Introductory Comments: The following article was written for the US-wide unionists group, the Emergency Labor Network, as one of its position statements. A more in depth analysis of the same topic is available on this writer’s website, http://www.kyklosproductions.com, (see ‘articles toolbar tab on the webpage) and accessible from the sidebar of this blog.

A pension crisis of major dimensions is growing in the US across all three forms of defined benefit plans (DBPs)—public, private single employer, and private multi-employer plans.

Corporate America and its political friends have begun to use the economic crisis that commenced in 2007 as an opportunity to initiate and expand yet another offensive aimed at further undermining defined benefit pensions in the U.S. Having already begun in 2009-10 with a new attack by governors on public employees’ pension plans, the Corporate Offensive over the subsequent eighteen months has expanded to include new coordinated attacks on private sector multi-employer and single employer DBPs as well.

Contrary to corporate, press and politicians’ claims, the crisis in pensions has had nothing to do with pension benefit increases for the workers. In many cases pension benefits have been frozen or actually reduced over the past decade and especially so since 2008.

Rather the crisis is directly attributable to government and corporate policies that have been implemented over the past thirty years—including, but not limited to, two decades of government encouraged management practices reducing pension funding, stagnant jobs and wage growth since 2001, massive speculative investment losses by pension funds, the collapse of the economy, jobs, and pension contributions after 2007, and the failure of the US economic recovery to restore jobs and wages the past three years, 2009-12.

Brief Overview of the Pensions Funding Gap

Multi-employer defined benefit pensions in the 1990s averaged shortfalls in funding (i.e. ratio of assets to liabilities) of only a very manageable $30 billion throughout the decade.
A 2009 Report by the Pension Benefit Guarantee Corporation, the quasi-government agency responsible for ensuring pension funds stability and solvency in the private sector, had a funding shortfall of $355 billion. A similar scenario applies to ratios and shortfalls in funding for single employer pensions, with funding shortfalls of approximately $407 billion. The highly respected Pew Center’s 2008 estimated public sector pensions gap for 2008 of $452 billion.

But the shortfalls in all the defined benefit pensions are overwhelming the result of economic conditions, government policies, and corporate practices over the past 12 years. In 1999, state public employee pensions were 103% funded, according to the Pew Center. Similarly, private pensions—multi-employer as well as single employer—were in good shape at the beginning of 2000. Whatever has happened is therefore clearly a consequence of events and policies since 2000.

Employers sense an opportunity today to falsify the facts regarding the causes of defined benefit pension shortfalls, and to use that falsification to attack and dismantle what’s left of defined benefit pensions that now cover barely 18% of the workforce compared to three decades ago when the percentage of coverage was two thirds or more. What facts are being conveniently ignored in this new corporate offensive?

Corporate Manipulation of the Pension Funding Gap

Corporations have not hesitated to take advantage of the funding gap that they themselves have largely created, with the help of compliant politicians.

On the multi-employer side, the employer new offensive is evident in a series of banks’ reports claiming the funding gap is even greater than it is. By making extreme low-ball assumptions on returns, banks’ research departments and corporations argue the gap for multi-employer plans is significantly higher than even the PBGC has estimated. Their conclusion is major reductions in pension benefits are therefore required, even though pension benefit payments are not the source of the problem.

This strategy of overestimation of the funding gap, cherry-picking the worst assumptions and then extrapolating the losses in a straight line out for decades, has been adopted as well by governors and state politicians intent on cutting pension benefit payments to resolve a crisis workers did not create.

A typical, extreme case is New Jersey governor, Chris Christie, who over-exaggerates an estimated $2.5 trillion funding gap in 2010—i.e. six times greater than that estimated by the respected Pew Center. Christie’s answer to the shortfall in New Jersey is a massive gutting of public employee pension benefits. However, Christie conveniently hides the fact that his state, New Jersey, only made 31% of the required contributions to its employee pension fund in 2009, thus contributing significantly to its relatively low funding ratio of 66%. Like Christie, governors complaining the most about State pension funding gaps are typically those who created those gaps by refusing repeatedly to make the required contributions to their pension funds in the first place.

Single Employer Pension funds are also under a similar direct attack, exemplified by the latest efforts of American Airlines to project massive losses in its fund as a way to justify dumping it on the PBGC and thereby shedding $9 billion in contributions it should have made, but didn’t, for decades. American Airlines for decades has been one of the most egregious practicers of ‘pension contribution holidays’, refusing year after year to make legally required contributions to its fund, and thereby ensuring it would be under-funded.

Fundamental Causes of the Pension Funding Crisis

The deterioration in defined benefit pensions over the past decade has had virtually nothing to do with providing more generous benefits for workers. Nor is it the case that workers are retiring in greater numbers all at once. The causes of the pension shortfalls are due to reductions in employer contributions to the pension funds for multiple reasons, to speculative investments gone bad and massive losses in pension funds over the preceding decade, a major collapse in jobs since 2000 due to repeated and protracted recessions, jobless recoveries, and shifting of jobs offshore that have further undermined total pension fund contributions, and government policies since 2008 that have ensured pension fund returns on investment are reduced to below-normal historical rates of return..

The following is a partial summary short list of a dozen true causes of shortfalls in defined benefit pension funding.

1. Two recessions since 2000 and two bouts of ‘jobless recoveries’ (2002-05 and 2009-12) resulting in sharp reductions in contributions to the funds

2. Structural unemployment due to offshoring and free trade that has in addition to #1 progressively reduced jobs and therefore contributions, especially in tech and manufacturing industries

3. Government allowed ‘pension contribution holidays’ that permitted suspension of employer contributions for decades, thus further lowering the contributions base of the funds

4. Employer manipulation of actuarial assumptions, like phony overstated rates of return and projected hirings that never happen, that covered up the shortfalls

5. Government rules that allow the diversion of pension funds to cover 20% of rising employer health care insurance costs

6. De-unionization of the workforce, resulting in employers suspending private pension plan participation for new workers, thus further reducing contributions.

7. Shift in U.S. job markets to part time and temp ‘contingency’ jobs and workers by tens of millions, who are excluded from participating (and thus contributing) to DBPs

8. Legislation and court decisions over the past decade that have promoted 401k plans and conversion to ‘Cash Balance Plans’, diverting contributions to what would have been to defined benefit pension funds.

9. Phony business bankruptcy policies that have permitted easy dumping of pensions on the PBGC, the Pension Benefit Guaranty Corporation that ensures DBPs, encouraging employers to underfund the pensions to create justifications for dumping the pensions.

10. Easing of restrictions allowing companies to leave multi-employer plans and for single employers exiting the PBGC

11. Pension Protection Act of 2006 that allowed pension funds to partner with high-risk speculators like hedge funds, resulting in pension funds’ headlong rush into speculative investing in subprime mortgages and other high risk real estate and financial markets, the consequence of which was massive fund losses in 2000-02 and again in 2008-12.

12. Low rates of return in general over the last decade on investments by pension funds, attributable largely to the protracted recession since 2008 and, even more so, to the Federal Reserve Bank’s still continuing policy of zero interest rates for four consecutive years.

Fundamental Solutions to the Pension Crisis

Pension funds are financial institutions. They perform much like commercial banks by lending to other non-financial institutions.

In 2008-09, the Federal Reserve bailed out the banks to the tune of $9 trillion by providing zero interest loans to banks for the past four years. The Fed also bought up bonds, especially mortgage notes, from the banks at their full value instead of their real depressed market values, thus further directly subsidizing the banks. The Fed in this manner not only bailed out banks and investment banks, but big conglomerates like GE and GM and their credit arms. So why shouldn’t it similarly provide assistance to financial institutions like the pension funds?

Given that the real causes of current pension fund shortfalls are: insufficient contributions by employers, bad investments by fund managers as a result of high risk speculation and losses, government rules allowing the undermining of pensions, and poor rates of return on investments by funds due to government economic policies since 2000—real solutions to the crisis should tackle the real causes.

Therefore, Congress, the President, and the Federal Reserve should:

· Provide short term 2 to 5 year bridge loans as needed to pension funds temporarily whose funding falls below 70%–i.e. funding provided at the same rate the Federal Reserve has been bailing out banks for the past four years, at a rate of 0.25% interest.

· Allow pension funds to issue their own bonds, much like corporations now issue bonds, and the Fed purchase those bonds long term, 10 and 30 years, to provide additional funding as necessary to pension funds.

· Prohibit pension funds from partnering in investments with hedge funds and other high risk financial institutions and financial instruments.

· Cities and local municipalities should be reimbursed for losses due to banks’ fraudulent and false promotion of derivatives and interest rate swap deals of the last decade, just as other institutional investors have been reimbursed for fraudulent subprime mortgages deals of recent years.

· Pension funding contribution holidays should be legally banned. Diversion of pension funds’ resources to subsidize employer health plans should be further prohibited.

· Corporate bankruptcy laws should be amended to prevent dumping of single employer plans. All non-pension assets in bankruptcy should be ruled subordinate to pension assets, requiring all other assets disposed of before pension funds are considered.

· Restrictions on employers exiting from multi-employer plans and from the PBGC should be strengthened.

· Public employee plans’ spending on consultants should be limited by law to no more than 1% of annual contribution levels.

· Employers should be prohibited from exempting ‘contingent’ workers from participation in plans, and should be required make pension fund contributions for all part time and temporary workers proportional to their total hours worked.

· Restore jobs and wage growth. The most important long run source of restoration of pension fund solvency is the creation of jobs at an historically acceptable rate.

· A sustained economic recovery—not the current ‘stop-go’ economy—that would raise rates of return on normal pension fund investments to restore losses of recent years

The crisis in Defined Benefit Plans is a crisis that has been brewing for decades, but that has appreciably worsened since 2000 and significantly further deteriorated after 2007. It is a crisis of falling and insufficient contributions fundamentally and not a crisis of excess liabilities or benefit payments to workers. Employers, both private and public, are now using the crisis they created that reduced contributions for decades to attack benefits. Fundamental solutions to the pension funding problems in DBPs must rectify the source problems on the contributions side of the fund ledger.

Jack Rasmus, copyright June 2012
Jack is the author of the just published book, “Obama’s Economy: Recovery for the Few”, April 2012, Pluto books and Palgrave-Macmillan, ordering from this blog at discount.

Nearly four years after the 2008 banking crash, and more than $11 trillion in liquidity injections in the US and Eurozone-UK-Japan, the global banking system is again showing clear signs of growing unstable. Notwithstanding several rounds of bank ‘stress tests’ on both sides of the Atlantic since 2009, what has been improperly identified as a sovereign debt crisis in Europe is revealing itself with each passing week, as a more fundamental banking crisis as well.

This past week registered a series of reports and events that strongly suggest below the surface the global banking system is not in particularly good shape, and is getting worse.

The most recent indication was yesterday’s, June 21, announcement by the rating agency, Moody’s Inc., downgrading 15 banks across the globe. Included were the two big US banks, Bank of America and Citigroup, which have been in effect technically insolvent since the 2008 bank crash but which have been kept afloat by various measures supported by the US Federal Reserve. Under pressure by the US government, both have been selling off their best assets at near-firesale prices in order to raise capital. Not much better has been the US investment bank, Morgan Stanley, which recently hosted the bungled Facebook initial public offering. French and UK banks fared no better, however. HSBC, Royal Bank of Scotland, Societe General, and even the Swiss, Credit Suisse were all downgraded. This kind of widespread, global downgrading does not occur randomly. It is reflective of something systemically at work.

The Federal Reserve Signals QE3

A day before the Moody bank downgrades, the U.S. Federal Reserve announced a further $267 billion liquidity injection into the US system, in an extension of its ‘Quantitative Easing 2.5’ program called ‘Operation Twist’ announced last fall. That $267 billion was in addition to the original ‘Twist’ QE 2.5 of $400 billion, which followed a prior QE 2 of $600 billion in 2010 and a QE1 of $1.75 trillion in 2009. The ‘markets’ in the US—which means banks, various financial institutions, and very high net worth individual investors—responded to the Fed’s latest extension of QE 2.5 announcement with a thud. Stock markets in the US the following day had their worst decline in months. Expect more of the same soon to come. Investors expected on Wednesday that the Fed would introduce a bona fide QE3. Translated that means expectations of hundreds of billions more of Fed direct liquidity injection into the markets, buying up not only US treasuries but mortgages and other bonds and securities. After all, QE 2.5 was coming to an end this month, and the Fed for the past four years has always followed the concluding of a QE program with still another QE liquidity injection. Indeed, a good argument can be made that the ‘markets’ in the US are becoming increasingly dependent upon—even addicted to—continuing massive Fed liquidity injections.

The correlation between announcements and anticipations of new QE programs and the take off of stock markets, and the declining of stock market indices as QE reach the end of their course, has been very high.

Dow-Jones Industrials Average & QE Correlation

QE Program   Dow Low & Date  QE Intro Date  QE Conclusion Date  Dow High & Date

QE 1                7,062                  March 3, 2009          April 4, 2010         11,204

(February 27, 2009)                                                         (April 23, 2010)

QE2                 9,686              November 4, 2010       June 30, 2011      12,657

(July 2, 2010)                                                                            (July 8, 2011)

QE 2.5           10,992

(September 9, 2011)  September 21, 2011        June 30, 2012        12,837

(June 19, 2012)

Source: Dow-Jones Industrial Average (DJIA) History, online at nyse/tv/dow-jones-industrial-average-history-djia.htm.

While QEs have been a boon to stocks and other speculators, QEs to date as a group have accomplished very little in terms of helping generate a sustained economic recovery in the U.S. In that respect they have done no more than the additional trillions of dollars in liquidity injections by the Fed in the form of near zero interest rates for almost four years now. Like QEs, near zero interest rates were supposed to provide virtually ‘free money’ to financial institutions that were, in turn, supposed to lend to stimulate investment and jobs. But that didn’t happen. Following QE1 and zero rates, after the official end of the recession in June 2009 bank lending fell for 15 consecutive months. To whatever extent bank lending rose in 2010 it went mostly to hedge funds and the largest corporations. Small and medium sized companies continued to starve for bank loans. And now, in recent months, lending is in retreat once again. So if anything is proven by the past four years, it is that monetary and Fed policies (QE, zero rates, etc) have had little to no effect on the real economy and economic recovery in the U.S. What they have achieved is a return to speculative lending practices by banks (called euphemistically ‘trading’)—i.e. banks lending to hedge funds and other institutional investors that then speculate in foreign currencies, commodities, oil futures, stocks, junk bonds, and, of course, derivatives of various sorts including CDS on Greek sovereign bond debt.

ECB Follows the Fed’s Lead

What the US Federal Reserve has been doing since 2008 the ECB has begun to mimic increasingly as well. For the EU banks, the ECB since late 2010 has been the only game in town when it comes to EU banks’ bailout. The two Euro-wide bail out funds, the European Financial Stability Facility (EFSF) and the more recent European Stability Mechanism (ESM) are targeted mainly for bailing out sovereign debt, from Greece to Spain and beyond. And the International Monetary Fund’s smaller cash hoard is being held in reserve, uncommitted, as the IMF tries desperately to line up China and other emerging economies’ contributions to its fund. But now the Euro banks are in deepening crisis, not just the governments, confirming what this writer has been saying and publishing for more than a year—namely, what’s developing in the EU is not simply a sovereign debt crisis and contagion but, more fundamentally, a growing banking crisis and contagion. It is a dual debt crisis growing in scope and intensity, and the two poles of the crisis—sovereign and banking system—are exacerbating each other.

Following the lead of the US central bank, the Federal Reserve, since 2010 the European Central Bank, ECB, has injected the equivalent of trillions of dollars into the Euro banks, including hundreds of billions of dollars in late 2011 plus another $125 billion earlier this month in what is only an initial tranche required to bail out Spanish banks. An eventual full bailout of Spain’s banks will cost, per this writer’s estimate, at least $300 billion. (And that doesn’t include future bailouts of more hundreds of billions of dollars to rescue Spain’s regional and central governments that the EFSF and/or ESM bail out funds will have to address.)

The Eurozone banking crisis is so severe that in recent months cross-border bank to bank lending in the Eurozone has been drying up. As ECB chairman, Mario Draghi, reportedly said just last week, the inter-bank lending system is ‘dysfunctional’ and ‘simply not working’. And as inter-bank lending has begun to dry up, so too as lending to EU nonbank businesses. Together the two developments signal a sure sign of a general banking crisis in early stages of development.

Much of the growing EU bank crisis can be laid at the feet of the general solution to the sovereign debt crises that EU governments, banks, and investors have been attempting to implement for two years now: Austerity. Austerity solutions imposed in Greece, Spain and now the U.K. result in less government revenue generation and further rising government debt. Repeated and prolonged recessions result in revenue falling off faster than cuts in deficit spending (austerity) can make up for the revenue losses. Budgets consequently continue to fall deeper into the red and government bond yields escalate further. Speculators in credit default swaps on government debt then accelerate the process, making it worse. Government debt then has to be restructured, often at a greater cost. Austerity solutions also have a simultaneous negative impact on the private sector as well: The deficit cutting at the heart of austerity solutions results in less consumption by households and subsequently less business spending in turn as household income drops. Banks thus generate less income from loans to businesses and households, while they simultaneously have to put aside more capital in anticipation of sovereign debt losses. Bank lending freezes up, as is now increasingly the case in the Eurozone, just as it has been in the U.S.

The Bank of England

Like the US Federal Reserve and the ECB, the Bank of England ((BoE) has also implemented a near zero interest rate policy and successive QEs. To date nearly $500 billion has been committed to QE bond and securities buying by the BoE. But that hasn’t prevented the UK from falling into a double dip recession recently, as the government simultaneously embarked on a major austerity, deficit cutting policy. QE by the central bank may have temporarily kept the UK banking system afloat, but not so the economy now in a bona fide double dip.

A week ago the BoE’s monetary policy committee met to discuss increasing the amount of liquidity into the banks in yet another QE round. It postponed that decision, however, until early July, waiting on events in the Eurozone later this month, and further ECB and US Federal Reserve actions. Another $120 billion QE by the BoE therefore will likely soon occur.

Bank of Japan

The Bank of Japan also launched its own QE in a surprise move this past February-March 2012. It is projected to further that injection of liquidity later sometime later this year

Global Central Bank Crisis Coordination

What appears in development is an attempt on a global scale to coordinate central bank interventions in the form of QE liquidity injections, not only in the Eurozone but elsewhere as well. This appears to be in response at least in part to the big private banks globally demanding such coordinated action. In other words, they expect another banking crunch soon and are demanding another bailout in anticipation and before it happens.

The Eurozone debt crisis in Spain, Greece, and soon Italy is only one of the main drivers of this, however. The sovereign debt crisis represents a squeeze on banks’ income as a result of borrowers inability to repay principal and interest on past debt. Austerity is about getting someone else, the taxpayer and populace, to pay the bill. QE, zero interest rates, and monetary policy represents the equivalent of a massive, short term ‘bridge’ loan (often free of charge) to the banks via printing money or government subsidized bonds. But all that’s ‘past’ payment revenue. The deepening recession represents the inability of banks to earn ‘future’ revenue.

And recession and future revenue shortfalls are the even greater, imminent threat to banks’ solvency. Not only is the Eurozone rapidly descending, country by country, into recession across the continent, but the UK is already there. Meanwhile, the US economy is now clearly on a track in recent months to its third ‘relapse’ this summer. Economic indicators across the board are flashing red, from jobs to housing to business spending to manufacturing activity to consumer and business sentiment. And should US policymakers decide in November 2012 immediately after the elections to cut spending by an additional $2-$4 trillion, on top of the $2.2 trillion to start taking effect in January 2013—as this writer has repeatedly predicted will be the case—then a US double dip recession is etched in stone. At the same time it is becoming abundantly clear, as this writer also predicted last year, that China and the other BRICS economies are destined for a ‘hard landing’ in 2012-13. All that said, a global double dip possibility is rising significantly.

The banks know this and are demanding pre-emptive action by their respective central banks in order to buffer their cash and liquidity up front. A coordinated global QE action may buy global banks some additional time, but it won’t solve the bigger problem of a global economy slouching toward a synchronized double dip. Bankers may indeed get their pre-emptive bailout. But the rest of the economy will likely be left to fend for itself in 2013-14, just as it was in 2009-11. Only this time, this ‘second dip’ may be worse, much worse, than the first.

Dr. Jack Rasmus
June 2012

COMMENTARY: The following short piece is the summary-abstract of the author’s new book, OBAMA’S ECONOMY: RECOVERY FOR THE FEW, the Table of Contents of the Book, and early endorsements by senior labor leaders in the USA. The book may be purchased at the author’s website front page, accessible from this blog’s sidebar, at discount via Paypal credit card payment. The book is also available online, and may be purchased in the USA from the distributor, Palgrave-Macmillan, and from the Publisher, Pluto Books, in the U.K for rest of world locations. It may also appear in local bookstores.

THE FOLLOWING ARE THE SHORT ABSTRACT-SUMMARY OF THE BOOK, THE BOOK TABLE OF CONTENTS, AND EARLY ENDORSEMENTS BY THREE SENIOR UNION LEADERS IN THE USA.

BOOK ABSTRACT

OBAMA’s ECONOMY: RECOVERY FOR THE FEW, by Jack Rasmus, Published by Pluto Press and Palgrave-Macmillan, April 2012, 190 pp., $24.95.

By Dr. Jack Rasmus

After a $9 trillion bailout of banks and financial institutions by the U.S. Federal Reserve, and more than $3 trillion in fiscal stimulus by Congress and the Obama administration, nearly four years after the onset of recession the U.S. economy is still mired in the weakest, and most lopsided, economic recovery since 1947. U.S. stock markets have risen more than 100%, corporate profits have exceeded 2007 levels, CEO pay and bankers’ bonuses have once again returned to pre-recession levels, the largest U.S. companies continue to hoard $2.5 trillion in cash, and banks dribble out loans to small businesses. In contrast, more than 23 million American workers remain jobless or underemployed, home foreclosures exceed 12 million, 15 million homeowners struggle with negative equity, income growth for 80% of households continues to stagnate at best, while state and local governments lay off workers and teachers by the hundreds of thousands, cut services, and raise taxes.

This book explains how the weakest and most lopsided economic recovery since 1947 has been the direct result of the failed economic policies of the Obama administration and the U.S. Federal Reserve. The book provides seven specific reasons—not just insufficient fiscal stimulus argued by liberals—that explain why recovery programs under Obama’s first term in office have failed to generate sustained economic growth. Tracing the evolution of Obama policies from his presidential election campaign in 2008 through the passage of his 2012 budget, the book explains how the US economy got where it is today and continues on a ‘stop-go’ trajectory of short, shallow relapses followed by weak and unsustained recoveries. A sequel to this writer’s previous 2010 book, Epic Recession: Prelude to Global Depression, this book, Obama’s Economy, argues and shows, based on extensive data, why the U.S. economy will once again suffer a ‘third relapse’, or a worse double dip recession, in 2013.

The book concludes by offering an ‘Alternative Program for Economic Recovery’ to the policies of the past four years, which focuses on jobs, housing, and local government immediately, and by introducing concurrent major structural economic reforms targeting the tax system, retirement system, and banking systems in the U.S. The ‘Alternative Program’ concludes with proposals for fundamental, longer term change necessary to reduce household, small business, and State-Local government debt and to restore historic rates of income growth for working and middle class households.

TABLE OF CONTENTS

OBAMA’S ECONOMY:
RECOVERY FOR THE FEW
Jack Rasmus
Copyright 2011

INTRODUCTION: A Systemic Crisis of Recovery
Subtitle: ‘The Wasted $12 Trillion’

Chapter 1: The Weakest, Most Lopsided Recovery
Subtitle: ‘Who Recovered, Who Didn’t, and Why?’

Chapter 2: From Tax Cuts to Tactical Populism
Subtitle: ‘Obama’s 2008 Campaign Promises’

Chapter 3: Obama’s Jobless-Homeless Stimulus
Subtitle: ‘The 1st Economic Recovery Program (2009)’

Chapter 4: A Record Short, Faltering Recovery
Subtitle: ‘The 1st Economic Relapse of 2010’

Chapter 5: How More Is Less of the Same
Subtitle: ‘The 2nd Economic Recovery Program (2010)’

Chapter 6: Historical Parallels and the Midterm Elections
Subtitle: ‘Obama as Franklin Roosevelt or Jimmy Carter?’

Chapter 7: Deficit Cutting on the Road to Double Dip
Subtitle: ‘Economic Recovery Policy in Reverse’

Chapter 8: Sliding Toward Global Depression?
Subtitle: ‘The 2nd Economic Relapse of 2011’

Chapter 9: From Failed Recovery to Austerity Recession
Subtitle: ‘The 3rd Economic Recovery Program (2011)’

Chapter 10: An Alternative Program for Economic Recovery
Subtitle: ‘Fundamentals of Economic Restructuring for the 21st Century’

Editorial Reviews:
Obama’s Economy: Recovery for the Few
By Jack Rasmus

Reviews

“Jack Rasmus has written in Obama’s Economy: Recovery for the Few a revealing exposé of Barack Obama’s economic policies since 2008. Explaining in detail why Obama’s programs have failed to generate an economic recovery for all but big bankers, corporations, speculations, and the 1% wealthiest households, Rasmus predicts more of the same economic stagnation, or perhaps worse, by 2013 if current economic policies continue. Rasmus concludes the book with his own detailed ‘Alternative Program for Economic Recovery.’ It is time to seriously begin public discussion and debate of economic alternatives to the past four years, which Rasmus’s book clearly has begun.”

– Nancy Wohlforth, Co-Convenor, U.S. Labor Against the War

“Obama was elected because he represented hope and the expectation of change. But as Jack Rasmus details in Obama’s Economy: Recovery for the Few, little changed for tens of millions of unemployed, homeowners, and those dependant on local government services for whom economic recovery has been anemic to non-existent the past four years. Rasmus describes in detail how Obama was the most conservative and business oriented of the Democratic candidates in 2008, and how his first term economic policies reflected that pro-business orientation.”

– Chuck Mack, Former International Vice-President, International Brotherhood of Teamsters Union

“Jack Rasmus in his new book, Obama’s Economy: Recovery for the Few, connects the dots and gives new meaning to common sense economics. While working people reel in the downward spiraling economy, Rasmus analyzes how we got where we are and makes recommendations for sustained economic growth and recovery. It’s the kind of reading that makes every leader stop and say ‘Wow! That makes perfect sense. Why didn’t I think of that?’ Then ask yourself, ‘Why wouldn’t our President think of that?’ When you’ve read the book I’m confident that you will conclude that Rasmus has done a brilliant job of defining the impact of the Obama policies and decisions to this continued economic crisis.”

– Donna DeWitt, President, South Carolina AFL-CIO

COMMENTARY:  FOR TWO CONSECUTIVE YEARS DURING THE WINTER OF 2010-11 AND 2011-12 THIS WRITER HAS BEEN FOREWARNING THAT JOBS DATA REPORTED FROM NOVEMBER TO MARCH IS POSSIBLY DISTORTED BY LABOR DEPARTMENT STATISTICAL ADJUSTMENT.  THAT SAME SCENARIO–OF WINTER JOBS GROWTH OVER-ESTIMATION FOLLOWED BY SPRING-SUMMER JOBS CREATION RELAPSE–APPEARS TO BE EMERGING ONCE AGAIN. THE FOLLOWING ARTICLE, TO APPEAR SHORTLY ON PUBLIC BLOGS, EXPLAINS WHY THIS PATTERN HAS BEEN, AND CONTINUES TO BE, OCCURRING.

For the third time in as many years, jobs growth over this past winter 2012 once again shows signs of a major ‘relapse’ this spring and summer.  The Labor Department’s employment numbers released April 6, 2012 indicate a mere 120,000 new jobs were created in March, a number not even sufficient to absorb new entrants into the labor force for the month. This follows reports of more than 200,000 jobs created monthly since last December 2011.

If this latest, third major reversal in jobs creation were a one time occurrence, it could be attributed perhaps to real economic conditions simply shifting. But three years in a row every spring? That repetition means there is likely something more fundamental at work.

A year ago, during winter-spring 2010-11, this writer forewarned that the jobs recovery that was being reported during the winter 2010-11 would not be sustainable, and that job creation would collapse in the summer of 2011. And it did. (see this writer’s published articles: ‘The Truth Behind the December (2010) Jobless Numbers’, ‘Behind the February (2010) Jobs Numbers’, ‘March Jobs Numbers—A Contrarian View’, ‘Why March (2011) Jobs Gains Will Collapse This Summer’, and ‘The Predicted Job Collapse Now in Progress’, all of which are available on this writer’s blog, jackrasmus.com).

More recently over this most recent winter 2011-12, this writer once again warned that the real, raw jobs data reported by the Labor Department was showing a massive mismatch compared to the ‘statistically adjusted’ jobs data reported by the Department.  While it is reasonable to expect some degree of divergence between the raw, ‘statistically unadjusted’ jobs data vs. the ‘statistically adjusted’ data—the latter of which are smoothed out based on assumptions of seasonality, new businesses formed, and other manipulations of the raw, actual jobs data—nevertheless the mismatch between the actual jobs numbers and the statistically adjusted numbers this past winter revealed a massive, extraordinary gap between the two.  (see this writer’s more recent published pieces, ‘Those Peculiar January (2012) Jobs Numbers’ and ‘The US Jobs Crisis—The Bigger Picture’, also available at jackrasmus.com).

For example, this past winter, the ‘gap’ between the decline in raw, actual (statistically unadjusted) jobs and the statistically adjusted jobs numbers between November-December 2011 showed a ‘net swing’, or difference between adjusted and unadjusted, of about 430,000 jobs.  That was not unreasonable. But over the period December 2011-January 2012, the U.S. labor department reported a statistically adjusted gain of 243,000 jobs in January 2012, whereas the raw actual jobs numbers showed an actual decline of –2.7 million jobs.  That ‘net swing’ of nearly 3 million jobs, more than seven times greater than of the preceding November-December period, is unprecedented. That kind of massive gap between declining actual job creation and statistically adjusted, reported job increases requires an explanation. However, the media seemed simply to accept the 243,000 jobs created in January without question.

A corroborating further example is what also happened to the U-6 unemployment rate over this past winter 2011-12: The November to December 2011 U-6 jobless rate showed a ‘gap’ between raw data and adjusted data of only 112,000 jobs. That was reasonable. But the December-January the gap ballooned to a ‘gap’ or net swing of more than a million jobs difference between the actual vs. statistically adjusted jobless numbers. That’s a tenfold difference.

Something is going on, in other words, with the statistical adjustment methodology employed by the labor department to estimate jobs in the winter months and the first quarter of each year. The jobs creation numbers reported by the labor department between each winter the past three years are simply grossly overstated.  That overstated thereafter appears to end come late spring-summer and the jobs numbers, even the statistically adjusted numbers, in turn collapse. This has happened now three years in a row. That means the gains of the past winter will likely again, for a third, time fade during the summer and third quarter of this year.

In this writer’s earlier articles, 2010-11, identifying this trend, it was suggested that at least two of the labor department’s statistical operations—the winter seasonality adjustments and the department’s additional, and grossly inaccurate, assumptions and methodology for estimating ‘new business formation’ (that raise the estimate of jobs created from new business formation)—are seriously deficient. Those methods and assumptions, in other words, may be based on conditions that pre-dated the current unique and qualitatively different and more severe ‘Epic’ recession conditions. These out of date methodologies may well be resulting in gross overestimation of adjusted job creation at certain times of the year (fourth and first quarters) and perhaps even underestimation at other times (second and third quarters). If so, what appears as volatility—gains in the winter and losses of jobs in the summer—may obscure what is essentially stagnant job growth throughout the year during the past three years.

It is also possible that the volatility in job creation may not be all statistical adjustments. It may be due as well to business cautiously hiring at the start of their fiscal years and then not continuing to hire further as the year progresses as it becomes clear, once again each year, that consumers do not have the income to sustain their consumption. Household real income growth for the ‘bottom 80%’ one hundred million or so households has declined steadily since 2009, and has been negatively impacted every spring by speculation-driven oil price hikes every spring the past three years. So too has spending by the wealthiest 10% households, whose buying is largely driven by the stock market. Stocks the last three years have surged in the Fall to Spring period, driven by free money pumped into the economy as a result of the Federal Reserve’s ‘Quantitative Easing’ programs. Those programs for three years ‘run out’ by the spring, the stock market stalls, and the wealthiest households pull back their spending as well.  Like jobs, general economic recovery has also entered a ‘relapse’ in the summer-third quarter in 2010 and 2011. Thus both the economy and jobs are locked in a ‘stop-go’ scenario since 2009.

What all that also means is—notwithstanding a winter economic and jobs resurgence the past three years—there really isn’t, nor has there been, any sustainable job creation of any consequence for the past three years. Jobs aren’t declining in great numbers. Nor are they growing. We are ‘bouncing along the bottom’—both in terms of jobs and the economic recovery in general.

The three economic recovery programs of the Obama administration, introduced in early 2009, late 2010, and now in 2011-12, have not fundamentally resolved the jobs crisis. Nor have they been able to get the economy on a sustained growth path.

This fundamental stagnation in the jobs markets, and the general economy’s trajectory of  short shallow recoveries followed by brief ‘relapses’, is all the more amazing given that more than $1.5 trillion in tax cuts introduced by the Obama administration over the course of its three economic recovery programs since 2009. Another $1.5 trillion occurred in the form of government  spending (mostly subsidies to the states, unemployed, and long term infrastructure projects that haven’t gotten off the ground) since 2009. In addition, more than $9 trillion pumped into the banks and stock and bond markets by the Federal Reserve.

This more than $12 trillion in total fiscal-monetary stimulus has resulted in large corporations accumulating a reported ‘cash hoard’ of more than $2.5 trillion. They have committed little of that to investment and job creation in the US. What was once termed ‘trickle down’ has become a ‘drip-drip’ investment-job creation process. More and more subsidies to corporate America (banks and non-banks) is producing less and less results in terms of US-based investment and job creation. Some job creation is occurring, but when that minimal job creation is contrasted to the massive, $12 trillion of stimulus of the past three years, it becomes clear that economic recovery programs, and related fiscal-monetary policies, are today essentially broken.

To the extent jobs are being created at all, it is heavily skewed toward lower paid temp, part time, and ‘two tier’ wage jobs. Both Obama and Corporations are making a big deal about jobs being brought back to the U.S. by the big Multinational Corporations, like General Electric and General Motors. But the relatively small flow of such jobs are at half pay and often with no benefits. Check out GE’s vaunted job creation at its Kentucky plant. And GM’s alleged new jobs in Detroit. New hires at both are paid $14 an hour, about half that of other workers, with less if any equivalent benefits.

And how many jobs in recent years have really been created in Manufacturing in general, and in Autos in particular?  When the recession started in December 2007, there were 13.9 million jobs in manufacturing in the U.S, and 978,000 in autos, according to the Labor Department’s B-1 Table of Employment. In July 2009, at the official end of the recession, there were 11.9 million manufacturing jobs and 640,000 auto jobs. This past March 1, more than four years after the start of the recession and approaching three years since it was officially declared ‘ended’, there are 11.7 manufacturing and 751,000 auto jobs. In other words, more than a quarter million auto jobs were lost since the recession started and less than half, 110,000, have been recovered (paying half pay remember!). And more than two million manufacturing jobs were lost since the start of the recession and the number of manufacturing jobs today is still less by 100,000 today than when the recession officially ended three years ago!

To conclude, after three years and three repeated false job recoveries the outlook for a sustained jobs growth today is once again in decline.  The fiscal-monetary policies of the past three years have not resurrected the jobs market in any sustained way, any more than they have succeeded in restoring the housing market or helping homeowners in foreclosure or have in any way stabilize state and local governments’ finances.

As this writer points out in his new book ‘Obama’s Economy: Recovery for the Few’,  there has never been a recovery of the economy from recession since 1947 without a sustained recovery of jobs, without the housing sector leading the recovery, and without state-local government increased spending on jobs and services.

So long as current economic recovery policies focus on more tax cuts for business and investors, on more subsidies for corporations, more free trade, more deregulation, and more deficit cutting for the rest of us—there will be no sustained recovery. It will at best result in a continuation of the ‘stop-go’ economy of the past three years that is the defining characteristic of today’s on-going ‘epic’ recession.

Jack Rasmus

Jack is the author of the just released book, ‘Obama’s Economy: Recovery for the Few’, published and distributed by Pluto Press and Palgrave-Macmillan and the 2011 ‘An Alternative Program for Economic Recovery’. His website is: www.kyklosproductions.com and blog, jackrasmus.com, where the above referenced articles on jobs are available.

INTRODUCTORY COMMENTARY:

LATER THIS MONTH, APRIL 2012, THIS WRITER’S MOST RECENT BOOK—“OBAMA’S ECONOMY: RECOVERY FOR THE FEW”—WILL BE AVAILABLE IN BOOKSTORES. THE BOOK IS AN ANALYSIS OF THE OBAMA ADMINISTRATION’S THREE ECONOMIC RECOVERY PROGRAMS INTRODUCED IN 2009-2011 AND RELATED FISCAL-MONETARY POLICIES OF THE PAST THREE YEARS.

THE BOOK ADDRESSES THREE QUESTIONS:

· WHY HAS THE RECOVERY BEEN THE WEAKEST ON RECORD SINCE 1947
· WHY HAS IT BEEN THE MOST ‘LOPSIDED’, BENEFITING MOSTLY BANKS, CORPORATIONS, INVESTORS, CEOs, AND THE WEALTHIEST HOUSEHOLDS
· AND WHY HAVE MORE THAN $12 TRILLION IN TAX CUTS, GOVERNMENT SPENDING, AND FEDERAL RESERVE ‘FREE MONEY’ TO BANKS RESULTED IN ONLY AN UNSUSTAINED ‘STOP-GO’ RECOVERY?

THE BOOK CONCLUDES BY OFFERING AN ALTERNATIVE PROGRAM FOR RECOVERY TO THE POLICIES OF THE PAST THREE YEARS.

THE FOLLOWING ARTICLE IS THE FIRST OF A FOUR PART ESSAY THAT SUMMARIZES THE ABOVE MAJOR THEMES OF THE BOOK.

· PART 1 DOCUMENTS HOW OBAMA’S ECONOMY HAS BEEN THE WEAKEST RECOVERY ON RECORD SINCE 1947
· PART 2 TO FOLLOW WILL DOCUMENT TO WHAT EXTENT THE PAST THREE PLUS YEARS HAVE BENEFITED THE WEALTHY AND THEIR CORPORATIONS.
· PART 3 WILL UPDATE THE BOOK’S THEMES BY EXAMINING WHAT HAS HAPPENED TO THE US ECONOMY SINCE NOVEMBER 2011. IS A RECOVERY FINALLY REALLY UNDERWAY, OR ARE WE IN YET ANOTHER, A FOURTH, STOP-GO SCENARIO?
· PART 4 WILL OFFER AN ANALYSIS WHY FISCAL-MONETARY POLICIES HAVE FAILED TO RESULT IN A SUSTAINED ECONOMIC RECOVERY IN THE U.S. SINCE 2007 AND WHY THEY WILL STILL CONTINUE TO DO SO AFTER THE UPCOMING NOVEMBER 2012 ELECTIONS.

(The first three parts of this series are combined in an article, ‘Obama’s Economy: The Limits of Economic Recovery’, that will appear in the May 1 Issue of ‘Z’ Magazine).

Part 1

Since January 2009 the U.S. economy has been mired in the weakest, most lopsided recovery on record since 1947. It has limped along the past three years in an historic ‘stop-go’ trajectory, during which two brief, shallow recoveries were followed in the summer of 2010 and again in 2011 by two short economic ‘relapses’—the latter defined as a condition where momentum toward recovery fails and the economy falls back to near stagnant growth in key economic sectors.

After two weak recoveries and two subsequent relapses, since last November 2011 the economy has been undergoing yet a third brief, shallow rebound. Although hyped by the media and public officials, this current ‘third recovery’ is limited once again only to certain sectors of the economy and is being driven by forces that are temporary and cannot be sustained. The ‘stop-go’ trajectory—characteristic of the US economy since early 2009—has therefore not been fundamentally checked or reversed. The economy remains on a path that will experience yet another relapse, or possibly an even worse double dip, sometime no later than 2013—as this writer previously predicted last January.

Forty-five months after the start of the current recession in December 2007, the U.S. economy as of October 2011 was therefore no larger in terms of GDP than it was in late 2007. In other words, nearly four years after the recession began there was no net additional economic growth. The net growth of the economy over the past four years was 0%. After nearly four years the economy was merely back where it began.

Repeated economic relapses since 2009 indicate an inability of the economy to achieve a sustained recovery. This failure to achieve sustained recovery stands in stark contrast to the 11 previous recessions that have occurred in the U.S. since 1947, the worst of which took place in 1973-75 and 1981-82. According to U.S. Commerce Department data, 45 months after its start of the 1973-75 recession the U.S. economy had grown by 15.95%, or at a rate of 4.25% per year. Similarly, 45 months after the start of 1981-82 recession, the economy had grown by 13.65%, or at a rate of 3.64% per year. Another way to illustrate the historic weakness of the current recovery is to consider the rates of annual GDP growth for the two non-recession years following the end of each of the three recessions: 1976-77, 1983-84, and 2010-11. The following Table 1 provides the comparison:

TABLE 1
Percent Change in Gross Domestic Product After Recessions
Source: Bureau of Economic Analysis, Historical Table 1.1.1

1973-75 Recession   1981-82 Recession     2007-09 Recession

1976: 5.4% GDP           1983: 4.5% GDP           2010: 3.0% GDP
1977: 4.6% GDP          1984: 7.2% GDP            2011: 1.7% GDP

Once again the comparison is dramatic. The recovery the past two years has averaged barely 2% per year, after a fiscal stimulus of more than $3 trillion and monetary stimulus of more than $9 trillion. In contrast, prior recoveries from the two worst previous recessions averaged two and three times that. Furthermore, even the current 2% is a high-side estimate and is about to weaken further in 2012.

The Obama ‘recovery’ since 2009 has been the weakest of the 11 previous recessions on record not simply in terms of GDP growth, but the weakest in the three critical areas of jobs, housing, and state-local government. These three key areas have hardly participated at all in recovery since 2009. This fact in turn explains much of why the U.S. economy today still remains locked in a ‘stop-go’ trajectory and why another relapse is virtually guaranteed, or why an even more serious double dip recession in 2013 is increasingly possible.

For example, as of the official end of the recession in June 2009, there were a total approximately 25 million unemployed. After more than $3 trillion dollars in tax cuts and government spending by the Obama administration, today about 23 million are still jobless. That’s a cost of about $1.5 million per job. Since mid-2010 Obama has placed his bet on manufacturing, exports, and free trade to lead the jobs recovery. He put multinational corporation CEO, Jeff Immelt, in charge of his ‘Jobs Council’. Immelt delivered more free trade deals, more tax cuts for multinationals, and more deregulation of business as the latest ‘jobs program’. But manufacturing has not led a jobs recovery. There were 11,869,000 manufacturing jobs in the U.S. in June 2009; at year end 2011 there were 11,790,000 manufacturing jobs, for a net decline of nearly 80,000. So much for a manufacturing-driven jobs recovery.

The sad state of administration jobs creation program is illustrated by the recent misnamed JOBS (‘Jumpstart Our Business Start-Ups’) bill passed by Congress—a bill about jobs in name only and, in fact, a proposal for more business financial deregulation, more freedom for financial speculators, and more small business tax cuts.

In the housing sector, 3.6 million homes were foreclosed during the recession years of 2007 and 2008. Yet during the first three years of the Obama administration there were an additional 8 million homes foreclosed, with the number projected to rise by at least another million or more in 2012, according to the industry source, Realtytrac. While a couple dozen big banks got $9 trillion in bailouts from the Federal Reserve, 8 million homeowners facing foreclosure got nothing in mortgage principle reductions or else were given a pittance of less than $10 billion in temporary, partial interest rate reductions under the Obama HASP and HAMP housing programs introduced in 2009.

The Obama administration’s recent HARP 2.0 is another handout to the big 5 bank mortgage lenders. HARP is supposed to require mortgage lenders to refinance principle owed by homeowners with mortgages in ‘negative equity’, something the lenders have successfully blocked for three years now. In exchange for doing so, the Obama administration has forced States’ attorneys general to accept a $26 billion ‘cap’ on legal suits pending against the mortgage lenders arising out of the 2010 ‘robo-signing’ housing scandal where millions of homeowners were illegally foreclosed and thrown out of their homes by the banks. But HARP is already being gamed by the banks. As they put aside funds for refinancing negative equity mortgages, they are raising mortgage interest rates and fees on all non-negative equity mortgage applications to cover the cost of the negative equity refinancings. In other words, charging non-negative equity homeowners more to pay for the negative equity homeowners. Immediately upon announcement of HARP, mortgage rates began once again to rise, thereby dooming any nascent housing recovery.

In the previous worst recession in the 1970s and 1980s, the loss of jobs in the private sector were offset by hiring by state and local governments, thereby dampening the depth and duration of the recession and accelerating the recovery process. In contrast, since June 2009 state and local government has not only not increased hiring to offset private sector job loss, but has itself become the biggest contributor to job loss. From June 2009 through 2011 the number of state and local government workers declined by more than 640,000—most of them teachers.

The answer to the question previously posted—i.e. why has the Obama recovery been so short and shallow, so uncertain, and characterized by repeated relapses—can be explained in large part by the failure of Obama policies to address jobs, housing, and state-local governments. There have been three distinct economic recovery programs introduced by the Obama administration—in early 2009, late 2010, and late 2011. The fact that a third has been introduced in the past six months is testimony to the failure of the first two. But none of these three programs have resulted in a rapid recovery of jobs; none have resolved the foreclosure mess and continuing veritable depression in housing; and none have succeeded even remotely in stabilizing state and local government finances that would prevent layoffs, cuts in services, or rising local taxes and fees.

The importance of jobs, housing, and state-local government spending to recovery is evident by the fact there has never been a recovery from any recession since 1947 without increased spending and hiring by state and local government; without the housing sector recovery leading the way; or without job creation averaging at least 400,000 to 500,000 each month for at least six consecutive months.

The logical question of course is why has there not been a sustained recovery thus far—after more than $1.5 trillion in federal government spending since early 2009, after more than another $1.5 trillion in tax cuts, and after the Federal Reserve, the central bank of the U.S., has pumped in more than $9 trillion in virtually ‘free money’ into the banks (by purchasing at full price mortgage and other bonds worth pennies on the dollar and after lending banks all the money they can carry away at a mere 0.1% to 0.25% interest rates)?

The answer to the question is that a pittance of the cumulative $12 trillion of fiscal and monetary stimulus since 2009 has ‘trickled down’ to job creation, to stopping foreclosures or stimulating the housing sector, or to increase state-local government spending. What was once called the ‘trickled down’ economy in the U.S. in the past has basically changed since 2008. It has become, at best, a ‘drip-drip’, leaky faucet economy, with most of the $12 trillion spent by Congress and the Federal Reserve having been siphoned off by large multinational corporations and the big 19 banks, by speculative investors manipulating commodity, oil, and currency markets, by CEOs, hedge fund, and private equity managers ensuring huge personal income gains for themselves, and by the wealthiest 10% of households in the U.S., about 1 million of the approximate 130 million households in the U.S., reaping the harvest of record stock and bond market expansion set in motion by trillions of dollars of Federal Reserve free money.

Jack Rasmus, April 3, 2012

Jack’s book, Obama’s Economy: Recovery for the Few, is published by Pluto Press and Palgrave-Macmillan. It is available online April 1 at Amazon and from the author’s website, http://www.kyklosproductions.com, and his blog, jackrasmus.com

COMMENTARY: THE EUROPEAN CENTRAL BANK, THE ECB, IN THE PAST FEW DAYS PUMPED ANOTHER $1 TRILLION OR SO INTO THE EUROPEAN BANKING SYSTEM, AN INDICATION THAT THE SO-CALLED EURO DEBT CRISIS IS FUNDAMENTALLY A EURO BANK CRISIS. THE ECB IS FOLLOWING IN THE FOOTSTEPS OF THE US FEDERAL RESERVE, THE BANK OF ENGLAND, AND THE BANK OF JAPAN: ALL HAVE PUMPED TRILLIONS INTO THE GLOBAL BANKING SYSTEM TO PREVENT A SECOND GLOBAL BANKING CRISIS. BUT THE CONSEQUENCES OF “FREE MONEY” IS A GROWING ADDICTION BY THE BANKS AND EVEN NON-BANKS ON THAT FREE MONEY, A REPEATED STOCK AND COMMODITY BUBBLES CYCLE, AND COMMODITY INFLATION (ESPECIALLY OIL) THAT LOWERS REAL INCOMES FOR HUNDREDS OF MILLIONS OF HOUSEHOLDS, CONSTRAINS CONSUMPTION GROWTH, AND PREVENTS A SUSTAINED ECONOMIC RECOVERY.

Growing sectors of Capital are becoming addicts—dependant on virtually free money from central banks, from Europe to the USA to Japan. That means, in particular, banks, financial intermediaries, stock market and commodities institutional speculators, and even a growing segment of non-bank corporations.

Since 2008 the US central bank, the Federal Reserve, has pumped more than $9 trillion into the banking and financial system to prevent it from collapsing. It has done this at great cost, however. The trillions of dollars of liquidity injections from the Fed have not eliminated the original problem that that liquidity was supposed to resolve: i.e. removal of the bad assets on financial balance sheets. Those bad assets still remain for most part, especially for institutions like Citigroup and Bank of America that – were it not for phony bank stress tests and suspension of normal accounting rules since 2009 – would be technically bankrupt today. The Fed has not ‘removed’ those bad assets, which have only in part been written off as losses; the Fed has merely mirrored them by adding them to its own balance sheet. In so doing, it has bought some time. But that is all. It has not resulted in sustained recovery of the US economy in any real sense.

For the past three years since February 2009, the Obama administration and supporters have argued that the Fed’s $9 trillion bailouts would generate recovery for the rest of the U.S. economy. But in this objective, it has clearly failed. Except for stock and bond markets, large company corporate profits, CEOs pay and bankers’ bonuses, and the wealthiest 10% households, nearly all economic indicators today still remain below their level when the recession began. And some indicators—especially jobs, housing, and local governments’ finances—are significantly below pre-recession levels.

The Fed’s virtually zero interest loans to banks, and its more than $2.7 trillion in direct purchases of bonds from the private financial sector using printed money (called ‘Quantitative Easing’ or QE), has not revived the economy. What that massive injection of liquidity to banks and investors has accomplished is a hand-stuffing of the capitalist goose with free money. That liquidity has financed stock and commodity market booms, that in turn have provoked inflation which reduces the real incomes of a 100 million US working and middle class households. That process, moreover, has occurred on three separate occasions in the US since 2008.

There have been three stock and commodity market booms since 2008. Remember gas prices hitting nearly $5 in the spring of 2008, then again in the spring of 2011, and now once more this spring 2012? Stock market and commodity price boomlets accompanied the massive liquidity injections during each of those same periods. Both stock market and commodities booms, and the resultant inflation, were immediately ‘fed’ by the Federal Reserve’s QE policies: The 2008 event was highly correlated with the Fed’s bailout of Bear Stearns and rescue auctions of the shadow banks in 2008. The 2010 stock-commodity boom was similarly set off by the Fed’s QE1 $1.75 trillion direct bond purchases and zero interest loans to banks in 2009. When the QE1 bond buying stopped in late spring 2010, the stock and commodity markets immediately collapsed. When the Fed announced another $600 billion QE2 in the fall 2010, the stock-commodity booms took off again in late 2010 and into the spring of 2011. When that QE2 buying binge finished in late spring 2011, the stock-commodity markets quickly fell back once again. Banks and investors once more demanded another round of Fed bond buying and free money. That led to the Fed’s ‘operation twist’ bond buying in late 2011, as well as demands for even more generous QE3 money injection since late last year. With that, the stock market surged again from late 2011 continuing today into 2012. Highly correlated with all the QE1, 2 and 3 and free money have been three corresponding bouts of stock and commodity – especially oil – price expansion and speculation. In other words, there’s an almost perfect correlation between Fed monetary bailouts, QE, and zero loan policies ‘coming and going’ and corresponding stock and commodity speculation ‘stop-go’ since 2008 to the present.

Here’s how it works: The Fed pumps no cost money into the banks. The banks then loan it at 5%-10% to speculators like hedge funds, private equity firms, ‘dark pool’ stock buying consortia, and other institutional and wealthy individual speculators. The latter then funnel the money into large block stock purchases, into commodity futures, speculate with credit default swaps on Euro sovereign bonds in Greece, Spain, etc., further exacerbating those crises, or into currency speculation (one favorite: the Brazilian currency, the Real), Hong Kong and Chinese property, etc. Where the Fed money doesn’t go, however, is into loans to small and medium businesses in the US for which it was originally purportedly intended or to aid the recovery of the collapsed housing and commercial property markets in the U.S.

After three years, 2009-12, it appears the U.S. financial system is becoming increasingly addicted to this Free Money from the Fed, increasingly (QE) money printed by the Fed instead of traditional Treasury bond open market operations.

But when the Fed stops, the stock and commodity markets flop.

The fundamental question therefore: if the Fed ever permanently ceases providing free money, can the stock, commodity, and even bond markets function on their own any more without that prop of multi-trillions of dollars? And there’s a converse to all this, of even greater importance: what happens when the Fed tries to retrieve those trillions of free money by cutting off the free money and raising interest rates? If it takes the recent massive liquidity injection just to keep the Capitalist financial system barely functioning, what happens should the Fed try to retrieve that liquidity? The Capitalist system may be ‘super sensitive’ to attempts to slow an economy, as well as ‘super insensitive’ to attempts to stimulate an economy. What that means is that it takes an ever-increasing massive liquidity injection to keep the system from collapsing in a recession phase, but that it will take very little Fed shift from free money and raising interest rates to choke off a nascent recovery of the economy in an early expansion phase. Stated differently in economists’ parlance, this means the financial system today may have now become ‘liquidity and interest rate inelastic’ in efforts to stimulate recovery, but conversely ‘liquidity and interest rate elastic’ given attempts to slow a recovery.

This addiction is not limited to the US financial system. It appears to be spreading as well to the non-banking sector. Large corporations increasingly do not appear eager today to invest their massive earnings and cash now on hand, estimated at more than $2.5 trillion, nor even to distribute most of it to their shareholders. They prefer to hoard it. The super-cheap Fed money means they either borrow it, through their financial subsidiary if they have one, directly from the Fed, or borrow from banks at today’s super low interest rates. Or they issue cheap corporate bonds, take on more debt, and use the borrowed funds to buy back their company stock and pay dividends to their shareholders. In other words, they borrow money at the super low rates and pay themselves the unearned capital gains ‘profits’. They don’t have to ‘make’ profits; they just transfer the free money from the Fed to their shareholders.

Among smaller and medium sized businesses, the main ‘play’ is to issue a mountain of high risk, ‘junk bond’ debt on their companies’ assets. Often, they issue new junk bonds to roll over and payoff old junk bonds, compounding the debt on their balance sheets. Junk bond issuance hit record levels in 2010 and now again in 2012. But the junk bond booms are made possible by the Fed’s free money. Much of this junk bond debt is set to come due in 2013-14. But should interest rates rise, small-medium business defaults will almost certainly escalate to record levels for those non-financial companies now addicted, it appears, to junk bond debt.

Another way to look at the addiction to free or super low cost money is that it is being made available because banks, speculators, and even non-bank companies are increasingly unable to generate profits from traditional normal business activities. So the central bank in a crisis must spoon-feed them the money to prevent their collapse. Capitalist companies are less interested today in making money by making things than in turning speculative profits, based on Fed free money availability and by borrowing in lieu of real profits creation. Of course, there are exceptions—in emerging markets infrastructure investment, making cars and iPads in China, and so forth. But I’m talking here about a growing trend and growing apparent dependency—that is, an addiction.

And the phenomenon increasingly is not limited to the US economy today. We now see this same development and trend occurring in the Eurozone with the European Central Bank, ECB.

Late last year, as the Eurozone economy and financial system began approaching a crisis stage with Greece, Spain, Portugal, Italy, etc. and, beneath the surface, the private banking systems throughout Europe. To prevent a run on the Euro private banking system, the European Central Bank, ECB, embarked upon a strategy almost exactly like the U.S. Federal Reserve’s. Last week alone, the ECB pumped 530 billion euros, or $777 billion, into the banks at 1% interest. That follows a previous 489 billion euros injected late last year, i.e. another $700 billion. (Which followed another $500 billion in 2010). That’s a total of more than $1.5 trillion in just six months of virtually free money pumped into the euro banking system, no doubt in anticipation of bank failures occurring in the wake of the Greek and other European bond crises. That massive recent ECB injection has temporarily stabilized the banking system in the Eurozone, much as this writer predicted last December would happen. However, ‘temporary’ is the operative term here. It is not likely another such liquidity injection will occur prior to a string of bank collapses taking place first, given growing opposition by the Germans to the ECB ‘printing money’ like the Federal Reserve. Meanwhile, the Greek debt crisis will almost certainly erupt once again before year end 2012. And Spain and Portugal and other Euro periphery economies are not far behind. The point is: massive liquidity injections by central banks may temporarily stabilize a banking crisis, but not permanently. Furthermore, they do not result in economic recovery—and in ways actually serve to constrain that same general economic recovery by precipitating inflation and reducing consumption. Here’s how massive liquidity injections, ‘free money’, restrain recovery:

The massive liquidity injections now commencing in Europe, just as they have been in the US since 2009, have not to date resulted in the European economies avoiding recession. Nor will the Fed’s ‘free money’ prevent the coming of another recession in the US by 2013. Today’s European recession train has left the station and Europe is now well on its way toward a generalized downturn. It’s only a question of how deep and how long. That rapid Euro slowdown has already begun impacting the rest of the global economy, as exports to Europe from China, India, and Japan are now falling, in turn slowing growth in China, India, and the rest of the global economy. The European recession will also mean fewer US exports and a further slowdown of the U.S. economy as U.S. manufacturing pulls back, which is already underway. Contrary to business pundits and the Obama administration, there is no way manufacturing can lead the US economy to a sustained recovery this year, next, or ever!

The joint Federal Reserve and ECB massive injection of free money into the global economy will continue to set off stock and commodity price inflation worldwide. For the rest of us non-professional investors that translates into more inflation, which is already happening, as commodity prices like gasoline and food escalate in both Europe and the U.S. In the U.S. gasoline prices alone in some places rose by 40 cents a gallon in a matter of just two weeks last month. And that’s well before the spring take-off in gasoline prices kicks in. That inflation means a further fall in household income, already declining for the past three years, less consumption in turn, more household credit card spending to try to make up for it, and especially severe stress on retiree fixed income households. It will also mean the recent passage of the extension of the payroll tax cuts will be largely absorbed by the oil companies—just as half of the same payroll tax cut in 2011 was absorbed by rising gas prices. The overall consequences for the US economy in turn later this year could prove negative.

To sum up, a real question remains whether the global capitalist system today, in particular in the northern tier of Europe, North America, and Japan—can function any longer as it once had. It may have become so addicted to, and so dependent upon, free central bank money, that it is questionable whether it can wean itself off that ‘fire hose’ injection of free money. Europe looks much like the US now in that regard, and both look very much like their predecessor capitalist invalid, Japan.

Like true addicts, attempts at some point to return to pre-crisis arrangements may result in such severe ‘withdrawal symptoms’ that the US and Euro economies may rapidly contract at the first attempt to shake the addiction. Going ‘cold turkey’ could result in a more severe economic contraction and recession than even that experienced during the 2007-09 initial downturn. Some form of ‘monetary methadone medical’ injection may have to continue. The patient may prove permanently in need of assistance—paid for by the rest of the economy. That means us. It also means more or less permanent ‘austerity’ blood transfusions. But blood transfusions cannot go on indefinitely. As some point the donors will shout, ‘I’m not going to die’ to save them and will tear off the hyperdermic needle.

However, before that occurs, in the interim the Eurozone’s current massive money injection by the ECB to the euro banks, and the U.S. Federal Reserve’s continuing liquidity injection to US banks, will no doubt continue. Continuing as well will be repeated stop-go cycles of stock market and commodity bubbles that stifle economic recovery, gasoline and food price inflation, further pressure on real incomes, hesitant consumption spending, and weak, unsustained economic recovery.

Jack Rasmus

Jack is the author of the forthcoming, April 2012 book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, Palgrave-Macmillan (US) and Pluto books, (UK). His website is http://www.kyklosproductions.com and his blog, jackrasmus.com

COMMENTARY: THE FOLLOWING ENTRY REPRESENTS A FORAY INTO COMMENTARY ON THE CURRENT GREEK DEBT CRISIS AND THE RISING DIRECT OPPOSITION IN THE STREETS OF GREECE TO EFFORTS BY BANKERS AND POLITICIANS TO MAKE THE GREEK PEOPLE PAY FOR THE CRISIS. PARALLELS BETWEEN GREECE TODAY, AND THE US AUSTERITY PROGRAM TO COME IN 2013 IMMEDIATELY AFTER THE NOVEMBER US ELECTIONS, ARE MADE

The crisis in Greece is not a ‘sovereign, or government, debt’ crisis. That’s the surface appearance of the problem. The below the surface struggle is about how bankers, bondholders and speculators–together with their politicians in government–can offload the cost of bad assets they created onto the shoulders of the Greek people. It’s about ‘who’s going to pay for the bad assets’.

The news coming out of Greece, reported in the western press, is that the big boys of northern Europe, US, and their hedge fund-banker buddies, are willing to ‘take a hair cut’ and lose 70% of the value of their existing bonds. But the real facts are that 70% reduction includes only 30% of the current bonds that have become ‘bad assets’. No mention is made in the press of the other 70% of bonds that are not required to take a loss.

The reported Greek debt is somewhere between $300-$400 billion. The current ‘loan’ in question is about $170 billion. But the real Greek total debt is likely around $600-$650 billion. That’s just about the total on hand for the European bailout fund. (Total bailout that will be needed for all of the Eurozone is likely around $4 trillion, this writer estimates, to cover not only Greece but Portugal (next up for another $200 billion), Spain, Italy (more than a $trillion), as well as other ‘lesser economies’ also increasingly in trouble, such as Hungary, Austria, Belgium, and soon perhaps even economic stalwarts like Norway, whose housing bubble is now about to burst.

In other words, the Greece and overall Eurozone debt crisis is far from over and has a long course yet to run. That means little Greece’s problems are also far from over as well. As they say, ‘you ain’t seen nothing yet’.

If you want to see what a bona fide economic depression in the 21st century looks like, look at Greece. One out of two youth unemployed. General unemployment in excess of 25% (the worst year level in the US in the 1930s). GDP collapsing. Pensions shrinking. Jobs melting away at an increasing rate. And the bondholders-bankers behind the Germany-French and other Euro governments want the Greek people to pay for something they didn’t create. They want the people to cover the lion’s share burden of making up for their bad assets.

Greece is also a good example how an economy cannot ‘austerity its way to recovery’. Cutting incomes of those whose spending make up the overwhelming majority of the economy is not a path to recovery–as Obama and Congress will soon find out in 2013. Already the $2.2 trillion US deficit cuts mandated in 2011, which are scheduled to take effect AFTER the upcoming November 2012 national elections, will slow the US economy to a less than 1% GDP growth. Those aren’t my numbers; they’re the cautious Congressional Budget Office’s numbers. And that less than 1% growth is BEFORE Congress and the next president (doesn’t matter who) set to work cutting another $4 trillion immediately after the elections. That’s when the real US deficit cutting crunch will start–and the next double dip of the US economy.

Obama and Congress will discover what an ‘austerity recession’ is, come 2013. In that they will join Japan and most of western Europe, including the French and the British. Austerity, or deficit-budget cutting, only makes a debt crisis worse. Dont’ believe me, ask the Greeks!

There are only two ways to get out of deep debt-driven economic contraction that remains ‘systemically fragile’ today across the board. I’m talking about both the US and the Eurozone, as well as Japan. One way is to reflate the economy by generating inflation. The other is to liquidate the bad assets.

The Federal Reserve has done a horrible job at reflating the economy. The trillions it has spent on bailing out the banks, printing money, buying banks and mortgage lenders’ bad subprime loans at near full purchase price instead of the real 15 cents on the dollar they are worth, has led not to inflation in product prices (that would stimulate investment) but instead resulted in the Federal Reserve spoon-feeding speculators around the globe. The Fed has pumped up stock markets, real estate, currency speculation and volatility, oil and commodity prices, and financial securities in general. The money and credit from the Fed has not gotten to those parts of the economy that need it most. The Fed is not broke. It can always print money. It’s just that Fed policy is itself broken.

The other option is to ‘liquidate’ the bad assets. That too the Fed and the Obama administration have sadly failed at. The essence of the Fed-Obama bank bailout strategy since 2009 has been to ‘rescue’ the banks–not by removing the bad assets from their balance sheets but just by pumping liquidity into these zombie institutions (many of which have been technically insolvent and bankrupt now for years), to in effect ‘offset’ the bad assets on their balance sheets. The bad assets are still there. The Fed and Congress have not only just ‘offset’ the bad assets on the private balance sheet, but have in so doing mirrored those bad assets on the public balance sheet side. So it not only failed to remove (liquidate) the bad assets; it doubled them. Now the public sector has become as ‘fragile’ as the banking sector. But liquidation, you see, is abhorred by the bankers and bondholders. They don’t want their asset values ‘reduced’ or expunged. They want the people to pay for the losses. And that, once again, is Greece today–and the USA come 2013 and beyond.

Jack Rasmus
For an ‘Alternative Program for Economic Recovery’ that makes bankers and bondholder-speculators pay for the losses on their bad assets, see Jack’s program by the same title on his website, http://www.kyklosproductions.com, accessible from the right side of this blog page.