Dr. Jack Rasmus
Copyright 2020

This past Friday, May 8, the US Labor Dept. released its latest jobless figures. The official report was 20 million more unemployed and an unemployment rate of 14.7%.
Both mainstream and progressive media reported the numbers: 20 million more jobless and 14.7%. But those numbers, as horrendous as they are, represent a gross under-estimation of the jobless situation in America!

One might understand why the mainstream media consistently under-reports the jobless. But it is perplexing why so many progressives continue to simply parrot the official figures. Especially when other Labor Dept. data admits the true unemployment rate is 22.4% and the officially total unemployed is 23.1 million.

Here’s why the 20 million and 14.7% is a gross under-representation of the magnitude of jobless today:

Only Half Month Data

First, the 20 million for April is really only for data collected until mid-April. Nearly 10 million more jobless workers filed, and received, unemployment benefits after mid-April. And likely millions more jobless have been attempting to get benefits but haven’t. Even officially, more 33.5 million have filed for benefits, with several millions more in the pipeline. So the April numbers of jobless—both receiving benefits and not yet getting them—are more than 20 million!

Only Full Time Employed Layoffs

An even greater misrepresentation is that the official 20 million unemployed represents only full time workers becoming unemployed. It’s the figure from the government report that is the category called U-3, or full time workers. There are between 50-60 million more workers who are part time, temp, contract, gig and otherwise ‘contingent’ workers (i.e. not full time) who are not considered in the 20 million and 14.7%.

Check out the Labor Dept’s own data, in Table A-8, which shows for March and April no fewer than 7.5 million part time workers became unemployed. In April jobless in this group doubled over the previous month, rising by about 5 million in April, according to the Labor Dept.’s own monthly ‘Employment Situation Report’. 5 million to 7.5 million represent what’s called the U-4 government unemployment rate.

But there’s still more. It’s what’s called the U-5 and U-6 unemployed. Who are they? They are what the government calls workers without jobs who are ‘marginally attached’ to the labor force and workers who are too ‘discouraged’. They are just as ‘jobless’ as full time and part time workers. But they’re put in another category simply because they haven’t actively looked for a job in the most recent four weeks.

You see the US government defines unemployed as that subset of jobless who “are out of work and actively looking for work”. If you haven’t looked in the last four weeks, you may be jobless but aren’t considered unemployed! Go figure. Add them to the U-3 unemployed, and the totals for unemployed in America rise to 22.4%. Add in those who filed for benefits in the last half of April, or tried to, and we get closer to the publicly admitted 33.5 million without jobs and receiving unemployment benefits.

The Disappeared 8 Million Unemployed

But that’s not even the whole real picture. The way the government defines unemployment a worker must be part of the labor force. The labor force is composed of two groups: those who have jobs and those who are officially unemployed—i.e. out of work and looking for work in past four weeks. If you are not looking, you’re ‘marginally attached’ (U-5, U-6). It assumes if you have stopped looking in the past four weeks you are part of the 850,000 ‘marginally attached’. But that figure is not credible. Somehow there are less than a million jobless who simply haven’t tried to find a job in the last four weeks? Really? There are many millions.

A government stat that suggests there are likely millions more not in the labor force who are jobless nonetheless is called the ‘Labor Force Participation Rate’. It estimates the percent of the working age population who either have a job or are officially unemployed.

There’s approximately 164.5 million employed/officially unemployed in the US labor force as of May 1, 2020. In February 2020 the labor force participation rate was 63.4% of the US labor force. As of May 1, that had dropped to only 60.2%. Roughly 8 million had dropped out of the labor force over the past year ending this April 2020. And remember: if they aren’t in the labor force they can’t be counted as unemployed. So where did the additional 8 million dropping out go?

The US government doesn’t consider them unemployed so they don’t show up in the U-3 or even U-6 statistics! But if they aren’t in the labor force they are jobless by definition. Perhaps 850,000 are counted as the ‘marginally attached’. But what about the remaining 7.2 million or so? The government has no category for them except the estimation of them in the labor force participation rate. It tries to explain the large number away by saying they retired or went back to school. But did 7.2m (63.4% in Feb. drop to 60.2% in April) retire in 2 months? And they certainly can’t have gone back to school in mid-March/April 2020.

Another government statistic that corroborates this ‘missing 8 million’ in the labor force participation rate is called the Employment to Population Ratio stat. It measures how many are in the labor force as a percent of the total US population of nearly 340 million.

If the EPOP percentage goes down, then fewer are working even though they’re obviously still alive and part of the US population. That figure has declined from 61.1% of the US population employed to 51.3% of the population employed as of May 1, 2020. That’s a nearly 10% drop. 10% of 340 million is about 34 million. And 34 million is not 20 million for April, or even the Labor Dept.’s total 23.1 million.

So both the labor force participation rate and the employed to population ratio both suggest the Labor Dept.’s official U-3 (or even U-6) unemployed figures are grossly under-representations of the total Americans without jobs today.

Voluntary Jobless Are Not ‘Unemployed’

One possible reason for the discrepancies between the official unemployed of 23.1 million vs. the 33.5 million receiving benefits, or the 7-8 million not being counted per the labor force participation rate and EPOP ratio, may be due to the government in this current crisis choosing not to count as unemployed those workers forced to leave work since February to care for dependents.

Remember the government’s driving definition of unemployed is the worker must be ‘out of work and actively looking for work’. Millions of workers who have been forced by the current crisis to leave their job to care for elderly and disabled family members, or to care for young children forced to stay home due to school closures, are not ‘actively looking for work’. Few Americans can afford nannys to watch their young children so they can work. But those in this situation are not considered unemployed by the US Labor Dept. because they don’t fit the definition of ‘actively looking for work’! It’s not clear how many in this category the Labor Dept. has recently refused to acknowledge as officially unemployed.

In America you may be jobless, but that doesn’t necessarily mean per the government you are unemployed!

The above stats and data show that the under-reporting of the jobless in the US is not some kind of conspiracy by the Labor dept. and the government. The data are there, buried in the monthly labor reports beyond the executive summaries. The government stats, moreover, are not perfect. There are serious problems related to raw jobs data recovery, to the various assumptions on that raw data the government makes to come up their jobs ‘statistics’ (always operations on raw data with assumptions which data to count and how). There are conflicting conclusions often between this or that data or statistic. Furthermore, in recent years changes in statistical processing have sought repeatedly to change definitions and processes in order to ‘smooth out’ swings in the statistics—whether employment, unemployment, wages, or inflation. The government has a vested interest in ensuring the smoothing. It reduces government (and especially business) costs of programs and operations.

If there’s a conspiracy of sorts, it’s in the media that purposely seems to always ‘cherry pick’ the most conservative stat to report. Thus we get the media trumpeting every month the nearly worthless statistic of the U-3 unemployment rate—a stat that applies only to full time workers and ignores part time, temp and other contingent labor who make up now nearly a third of the US labor force; a statistic based on a narrow definition of unemployed that has become an oxymoron when estimating unemployed; a statistic based on questionable assumptions and data gathering; and a statistic that can’t be reconciled with other statistics like the labor force participate rate.

The real unemployment rate is not the U-3 figure of 14.7% but easily 25% today. And the real total jobless are not the U-3 20 million, or even 23 million, but somewhere between 35-40 million… and rising!

However, what’s really disappointing is that many progressive and left economists simply parrot the government’s and mainstream media’s misleading U-3 statistic. One can understand why the corporate mainstream media keep pushing the U-3 stat and thus trying to make the unemployment situation look better than it is (or today not as bad as it is). But progressive economists should know better.

Dr. Jack Rasmus
May 11, 2020
Copyright 2020

Dr. Rasmus is author of the just published book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020; and the previously published ‘Central Bankers at the End of Their Ropes, Clarity Press, August 2017. He blogs at jackrasmus.com and tweets at @drjackrasmus and hosts the weekly radio show, Alternative Visions, Fridays at 2pm eastern time.

There’s a historic experiment underway among US capitalists and policy makers. That experiment may or may not succeed. It’s the Federal Reserve PRE-BAILOUT of not only the US financial system but the entire business economy as well. The Fed has introduced at least $9T in liquidity (money) injections into the system in the goal of heading off a massive wave of potential and forthcoming debt defaults, deflation, and bankruptcies via various measures: new QE, trillions of $ to Repo markets, funneling trillions more via recent bailout funds for large, medium and small businesses through the private banks, ending financial regulations on the banks, liabilities for corporations, guaranteed loans, and so on. It’s all about fattening bank and non-bank balance sheets to weather the loss of revenues required to keep paying interest and principal on the tens of trillions of excess business and household debt (latter held by investors). The continuing payments on that debt is necessary to prevent a massive historic wave of debt defaults that will eventually sink bank balance sheets, creating a credit crash and a further and deeper collapse of the real economy–i.e. a depression. The Fed succeeded in 2008-09 in preventing a second banking crash by injecting $5-$6T into the banking system. The cost of that was to set off massive financial asset market speculation and bubbles, enriching investors as never before. The cost was also chronic low interest rates for 8 yrs that resulted in corporate binging on new business debt accumulation. Now the consequences are coming home once again. The Fed’s bailout of 2008-09 created a fragile system highly susceptible to another crash. The Fed’s solution in 2008-09 has become the Fed’s nightmare of a repeat, even greater, in 2020. So the Fed is throwing even more money at the system to prevent another crash. History will tell (soon) if it will be successful in staving off another financial crash, that will all but ensure a collapse into a bona fide depression.

The US economy is today unstably between a ‘great recession 2.0’ in the real economy and a bona fide great depression a la 1929-34. Whether the future trajectory is more like 2008-2017 or whether it slips into a 1929-34 scenario depends on whether the Fed’s $9T (and rising) money injections can prevent a financial crash in 2020-21, as defaults and bankruptcies rise and expand throughout the US economy in 2020-21.

In my Alternative Visions radio show of May 1, 2020 I discussed these conditions and scenarios in detail.




The US central bank, the Federal Reserve (Fed), is in the process of throwing trillions of dollars at the economy, most to businesses and corporations, in an historic effort to bail out the banks and now non-bank businesses as well (for the first time). The objective is to head off and prevent the deep and rapid contraction of the US economy from spawning a wave of defaults and bankruptcies among non-bank businesses that will soon fail to ‘service’ their massive accumulated debt loads run up since 2010. Broad sectors of US business heavily laden with corporate debt—corporate junk bonds, junk loans, and related debt amounting to several trillions $ in the US alone—are on the verge of failing to make principal & interest payments on that massive debt. The Fed is feeding them free money to continue to do so. As well as pumping up bank balance sheets to provide a cushion for the defaults and bankruptcies and avoid a banking-financial system crash in the event of defaults when they come. Rasmus explains how the capitalist drive to return workers to their jobs now gaining momentum is also about business revenue restoration to avoid defaults. Industries most prone to defaults: travel, oil and energy, retail, entertainment will be the leading edge. Rasmus explains the magnitude and composition of the Fed’s $9T commitment to ‘pre-bail out’ the banks and business, and how the US working class will be required to pay the bill—a present on this May Day to workers.

One of the readers of this blog recently asked me my views on topics such as the call by some left economists for a general debt forgiveness (Debt Jubilee), on Modern Money Theory (MMT or sometimes referred to as ‘Magical Money Tree’), and the Federal Reserve bank (central bank) pre-emptive bail outs of banks and non-banks underway and whether the latter will succeed in generating an economic recovery from the current deep Coronaviral impacted US economy. What follows are some of my quick reflections and commentary on these topics.

My views on monetary policy are somewhat summarized by the argument that in the current era of finance capitalism dominance, monetary policy has been the first and foremost choice of capitalist governments and policymakers. Push the bail out (and normal times economic stimulus as well) through the central banks and into the private banking system. The latter then distribute the money injection to the non-banks and financial investors of their preference. What trickles down to the wage earners, consumers and households is a residual in terms of income. Fiscal policy in terms of taxation is focused on business-investor tax cutting and on expanding government fiscal spending on corporate subsidies. Deficits that remain are financed by global purchases of US Treasuries as the money capital is recycled back to the US from offshore where it accumulates due to US trade deficits with the rest of the world. Industrial policy is to compress real wages, weaken or destroy unions, incrementally shift the cost of benefits to workers, and deregulate and privatize what remains of public works and public goods. Monetary policy is designed to keep interest rates low and ensure a low dollar exchange rate to maximize US multinational corporations offshore repatriation of foreign profits into the maximum amount of US dollars.

In the 21st century both monetary and fiscal policy are about subsidizing capital, especially finance capital, and less and less about stabilizing or stimulating the economy. (See my recent book, The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020, for more of this argument in detail)

As a result of this view, needless to say I am not a big fan of capitalist central bank monetary policy. Nor of monetary policy in general, since it has always been about subsidizing and/or bailing out finance capital. Debt is a means by which financial assets are subsidized as well. Money and Debt are thus central to maintaining the current 21st century capitalist system which requires excessive money injections (liquidity) and corresponding Debt accumulation as means to further expand capitalist wealth. Since it is central, I argue that capitalists and their governments will not entertain either a ‘debt jubilee’, and MMT is a theory that attempts to invert capitalist monetary policy and employ it for fiscal income redistribution to workers, consumers and households; thus that too is a contradiction to the system and would not be allowed. In short, both a Debt Jubilee or MMT require a virtual political revolution first before they could ever be introduced. The advocates of both Jubilee and MMT are politically naive to advocate solutions that cannot be introduced in the era of 21st century global finance capital hegemony. They are impossible ‘reforms’ of the system without a fundamental political change that drives capitalist interests from the sources of institutional government and state power.


My questions for you (Jack) are about the ‘Magical Money Tree’ (i.e. MMT, my italics). Does it exist? Can the Fed create money to pay for whatever it decided was necessary for the economy? If the decision was to pay off all student debt, could the Fed do so? If so, who gets stuck with the bill. Could there be a complete debt repayment for personal debts and corporate debts? If there is not a Magical Money Tree could one be created? If so, how? What if the government took back the constitutional power to create money and a new Greenback-era developed?


This is the old Modern Money Theory hypothesis, renamed ‘Magical Money Tree’. It assumes that monetary policy, as money creation, can stimulate economic growth. MMT is just QE flipped on its head. Instead of the Fed bailing out corporations and capitalists only (per its mandate) it can be used to bail out the rest of us. But there are limits to monetary solutions to a crisis, whether QE or a public interest QE that would transform the Fed into a kind of public bank. The problem with MMT is it is politically naïve. To create a Fed as Public Bank it will take a political revolution. The banks and investors behind the Fed (they’ve controlled it ever since 1913) won’t allow that without a political fight that changes the nature of the capitalist system itself.

Beyond that, the problem with monetary solutions is that it holds that the redirecting the money supply is sufficient. It ignores the role of money demand and money velocity. You can provide all the money supply you want by creating money electronically, as the Fed does, but that doesn’t mean there’ll be the demand for money or that money demanded will eventually be used for investment, employment, and real growth. In times of deep crisis like this, much of the money supply might be ‘borrowed’ but will be hoarded, redirected offshore, distributed to shareholders, or invested in financial assets that are more profitable but produce no real growth.

Can debt be ‘expunged’? Yes, but all the talk of debt jubilee is again political naivete. Why? Because it means the finance capitalists that ultimately ‘own’ the debt will not just take a haircut but will have their heads shaved at the neck. They will resort to any undemocratic violent response necessary with the help of their politicians to stop it. All private debt forms, including credit card debt, auto debt, mortgage debt, revolving debt, and private bank provided student debt are owned by big capitalist investors. Debt forgiveness means their assets would collapse to zero. What about public held debt? US government, government held student debt, fannie mae-freddie mac government held mortgage debt, state-local government debt? While that could technically be expunged since the government (taxpayers & citizens) own it, to do so would cause a collapse of private debt markets’ price values and, in turn, mean a major loss of asset values for capitalist investors. So the latter resist that as well. A progressive government might be able to introduce a staged reduction in student debt. Or as I have argued, stretch out the 10 yr. normal term of student debt to 30 yrs and reduce the rate of interest to no more than that for the 30 yr. Treasury bond, or forgive one tenth of the principal per yr. over ten years for all student debt holders. That might pass but not with the Neoliberal governments we’ve had. Again the concern of capitalists is that even student debt expunging will have a negative impact on the values of other assets held by the capitalists.

What about relief from rents and mortgages.? Same story here. Who puts up the money capital for multi-family apartments, and for both residential and commercial property mortgages? It’s the rich private investors and their financial institutions (hedge funds, private equity, etc.). They take major losses if there’s a rent or mortgage forgiveness. A moratorium for rent and mortgages is different. It just means they move the payments to the back of the term of the debt payment schedule. On paper it doesn’t change the value of their assets significantly. But forgive it, or expunge it, and it destroys their values.

The current crisis has only just begun, both in health terms and economic. The virus is a precipitating causal force, not the fundamental driver of the current crisis–which is still unfolding both in health effect terms and independent dynamics of economic contraction. There will be a second virus wave, likely worse than the first which always happens in these severe pandemics. The present reopening of the economy by Trump and business interests behind him demanding it will exacerbate the contraction in a second wave, moreover. It’s certainly not a V shape recovery; it will be more like a ‘W’ shape, with successive contractions after short shallow recoveries. And if defaults lead to general bankruptcies it will mean a financial crisis at some point that will exacerbate the contraction still deeper.

And there’ll be no re-shutdown once a second viral wave happens, later this year most likely. Trump and broad sections of the capitalist class have already decided that they’ll accept the death toll and stay open throughout the second wave. (and the third, which also historically follows about 6-12 months later).

That’s been the pattern with the 1918 and 1958 pandemics. The second wave is always the worst.

Ditto for the economy. In other words, there are forces economic released that are now independent of the health effect, although the latter will also continue to wreck havoc economically. The massive $9T Fed-Treasury liquidity injection (so far, more coming) should be understood as a pre-emptive bank and non-bank bailout. Massive defaults are coming, already spreading from oil,energy and retail sectors, eventually to other service sectors and state and local governments. The bailouts are designed to flood the banks with liquidity and the contain the defaults in the non bank sectors. But once again, massive liquidity as money supply injection may slow down or even prevent some insolvency crises (i.e. defaults and bankruptcies) but that doesn’t mean stimulate economic investment and recovery. Once again, money solutions don’t necessary result in boosting the real economy, and that means jobs, and wage incomes that will collapse. Most of the liquidity will be hoarded on balance sheets or to make minimal payments on debt. It won’t go into real investment that generates real jobs, wages, consumption, and recovery.

Can the government, using MMT, engage in direct spending to restore the economy? Technically yes. But that kind of Treasury provided funding will add to the government debt at a time when business and capitalists are demanding more funds (and debt) for them (i.e. raise the government debt to bailout them out). So there’s a competition for who gets bailed out. Who do you think in the current Neoliberal era is going to get funded then: capitalists or consumers/households/workers? Corporations will come first, as we’ve seen in the bailouts of the last couple months: Trillions in loans and grants (mostly grants in the end since loans will be converted and forgiven eventually for businesses) for them vs. just $500b for workers. And there’ll be no more for extended unemployment benefits after July or supplemental income checks of $1200 forthcoming. That’s it. Go back to work and die. And if you’re on unemployment benefits now, if you don’t return to work you lose them.

The Fed ‘money tree’ is backed by US Treasury bonds sales. And those bonds add to the federal government debt. The Fed doesn’t simply create an electronic entry in its accounts from which banks and capitalists can withdraw funds. US Treasuries are created to allow the Fed to make those entries. And that adds to the government debt. You could have the US Treasury to perform the function of the Fed, as was the case before 1913. But the function remains the same, whether carried out by the Fed or by the US Treasury-Government. The Treasury was the Fed before 1913. So the problems of excess debt to bail out capitalism will continue even if the US Treasury took back the money supply creation function. Nothing really changes. The choice will always remain: create Treasury bonds for spending (or lending to banks, non-banks) for whom? Finance capitalists (bankers)? Non-bank capitalists? (airlines, oil frackers, etc.). Or consumers and workers? It again comes down to a political issue and whether the capitalist State will bail out capitalists or us. And who pays their politicians? So guess who they’ll bail first and foremost?

The Fed was created so that the politicians would not have to bail out the bankers and capitalists directly, by raising taxes. The bailouts funnel through the Fed, funded still however by T-bonds, which add to the national debt. How high can the US debt rise? It’s now well above 100% of annual GDP. But Japan’s is over 200%.

The US government is creating the money supply, but indirectly: by using T bonds to fund the Fed who injects liquidity into the banks (and now non-banks too). To say let’s get rid of the Fed as intermediary and use the Treasury itself only changes the structure but not the actual process. The Fed now in effect transfers the private capitalist debt on to its own balance sheet each time it bails out the banks and corps now. The Treasury would do the same without the Fed. But that would pose a political problem for the politicians with the electorate, so they prefer an intermediary like the Fed, central bank, to do it so folks don’t understand what’s really going on. Simply put, the government ultimately bails out the banks and capitalists. So ending the Fed and giving money creation back to the Treasury changes nothing but the appearances!

MMT simply creates the fiction that somehow, if the Fed or Treasury could directly fund social spending, that the liquidity injection to households could stimulate the economic recovery.

To sum up my view: it doesn’t matter if it’s the Fed or Treasury. Pure monetary solutions don’t work well in a deep contraction and crisis. Liquidity injections get hoarded not invested. And they don’t stop, only maybe slow, insolvency crises (defaults, bankruptcies). And what we have today is a Fed massive liquidity injection trying to hold off a general insolvency crisis. I predict it will fail. What we’ll need is another even larger ‘New Deal’ direct government spending, including government hiring (per WPA). But you don’t need an MMT program for that. You don’t need a Fed. The Fed is there to provide cover for the politicians and capitalist State so they don’t appear directly responsible for bailing out bankers and capitalists to the electorate. (Check out my 2017 book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’ for more on the limits of monetary policy in general).

Jack Rasmus
May 6, 2020

Listen to my latest 20min. radio interview with the ‘Political Misfits’ radio program in Washington D.C., May 1, on the state of the US economy and talk of V-shape recovery. Why V-shape will not occur despite desperate ‘return to work’ orders by Trump and politicians.



The spin is in! Trump administration economic ‘message bearers’, Steve Mnuchin, US Treasury Secretary, and Kevin Hasset, senior economic adviser to Trump, this past Sunday on the Washington TV talking heads circuit launched a coordinated effort to calm the growing public concern that the current economic contraction may be as bad (or worse) than the great depression of the 1930s.

Various big bank research departments predicting a GDP contraction in the first quarter (January-March 2020) anywhere from -4% to -7.5%, and for the current second quarter, a further contraction from -30% to -40%: Morgan Stanley investment bank says 30%. The bond market investment behemoth, PIMCO, estimates a 30% fall in GDP. Even Congress’s Budget Office recently estimate the contraction in GDP could be as high as -40% in the 2nd quarter.

Mnuchin-Hassett Promise a New Old Normal

Despite the flashing red lights on the state of the US economy, the Trump administration’s key economic spokespersons are pushing the official line that the economy will soon quickly ‘snap back’. On the near horizon is a V-shape recovery coming in the 3rd quarter (July-September) or, at the latest, the following 4th quarter. The economy may be particularly bad, they admit, but be patient folks a return to normal is on the way before year end!

Speaking on Fox News Sunday Treasury Secretary, Mnuchin, declared the US economy is about to open up in May and June and “you’re going to see the economy really bounce back in July, August and September”. And Hassett echoed the same, just a barely less optimistic viewing the snap back in the 4th quarter. Getting ahead of the bad news coming this Wednesday when 1st quarter US GDP numbers are due for release, Hassett admitted a big shock is coming on Wednesday, to be followed by “A few months of negative news that’s unlike anything you’ve ever seen”. But not to worry, according to Hassett, the 4th quarter “Is going to be really strong and next year is going to be a tremendous year”.

Meanwhile, the administration’s big banker allies were also making their TV news show rounds, singing the same ‘happy days will soon be here again’ tune. Bank of America’s CEO, Moynihan, appearing on ‘Face the Nation’ show, predicted consumer spending had bottomed out and would soon rise nicely again in the 4th quarter, October-December, followed by double digit GDP growth in 2021!

The Trump administration is pressing hard to reopen the economy now! It knows if it doesn’t the contraction of the economy could settle in to a medium to long term stagnation and decline. Business interests are pushing Trump and Republicans to reopen quickly, regardless of the likely consequences for a second wave of the virus devastating national health and death rates. There is a growing segment of US business interests desperate to see a return to sales and revenue, without which they face imminent defaults and bankruptcies after a decade of binging on corporate debt. A growing wave of defaults and bankruptcies could very well provoke an eventual financial crisis which would exacerbate the collapse of the real economy even further.

The Fed’s $9 Trillion May Not Succeed

So far the Federal Reserve central bank has committed to $9 trillion in loans and financial backstopping to the banks and non-banks, in an unprecedented historic experiment by the Fed. Not just the magnitude of the Fed bailout in dollar terms, already twice that the central bank employed in 2008-09 to bail out the banks in that prior crash, but the Fed this time is not waiting for the banks to fail. It’s pre-emptively bailing them out! Also new is the Fed is bailing out non-banks as well, trying to delay the defaults and bankruptcies at their origin, before the effects began hitting the banking system. Bailing out non-banks is new for the Fed as well, no less than the pre-emptive bank rescue and the $9 trillion—and rising—total free money being thrown at the system. But it should not be assumed the Fed will succeed, despite its blank check to banks and businesses. Its historic, unprecedented experiment is not foreordained to succeed—for reasons explained below.

For the magnitude and rapidity of the shutdown of the real economy in the US is no less unprecedented. Even during the great depression of the 1930s, the contraction of the real economy occurred over a period of several years—not months. It wasn’t until 1932-33 that unemployment had reached 25%.

As of late April 2020, that 25% unemployment rate was already a fact. The official government data indicated 26.5m workers had filed for unemployment benefits. That’s about 16.5% of the 165 million US civilian labor force. Bank forecasts are 40 million jobless on benefits by the end of May. But respected research sources, like the Economic Policy Institute, recently estimated that as many as 13.9m more are actually out of work but have not yet been able to successfully file for unemployment benefits. So the 40 million jobless may already be here. And that’s roughly equivalent to a 25% unemployment rate. In other words, in just a couple months the US economy has collapsed to such an extent that the jobless ranks are at a level that took four years to attain during the great depression of the 1930s!

A contraction that fast and that deep likely has dynamics to it that are unknown. It may not respond to normal policy like enhanced unemployment benefits, emergency income checks, and even grants and loans to businesses on an unprecedented scale such as being provided by the Fed. The psychology of consumers, workers, businesses, and certainly investors may be so shocked and wounded that the money injections—by Congress and by the Fed—may not quickly result in a return to spending and production. The uncertainty of what the future may bring may be creating an equally unprecedented fear of spending the money. Economists sometimes call this a ‘liquidity trap’. But it may more accurately be called a ‘liquidity chasm’ out of which the climb back will prove very slow, very protracted, and the road strewn with economic landmines that could set the economy on a second or third collapse along the way.

The V-shape argument is predicated on the assumption that the virus’s negative effect will dissipate this summer. Those supporting the argument assume, openly or indirectly, that the economic collapse today is largely, if not totally, due to the virus. It’s not really an economic crisis; it’s a health crisis. And when the latter is resolved, the economic crisis will fade as well as a consequence.

But this assumes two things: first that the virus will in fact ‘go away’ soon and not hang like a dead weight on the economy. Second, that there were not underlying economic causes that were slowing the US (and global) economy already before the virus’s impact. The virus is seen as the sole cause, in other words, and not as a precipitating factor that accelerated an already weak and fragile economy into a deep contraction. But the virus may be best understood as an event that precipitated and then accelerated the contraction of an economy already headed for a slowdown and recession.

These latter possible ways to understand the current economic crisis are of course ignored by the advocates of a V-shape recovery. In their view, it’s just a health crisis. And the health crisis is about to end soon. And when it does, we’ll return to the old ‘normal’ and the economy will snap back. But the depth and rapidity of the decline into what is, at least, a ‘great recession 2.0’ and perhaps something more like the even deeper and longer great depression of the 1930s, strongly suggests that forces of decline have been unleashed in the US economy that have a dynamic of their own now. And that dynamic is independent of the precipitating cause of the virus which, in any event, is not going away soon either. In all cases of such virus contagion, there has always been a second and even third wave of infection and death. And Covid-19 appears the most aggressive and contagious.

It’s not just the 40 million and likely more unemployed that define the unprecedented severity of the current crisis.

Millions of small businesses have already shut down or gone out of business. More will soon follow. And many will never re-open again. The average number of days of cash on hand for small businesses before the virus impact was 27 days. Many small businesses are projected to run out of that by end of April. That’s why we are not witnessing growing protests and refusals to abide by a ‘sheltering in place’ order announced by various state governors. Small businesses and their workers, both on the brink of bankruptcy are taking to the streets—encouraged of course by radical right forces, conservative business interests, and political allies right up to the White House.

The millions of workers who haven’t been able to get through to successfully file and obtain unemployment benefits, and the millions of smallest businesses who have been squeezed out of the Small Business bailout program (called the Pay Protection Program) are fertile ground for right wing propaganda demanding the country reopen the economy immediately, even if it’s premature in terms of suspending virus mitigation efforts and almost sure to result in a second wave of infection that will debilitate the economy again later in the year.

And the flow of funding from recent small business legislation passed by Congress has been bottled up by big banks gaming the system—first using the crisis to extract concessions from the federal government on further bank deregulation, getting guarantees by the government on liability protection, ensuring they receive lucrative fees and charges from the lending, and requiring the government to reimburse them for loans that might later default and fail.
In addition to the slow distribution of the loans by the big banks, the same big banks began re-directing the small business program loan funds first to their own largest and best customers. Thus the first $350 billion in Congress funding for small business was directed to the banks’ best customers in less than two weeks. A second $320 billion supplement just added is reportedly already accounted for in less than half that time.

Despite the data on jobs, small business, and GDP much of the liberal economist establishment appear to be falling for the Trump administration official line and spin that there’ll soon be a V-shape recovery.

Liberal Economists Buy the Mnuchin-Hassett Line

The dean of liberal economists, Paul Krugman, in one of his columns recently, says it’s not an economic crisis but a disaster relief situation. Kind of like an economic hurricane, he added, that once it passes the sun will come out and shine again at the same economic intensity as before. And then there’s Larry Summers, Harvard economics professor and advisor to Barack Obama in 2009, who agreed with Krugman, saying “it’s possible to collapse and come back quite quickly.” Or Robert Reich, Cal Berkeley professor and former member of Bill Clinton’s cabinet, who declared in another TV interview recently, that the crisis wasn’t economic but a health crisis and as soon as the health problem was contained (presumably this summer) the economy would ‘snap back’.

Theirs is economic analysis by means of weather metaphors. And the error they all make is assuming that the fundamental cause of the crisis is not economic but the virus. They don’t see the virus as only a precipitating cause, exacerbating and accelerating what was a basically weak US and global economy going into the crisis, but instead the virus is the sole, fundamental cause of the deep contraction.

Krugman and other proponents of the ‘snap back’ (V-shape recovery) thesis all deny the counter argument that the current deep and rapid economic decline is precipitated by the crisis and that there is an internal economic dynamic set in motion that is taking over that driving the economy into a downward spiral regardless of the initial health crisis effect.

As one partial example of that internal dynamic: once the contraction in the real economy accelerates and deepens, it inevitably leads to defaults and bankruptcies—among businesses, households, and even local governments. The defaults and bankruptcies then provoke a financial crisis that feeds back on the real economy, causing it to deteriorate still further. Income losses by businesses, households and local government thereafter in turn cause a further decline. Once negative mutual feedback effects within the economy begin, it matters little if the health crisis is soon abated. The economic dynamic has been set in motion. Krugman and friends should understand that but either don’t, or are cautioned by their employers and political friends not to tell the whole truth lest it cause further concern, lack of business and consumer confidence, or even panic.

When mainstream economists don’t understand what’s actually happening, they hide behind their metaphors as a way to obfuscate their lack of understanding and ability to forecast the future. Or they employ the same metaphors to avoid telling the truth. But the truth is this isn’t just a health crisis. And it won’t quickly disappear even if the health issue were resolved in a matter of weeks or months.
Instead of pacifying the public with nice metaphors, they might just look at the recent past. No snap back economic recovery occurred after 2008-09, which was a contraction far weaker in relative terms than the present, with fewer job losses and a much smaller GDP decline.

2008-09 Recovery Was No V-Shape

Even after the less severe 2008-09 contraction, bank lending after 2009 did not return immediately or even normally. Only the largest, best customers of the big banks and their offshore clients received new loans from them. Bank lending to US small and medium businesses continued to decline for years after 2009. And jobs lost in 2008-09 did not recover to the levels of 2007 just before the recession began until 2015. Wages of jobs recovered from 2008 to 2015 was much lower compared to wages of 2007 jobs that were lost. The ratio between full time jobs and part time/temp/contract work deteriorated after 2009, with more of the latter hired and the former not rehired. Real wages still has not recovered to this day for tens of millions of workers at median income levels and below.
So one c
an only wonder what the Krugmans, Summers and Reichs are ‘smoking’ when they make ridiculous declarations about ‘snap back’ recovery. They should know better. All they had to do was look at the evidence of the historical record post-2009 that V-shape recoveries do not happen when there are deep and rapid contractions! And that’s true not only for 2009, but even for 1933 when the great depression finally bottomed out.

Between 1929 and 1933 the US economy continued to contract. Not all at once, but in a kind of ‘ratcheting down’ series of lower plateaus as banking crises erupted in 1930, 1931, 1932 and then again in early 1933. When Roosevelt came into office in March 1933 he introduced a program aimed at bailing out the banks first, and then assisting business to raise prices. It was called the National Recovery Act. That program stopped the collapse but generated only modest recovery, and by mid-1934 that recovery had dissipated. It was then, in the fall of 1934, that Roosevelt and the Democrats proposed what would be called the New Deal, which was launched in 1935 after the mid-term 1934 Congressional elections. The US economy began to recovery rapidly in 1935 to 1937. In late 1937 Republicans and conservative Democrats in the South allied together and cut back New Deal social spending. The US economy relapsed back into depression in 1938 until Congress, fearful of the return to Depression, reinstated New Deal spending and the economy recovered again to where it was in 1937. The permanent recovery did not begin until 1940-41, as the US economy mobilized for war and government spending rose from 15%-17% of GDP to more than 40% in one year in 1942.

But mainstream economists are not very attentive to their own country’s economic history. If they were they would understand that deep and rapid economic contractions always result in slow, protracted, and often uneven recoveries. There never is a ‘snap back’ when depression levels of contraction occur—or even when ‘great recession’ levels occur, as in 2008-09. It takes a long time for both business and consumers to restore their ‘confidence’ levels in the economy and change ultra-cautious investing and purchasing behavior to more optimistic spending-investing patterns. Unemployment levels hang high and over the economy for some time. Many small businesses never re-open and when they do with fewer employees and often at lower wages. Larger companies hoard their cash. Banks typically are very slow to lend with their own money. Other businesses are reluctant to invest and expand, and thus rehire, given the cautious consumer spending, business hoarding, and banks’ conservative lending behavior. The Fed, the central bank, can make a mass of free money and cheap loans available, but businesses and households may be reluctant to borrow, preferring to hoard their cash—and the loans as well.

In other words, the deeper and faster the contraction, the more difficult and slower the recovery. That means the recovery is never a V-shape, but more like an extended U-shape.

Dr. Jack Rasmus
April 28, 2020

Dr. Rasmus is author of the just released book, The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, January 2020; and the preceding book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com. His twitter handle is @drjackrasmus and his website: http://kyklosproductions.com
Listen to my recent 45 min. interview with WKPN Radio on the origins and conditions on the eve of the current Coronavirus precipitated economic crisis. How Neoliberal policies prior to February 2020 created a fragile US economy, heavy susceptible to the virus effect when it occurred. How the virus precipitated, exacerbated, and accelerated the economic crisis once the virus hit the economy. Will the central bank, the Federal Reserve, be able to prevent the deep contraction in the real economy from setting off a financial crisis in its wake? Will the Fed’s $9T (and rising) free money being injected into both banks and non-banks of all sizes prevent a wave of defaults and deflation that might in turn ‘freeze up’ the banking system? Why the current crisis in the economy won’t result in a rapid V-shape recovery soon and why any ‘recovery’ will be very slow under the best of conditions with no banking crisis in particular.



Listen to my latest 30 min. radio interview on the US and Global Coronavirus Economy this past week, with host, Charles Dunaway, of KEPW, 97.3 Community Radio, Eugene, Oregon.




I am very pleased to welcome Dr. Jack Rasmus to Wider View. Jack has a Ph.D in Political Economy and teaches economics at St. Mary’s College in California. He is the author of a number of books including “Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression”, “Systemic Fragility in the Global Economy”, “Obama’s Economy: Recovery for the Few” and his latest, “The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump”. Jack is also host of a weekly radio show called Alternative Visions on the Progressive Radio Network. You can follow him on his blog at jackrasmus.com and on Twitter at @drjackrasmus