worse, before it ever begins to get better.

Dr. Jack Rasmus

Dr. Rasmus is the author of ‘Epic Recession: Prelude to Global Depression’, 2010, and ‘Obama’s Economy’, 2012, both published by Pluto Press; and the forthcoming ‘Transitions to Global Depression’, by Clarity Press, 2015. His website is http://www.kyklosproductions.com and blog, jackrasmus.com.

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