Jack Rasmus

Visitors to this blog who are interested in knowing more why Dr. Rasmus has been writing that the global economy is growing increasingly fragile, unstable financially, and heading toward (and in many cases already in) a global recession, should read his three part series based on his book which has appeared in Z Magazine in its December-March issues.

The Z magazine 3-part article series is accessible at no cost at Dr. Rasmus’s website at:

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

Part 1: Systemic Fragility in the Global Economy (China, Europe, Japan and Emerging Markets)

Part 2: Systemic Fragility in the Global Economy (Financial Shift, Debt, and the Next Crisis)

Part 3: Systemic Fragility in the Global Economy (Why Mainstream Economists Keep Getting It Wrong)

For the more in-depth analysis of what’s happening globally, the 9 fundamental driving forces behind the growing instability, a critique of ‘Hybrid Keynesians’ and ‘Retro Classicalists’ of mainstream economics, and Dr. Rasmus new conceptual framework for analysis of the global economy, see the full 490p. book, with sample chapters, by clicking on the book icon on this blog webpage and on Dr. Rasmus’s website, http://www.kyklosproductions.com. (Or go to the website from the sidebar on this blog webpage).

The following published article by Dr. Jack Rasmus in telesur summarizes the money behind the major candidates–including Rubio, Cruz, Trump, Bush and Clinton and the estimated $10 billion that will be spent on this year’s US national election.

published February 21, 2016, by telesur

“Poll after public opinion poll in the US today consistently show that US voters overwhelmingly share the opinion that big money billionaires and their corporations were increasingly dominating US elections.

As the United States election cycle began to ramp up last summer, for example, the New York Times/NBC News poll showed no less than 84 percent of U.S. voters – Democrats, Republicans, and Independents alike – shared the common view that there was simply “too much money” flooding into U.S. elections today. While 85 percent of those in the poll further indicated that either major changes or a “complete rebuild” of the U.S. election system was needed to take money out of politics.

Forget minor tweaking reforms of campaign financing. The people of the U.S. now believe the entire process is rigged in favor of rich contributors and corporations who fill to over-flowing the campaign coffers of their chosen politicians.

War for the White House 2016

A related major concern expressed by those polled was that those billionaires writing the checks for candidates were “hiding behind the curtain” as never before. The electoral system itself was becoming increasingly opaque. Seventy-five percent of those polled thus demanded full disclosure of just who was providing all the money.

The current election cycle is just now getting underway with the primary season and nominating of candidates, so total spending won’t be known for at least mid-2017 at the earliest. But there are signs appearing in numerous places that this election year will break all records for money flowing from the billionaires, their banks, and their corporations to their “hat in hand” candidates, as they regularly stumble over themselves and trek one after the other attending private meetings with the Koch Brothers, the Sheldon Adelsons, the Paul Singers, Goldman Sachs and other bankers – and all the rest of the billionaire class who write checks for tens of millions of dollars at a single sitting – to fund whichever candidate bends his knee and bows his head the most in committing to their favorite economic interest or pet political cause. And bend and bow they do.

Marco Rubio

For example, there’s the Republican presidential candidate, Marco Rubio, who led the attack on Argentina in the U.S. Congress to pressure that country’s Kirchner government to concede to the blackmail by U.S. vulture funds led by multi-billionaire, hedge fund magnate, Paul Singer. A financial supporter of the expansion of Israeli settlements in the west bank of Palestine, Singer is an ardent advocate that “Israel can do no wrong.” As Singer’s boy in the U.S. Senate, Rubio consistently takes a hard line on every Israel debate and vote, effectively representing Singer’s views and interests. Not surprisingly, for that Rubio has been repaid well. Singer is Rubio’s second biggest campaign contributor, second only to Florida real estate billionaire, Norman Braman. Multi-billionaires, both have already contributed more than US$11 million in 2015 to Rubio’s campaign. Software billionaire, Larry Ellison, the world’s fifth richest person, worth $47 billion, has also already contributed millions to Rubio. All three no doubt appreciate Rubio’s pledge to eliminate all taxes on capital gains and dividends, which would mean $1 trillion tax free to them and their billionaire friends. Rubio’s election campaign committee and his “Conservative Solutions” super PAC have accumulated more than $60 million in 2015. Bush money is reportedly moving to Rubio recently as well.

Ted Cruz

Then there’s candidate Cruz. His billionaires include ultra-right wing, hedge fund owner Robert Mercer, who contributes to restoration of the death penalty, advocates return to the gold standard, funds pro-life and anti-gay causes, and collects machine-guns for a hobby; Toby Neugebauer, the billionaire Houston investment banker; and Farris and Staci Wilks, extreme bible-thumpers, who view the U.S. from a prism of the biblical old testament, and whose family has made their billions by fracking and poisoning land in the U.S. from Texas to Montana. All have all written checks to the Cruz campaign for more than $10 million each thus far, and contribute heavily to Cruz’s super PAC, “Keeping the Promise,” and his campaign committee, together worth at latest estimate more than $100 million. Cruz repeatedly pilgrimages to their respective billionaire compounds and retreats, that is, when he’s not getting loans from the big Investment bank, Goldman Sachs, where his wife worked as a managing director, and from which Cruz has been given low interest loans.

Jeb Bush

Jeb Bush got most of his money from his personal and family investment sources, from his super PAC, “Right to Rise,” to which wealthy friends have already contributed $118 million in “outside money,” from his election committee with a pot of more than $40 million more so far, from his 50+ per year public speeches for which he is paid an average of $40,000 each, and unknown amounts from his multi-billionaire Bush dynasty family. Another big billionaire contributor, writing a $10 million check recently, was the notorious Hank Greenberg, former Chairman of the American Insurance Group that the government and U.S. taxpayer bailed out to the tune of $180 billion in the 2008 crisis.

Hillary Clinton

Hillary Clinton’s money comes from all the above sources and then some. For example, there’s hedge fund billionaire, George Soros, who contributed $8.5 million just last year. And the media billionaires, Haim and Cheryl Saban, who have directly already contributed millions; and reportedly may have contributed an estimated $10-$25 million more indirectly from their own personal foundation to the Clinton’s foundation: a favorite way the rich contribute to each other. Both Hillary and Bill have also had multi-million dollar royalty book contracts, Hillary’s latest worth $5 million. She is also the biggest recipient of contributions from professional Lobbyists among all the candidates. Her campaign committee has amassed $115 million as of January 2016 and her super PAC, “Priorities USA,” more than $40 million.

The Clintons, however, have especially farmed the speech circuit for big money ever since Bill left office. That’s how former presidents and other big-name, high visibility politicians who have performed well for the rich are “paid off” in the U.S. when they leave office. Corruption is “post-hoc” in the U.S. system, a more sophisticated arrangement than crude graft or theft while in office practiced in other countries. Bill Clinton has earned more than $100 million in speeches alone since 2001. Hillary and Bill have earned another $25 million just since her announcement to run. And then there are Hillary’s “closed door talks,” off-the record, unrecorded, Q&A sessions of an hour or so, which Hillary has held with scores of financial institutions, banks, and big companies since announcing her candidacy.

Her speeches and talks average $225,000 to $275,000, according to her “schedule A” campaign finance statement that is public record. When challenged by Sanders why she has been accepting fees of $275,000 from scores of bankers and big corporations, including a recent 3 speech $675,000 fee from Goldman Sachs, her reply was “I don’t know, that’s just what they offered”. Yeah, out of the pure generosity of their banker hearts, expecting nothing in return no doubt.

The Clintons have given more than 50 speeches each in 2014 alone, according to public records. Adding it up, it’s more than $25 million in speeches and “talks” in 2014 alone. Their 2014 income was $28 million and net worth $110 million. At least $28 million, and likely far more will eventually be reported for 2015 later this summer. Even more for 2016.

Trump and Sanders

Trump claims his net worth is more than $10 billion, and receives $3 million per show just as host of the TV show, “Celebrity Apprentice,” providing ample cash for his campaign, that is, so far. His long list of investments generate millions more in cash every year.

Sanders relies on small donors, has no super PAC or outside money, while his campaign committee reportedly has accumulated $95 million. He owns no business and his net worth is reportedly $330,000.

Estimating the Totals

A proxy of just how much money is involved this year is perhaps estimated by how much in total was spent on the 2014 midterm Congressional elections, where no presidential candidate was running. No less than $3.77 billion was spent that year. And that was what was only official reported to the Federal Election Commission for donors contributing more than $200 – excluding as well all spending on state and local government races and excluding what is called “dark” money from nonprofit organizations – called 501( c) (4) shell groups-like Karl Rove’s notorious “Crossroads GPS,” which has reportedly raised $330 million in recent years. Spending by 501s is directed at attacking a candidate’s opponents instead of contributing to the favorite candidate via PACs, super PACs, campaign committees, party committees, and the like. But it is campaign spending on behalf of candidates, nonetheless. Super-PACs and 501s are projected to spend more than a $US billion each in the current year.

Totals for 2015 from all the above sources – i.e. corporate and special interest PACs, super PACs, leadership PACs, the 30,000 Washington, D.C. lobbyists, the 501s and their “Limited Liability Company” middlemen who raise money from the super-wealthy but can legally keep their names unreported, from House and Senate and political party fund raising committees, and so on – were likely more than $5 billion, at minimum. But public records for 2015 totals won’t be released by the government until June 30, 2016

For the entire 2015-2016 election, the cumulative totals will no doubt range from $10 to $15 billion. But the actual totals will have to wait even longer, until June 30, 2017. But even then will reflect only what is officially reported, as more “dark money” flows into elections in increasingly opaque system that grows progressively “darker” as the mountains of election money provided by billionaires, corporations, and bankers grow ever higher.

Dr. Jack Rasmus is author of the recently published book about today’s unstable global economy, “Systemic Fragility in the Global Economy,” by Clarity Press, January 2016. For more on this book, click on the book icon on the front page. For free chapters, go to the author website:https://kyklosproductions.com/homewar.html

Listen to my radio show, Alternative Visions, today February 19, and my research on which billionaires are funding the campaigns of Rubio, Cruz, Bush, Trump and Clinton. Also, my assessment of the legacy of radical right Supreme Court Justice, Antonin Scalia, and the latest in global economic news.

To listen access and download the show at:

http://prn.fm/category/archives/alternative-visions/

or at:

http://www.alternativevisions.podbean.com

SHOW ANNOUNCEMENT:

In today’s show host, Jack Rasmus , focuses on who is providing the big money behind US presidential candidates—Rubio, Cruz, Bush, Clinton, and Trump. The names of the big right wing donors behind the Republicans candidates are noted, where they’ve made their billions and how much they’ve contributed. How the Clinton’s have amassed more than $110 million in assets since 2001, including more than $100million in speaking fees. Hillary’s billionaire contributors. The legal corruption of the US election system is explained, including ‘dark money’ from 501 (c) groups that hide their contributors. (see his blog, jackrasmus.com, for a more detailed analysis of ‘billionaires behind the US election’). Jack then digresses to comment on the recent death this past week of the right wing ideologue, Supreme Court justice, Antonin Scalia, whose legacy includes advancing the corruption of the US electoral system from Citizens United case to restricting voting rights, and limits on civil liberties of minorities. At the ‘top of the show’ Jack reviews the major economic developments of the past week, including actions by central banks in the Eurozone, Japan and China; prospects for a ‘deal’ on global oil prices between Russia and Saudi Arabia; and the negotiations in Brussels in progress between the UK’s prime minister, David Cameron, and the European Union on the coming June 2016 UK election to decide whether to ‘exit’ the EU or not. Jack concludes the show with a review of his late 2015 predictions of the ‘fault lines’ in the global financial system in China, Europe, Emerging Markets, and the US, which now appear to be emerging as predicted. (see his blog, jackrasmus.com, for a free chapter from his book, ‘Systemic Fragility in the Global Economy’, on why China will likely be the locus of the next financial crisis).

Although this blog typically posts shorter articles and audio files and leaves Dr. Jack Rasmus’ longer articles posted at his website, the following lengthy article is posted here as well addressing the major financial markets most likely to experience instability in the coming months–including bond, loan, equity and other markets in China, Eurozone, Emerging Markets, and the USA. (For more in depth analysis, see Dr. Rasmus’ recent book, ‘Systemic Fragility in the Global Economy’, of which the following is an excerpt:

“GLOBAL STOCK MARKETS

In the past year the stock markets in China erupted, contracting by nearly 50% in just three months, after having risen in the preceding year by 130%–truly a ‘bubble event’. That collapse, commencing in June 2015, continues despite efforts to stabilize it. Chinese bankers then injected directly $400 billion to stem the decline. Including other government and private sources, estimates are that no less than $1.3 trillion was committed to prop up stock values. So far it has produced little success, with more than $4 trillion in equity values having been wiped out in less than four months.

Another $500 billion in foreign currency reserves were committed by China to prop up the currency, the Yuan, which has declined in tandem with its stock markets. To finance its efforts to support its currency, China then began to sell its large pile of US Treasury bonds. Nevertheless, capital continues in 2015 to flee China in large volumes in the wake of the stock contraction, expectations of more currency disinflation, an initial devaluation by China of the Yuan, and a general expectation of more of the same.

Both China stocks and foreign exchange effects spilled over to other equity and currency markets throughout Asia, and as well to stock markets in the US, Europe and EMEs. In the case of the US and Europe markets, the contagion effect has not been that severe. Estimated around $150 billion, other counter-vailing forces also exist in US-Europe-Japan—i.e. potential more QE and suspension of US interest rate hikes—that have offset the initial China contagion effects. Not so, however, in the EMEs where financial assets in stocks and currencies followed the China trajectory more closely.

The stock and currency declines in China and the accelerating pace of capital flight from China will likely more than negate any future efforts by China to stimulate its real economy, already slowing noticeably. Money capital flows out of China perhaps faster than China’s central bank and state banks will try to pump it in. Should China’s stock markets decline another 10% to 20%, the financial markets in and out of China, will experience even greater contagion effects and become potentially severely unstable.

Meanwhile, European, Japan and US stock markets continue largely driven by the prospect of continuing QE, delays in US interest rate hikes, historic levels of corporate buybacks of stock, and record merger and acquisition activity—all of which provided a floor under artificially maintain stock levels. However, these forces may eventually become overwhelmed by China-EME market contractions. Contagion effects from the latter may eventually play a larger role in 2015 US-European-Japan stock financial asset deflation.

Except in the case of China, however, instability in global equity markets is not the potentially most severe source of financial instability in today’s global economy. That dubious distinction will likely reside with the bond markets. Globally stock markets represent about $40 trillion in value. Global bond markets, in contrast, equal at least two and a half times that with more than $100 trillion in assets. A bond market crash, even in one of its segments, could easily spread quickly to other bond segments and in turn other financial assets quickly as well, resulting in a crisis far worse than 2008-09.

GLOBAL BOND MARKETS

Several segments of global bond markets are prime candidates for precipitating a financial instability event of major dimensions.

One is the high yield or ‘junk’ bond market in the US and Europe. Another is the excessive corporate bond debt escalation Emerging Markets, especially that increasing growing sub-segment of EME bonds issued in dollars. Massive issuance of corporate bond debt in China and what are called ‘CoCo’ bonds in Europe should be added to the list. Sovereign bonds is another area of bond instability, especially in Latin America, Africa, and in the Eurozone southern periphery (especially Greece, Italy, Portugal-Spain) and even in that region of the Eurozone referred to as ‘Emerging East Europe’, including Ukraine. Longer term, theUS Treasury bonds market might be added to the bond instability list of prime candidates for instability, given the emerging issues of growing Treasury bond volatility and concern over liquidity should T-bond transactions accelerate in a crisis.

Hi Yield junk bonds in the US, and to a lesser extent Europe where they are growing especially fast, are perhaps the most unstable—along with EME and China corporate bonds. The junk bond segment represents bonds issued at high interest rates by the more financially strapped companies who cannot raise money through investment grade bonds or obtain bank loans. The bonds are typically short term borrowing earmarked for long term investing, a dangerous combination should bond prices begin to fall rapidly in a crisis.

Within the junk sector in the US, a large proportion of the bonds have been issued to fund expansion of the shale-gas fracking industry which is now in severe contraction. Junk defaults have doubled in the US compared with the past year, and the default rate is forecast to double in 2015, according to bank research projections. As companies default and go bankrupt in oil and energy, the instability will result in price instability transmitted to other US junk bond segments. And as the US junk bond market contracts in general, it can easily spill over to Europe and to EME markets that have a similar ‘high cost, short term’ bond composition. While Europe has previously not been a big market for issuing high yield corporate bonds in the past, the market has there has accelerated especially fast since 2008 in terms of growth, from a mere $20 billion that year to $600 billion in the past year, as the traditional bank lending has declined and weak companies desperate for financing have turned to junk bond issues.

The escalation of corporate bond debt in EMEs has been even more unprecedented. In the case of Latin American EMEs in particular, a large (and growing) proportion of that debt is also issued in US dollars. (Unlike for China, where the majority of corporate bond debt is in its local currency). The special problem this presents is, since the debt is in dollars, that debt must be repaid in dollars to investors. But if EME economies are in recession or slowing rapidly and global trade is stagnating—both of which are now the case—it means EMEs can’t earn from increasing export sales to the US or countries requiring payment in dollars, the necessary income with which to make the dollar denominated payments on their bonds as they come due.

Government bond debt in the EMEs is yet another potential severe point of instability. This is true in particular of those EMEs that have been heavily dependent on ‘servicing’ or paying their sovereign debt from income earned from oil and other commodity sales. As prices for both have deflated dangerously and as demand for their oil and commodities have collapsed simultaneously, many of the EMEs are now approaching default conditions. Latin American EMEs—Venezuela, Brazil, Argentina, Ecuador—and African EMEs like Nigeria and others in Asia have will soon experience growing instability in their sovereign bond markets.

As for European sovereign bonds, especially in the Euro periphery, their level of debt has not been significantly reduced since 2009, while in Greece, Italy, and elsewhere Eurozone government bond debt continues still to rise. Ukraine government bonds represent a special ‘black hole’ for Europe, with thus far no end in sight of financial support necessary to keep Ukraine’s bond markets, government and private, from further collapse near term.
In the case of US Treasury bonds, it may seem counter-intuitive that this traditional safest haven for bond investing is a candidate for instability, even longer term. But it is. It is not just that the US Treasury market has exploded from $4.5 to nearly $13 trillion in assets since the 2008 crisis. The problem is that structural changes in the US financial system in recent years has created increasingly volatile liquid markets for US government bonds, often marketed by high risk taking shadow bankers. A potential crisis point is reflected in the increasing use of these bonds by corporations to borrow short term in the US repurchase agreements, or Repos, in the market to fund longer term investments.

With Repos, a company puts up its government bonds as collateral to borrow cash short term from investors, often shadow bankers. Should short term investments collapse in price, liquidity for selling the bonds could prove significant insufficient, thereby driving down the price of Treasuries to excess levels and causing bond rates to rise. The Repo market (see below) is thus a serious weak point in the US financial system and US bonds. And US Treasury markets are thus subject to potential instability should the Repo market crack—as it did in 2008 in the case of Bear Stearns and Lehman Brothers investment banks, which had borrowed heavily and became dependent on repo financing. They went under when the Repo market shut down for them. The vast increase in the Treasury markets of nearly $9 trillion, much at low interest rates, will pose a related problem as the US government needs to refinance them in coming years, almost certainly at much higher rates of interest. Short period, massive escalations of multi-trillion dollars in asset values almost never end well—as China’s stock market crash shows or as the subprime housing bond market before 2007 or the tech dot.com bust of 2001 all have illustrated.

As will be noted in more detail below, corporate bond debt has exploded as well in China to unsustainable levels—just as China’s stock markets had. While not yet dollar denominated to a great extent, the rise in volumes of China corporate bond debt since 2008 are so huge that the money capital that will be needed to refinance it all in the near time raises serious questions whether China private corporate debt can ever be successfully refinanced. In 2018 alone, 5 trillion Yuan (about $800 billion) will need to be refinanced, or rolled over, according to China government banking reports; hundreds of billions of dollars more as well before and after 2018.

Given the especially large volumes involved and questionable repayment problems on the horizon—EME corporate bonds, China corporate debt, bonds associated with repo markets, government bonds in commodity-dependent EMEs, Euro periphery government bonds all reflect serious and growing ‘cracks’ in global bond markets that are expanding.

EMERGING MARKETS CORPORATE DEBT

EME corporate debt represent a problem not only of excessive issuance of corporate bond debt, both in domestic currencies as well as in dollars, but non-bond debt—i.e. corporate loans—as well. In Latin America the latter, dollar composition, is especially a problem. In some countries, like Mexico, the majority of the debt is issued in dollars. Even after subtracting China from the escalation of corporate debt from $5.5 to $18 trillion in EMEs since 2007, EME debt issued in dollars has risen by almost $2 trillion in the non-China EME sector. In China, corporate debt in general has risen from $2 trillion to about $12 trillion. So non-China EME corporate debt has nearly doubled, from $3.5 to $6 trillion while China’s has risen six-fold. The magnitudes of such corporate debt escalation cannot be end poorly.
The same risks apply with regard to making payments on this debt for EMEs, whether involving bond debt or loan debt. Loan debt is of even greater volume and thus a problem and potential source of financial instability, as repayments become more difficult as EME economies falter and slip into recessions.

CHINA FINANCIAL MARKETS

Compared to other EME financial markets, China’s financial markets are even more potentially unstable, and because of the sheer size of China’s economy and markets are even more capable of precipitating a generalized global financial crisis. China’s equity and corporate bond markets have been noted above, but there are additionally three big financial markets that are particularly unstable in China today—Local Government Financial Vehicles (LGFVs), Wealth Management Products (WMPs), and debt associated with what are called ‘Entrusted Loans’. In all three markets, China shadow banks are deeply involved in providing the credit and therefore excessively leveraged debt that makes these three especially unstable.

LGFVs represent the way in which local governments in China have financed infrastructure and commercial and residential construction spending beyond the financing provided by China government operated banks. Much of the LGFV financing has been arranged through shadow banks. Local governments have then sold real estate it obtains through forced sales from private owners to make payments on the debt. The problem is that land sales have been largely used up but the debt remains. In the process of debt escalation, real estate prices became a bubble. Now they are deflating, raising the real debt previously incurred while reducing the income source (real estate land acquisitions) for making debt payments. The LGFV debt was roughly 20% of China GDP in 2007, or $550 billion; it rose to 40% and $3.8 trillion by 2014.

It is estimated that 30% of more than $3 trillion in all ‘nonperforming’ debt in China today from all sources is non-performing LGFV debt. That means debt payments are not being made and more than $1 trillion in LGFV debt is in technical default. The government solution has been to rollover the debt at lower interest rates. Whether it can continue to do so, as more than $7 trillion in such debt must be refinanced during 2016-2018, remains to be seen. The potential contagion effects of LGFV defaults starting in 2016 may prove significant, both within China and throughout the rest of the global economy.

A second major financial asset of great potential instability is called the Wealth Asset Products or WMPs. These are also provided in significant degree through shadow banks. They represent bundled asset products sold to wealthy investors—comprised of roughly one third of stocks, one third local government debt, and one third industrial loans of small and medium businesses and state enterprises that are financially in need of private funding. The debt is opaque and held ‘off balance sheet’, not on the books of banks or other institutions. Like LGFVs, the escalation in such financial assets has been from just several hundred billion in 2007 to $2.9 trillion in 2014. Tied to stocks and local real estate, as these markets have deflated in 2015, the WMPs have no doubt lost massive valuation as well, making them highly unstable.

A third severe problem area in China financial markets involved ‘Entrusted Loans’, or ELs. These are associated with the major shadow bank sector in China called ‘Trusts’, as well as the China banking system. Entrusted loans provide a kind of ‘junk loans’ to industrial companies in particular, especially government enterprises in coal, steel, and other commodities production, that have been in severe distress as China growth has slowed and global demand for China steel, etc., has declined sharply. These loans are highly leveraged and thus subject to great volatility should financial asset deflation spread between markets in China, as stock markets implode, real estate values continue to decline, and LGFV and WMPs values fall further. Like LGFVs and WMPs, Entrusted Loans have surged from $272 billion in 2007 to nearly $3 trillion.

The three combined financial asset markets—LGFVs, WMPs, and ELs—combined represent more than $10 trillion private sector debt that is potentially highly unstable. When considered in relation to China equity and general corporate debt instability, the potential for a general financial crisis in China is not insignificant. Granted, China’s economy has great reserves in terms of foreign currency and assets available, and its government is capable of rapid response to major crises. However, the combined effects of all the above may prove overwhelming in the short term, and government responses may not be able to offset the panic by investors in the short term that could lead to a major financial contraction, followed quickly by a subsequent real economic contraction by an economy already slowing in those terms.

US FINANCIAL MARKETS

US financial markets today are not the primary locus of instability. The massive injections by the federal reserve central bank has offset the financial asset losses of most large banks and shadow banks, as well as big private investors, that occurred in 2008-09—in the process taking the losses onto its own Fed balance sheet. The private debt was not eliminated; it was only moved. Notwithstanding that, there are several financial markets in the US that are candidates for financial instability.

The junk bond market was previously noted, as was the Repo market and its strategic relationship to US Treasuries and the issue of bond liquidity. Mutual funds’ total assets have accelerated tremendously since the crisis as well, reflecting the extraordinary growth of financial wealth in the wake of the Fed liquidity injections and subsequent exploding values in US stocks and bonds. Mutual funds are also connected to the Repo situation, however. And should the Repo market experience significant liquidity problems, mutual funds will be exposed as well as bonds. The US government and Fed therefore are desperately trying to reform and shield the Repo and Mutual Funds markets from future instability, although have succeeded thus far poorly in doing so.

Other growing unstable markets include those for Leveraged Loans and Exchange Traded Funds, or ETFs. The former has surged again as banks and shadow banks have been providing highly leveraged debt to companies and investors involved in historic high merger and acquisition (M&A) activity (up 179%)—which, along with corporate stock buybacks (up 287%), has been driving much of US speculative stock gains in the past year. One shadow bank alone, Blackrock, controls more than a third, over $1 trillion, of the assets in this market. Since 2013 global M&A investing has risen to $4.6 trillion in 2015, compared to $2.2 trillion in 2009, according to the global research firm, Dealogic. These loans represent short term borrowing to finance long term investing, a classic condition for financial instability. ETFs are a new financial innovation that allow investors to bundle stocks, bonds, mutual funds, and other assets and ‘trade’ them instantaneously as if they were stocks. Because they ‘link’ market securities for stocks, bonds, etc. into one financial asset, they represent a kind of securitized asset product. And because their price can change by the minute and second, ETF asset values are highly volatile and can collapse precipitously as any of the bundled asset market securities in them collapses, as they did by 30%, for example, on August 24, 2015 in the case of Blackrock.

US defined benefit pension funds and municipal state and local bonds are also potentially unstable. Neither have fully recovered from the last crisis. Pension funds depend upon general interest rates remaining sufficiently high to ensure returns on investment to pay for retirement benefits. But a decade of central bank zero interest rates has played havoc with pension fund returns, forcing them to search desperately for more ‘yield’ (returns) by undertaking risky asset investments. Public sector pension funds are further at risk due to the still largely unrecovered financial losses experienced by many states, and especially cities, school districts, and other local government entities since the 2008 crash. Some states and many cities remain in the red financially still today from financial investment losses associated with the 2008-2009 crash. The picture remains highly uneven throughout the US for US defined benefit pension funds. Some states and cities recovering, but many are still not. Should another financial crisis erupt, municipal bond rates will no doubt rise even further, resulting in a state and local government fiscal crisis far worse than in 2008-09.
Another area of consumer finance and debt in the US is the student loan market. In recent years it has escalated from several hundred billion to more than $1.3 trillion. While not a source of major financial instability, student debt functions already as a major drag on the real economy and consumption in particular. In a strange arrangement, the federal government profits significantly from this asset, much but not all of which it legislatively has redirected away from the private banks.

EUROPEAN FINANCIAL MARKETS

Government sovereign loans and debt remains a major problem in the Eurozone in particular. The debt is unevenly distributed, making it politically explosive, moreover, where it is focused in particular in the Euro periphery. Eurozone monetary and fiscal policies continue to exacerbate the debt, causing government bond rates to remain excessively high in the affected economies and, conversely, driving bond rates in Germany and elsewhere into negative territory and thus further yet unknown consequences for instability.

One solution proposed has been the issuance of a new security called a Convertible Bond, or CoCo bond. This new bond is designed to convert from a bond to equity in the event of a financial crisis. Because it may convert, and result in almost a near total loss as is potentially the case of equities compared to bonds, the CoCo bond pays a higher interest rate to investors. It is riskier in other words. It is a kind of government analog to junk bonds. In the desperate search for yield by many investors, they have piled into the security. However, should a severe instability event erupt in Europe, CoCos could quickly lose much of their value.

The general government debt problem, which now after 8 years in Europe has not abated but actually continued, combined with Europe’s stagnant economic real growth, has resulted in a high level of non-performing debt remaining on Euro bank balance sheets. Non-performing loan and bond debt in the Eurozone is estimated by some as high as $1 trillion. As in China’s case, and increasingly for EMEs in general, companies with a high level of current non-performing corporate debt typically become companies that default in a subsequent crisis.

OTHER GLOBAL FINANCIAL MARKETS

Two remaining financial markets of general global relevance are foreign exchange currency trading (FX) and derivatives speculation.

As the data table above illustrates, FX has exploded in terms of its size since 2009, which reveals the contribution of the massive liquidity injections by central banks, a good part of which has found its way to global currency trades and speculation. The daily trading volumes have almost doubled, to $5.3 trillion in purchases of currencies daily. Much of that is done by central banks, banks, and global corporations, but a significant segment of 10% of the trading is now ‘retail’; that is, done by speculators large and small, hedge funds and even small investors who, up to recently, had been financing this trade by use of credit cards. As governments continue to inject liquidity via QE they in effect create excess liquidity that fuels currency wars and volatility. And as countries attempt to devalue their currencies to gain a temporary advantage for exports, the volatility grows further. It all draws in more shadow bankers and speculators who feed off of the volatility, making currency markets more subject to financial speculation and causing havoc to economies and economic policies.

Not least, another problem globally is the role played by derivatives—interest rate swaps, credit default swaps, and other innovative financial products that continue to proliferate and grow and, in the process, add to potential contagion effects and further asset price volatility. Sometimes reference is made to what is called the notational value of derivatives, now in excess of $700 trillion. The more important figure, however, is not the notational but the potential loss values measured in what is called the ‘gross value’ of derivatives. While not $700 trillion, gross value and potential loss represents a massive $21 trillion, up from $15 trillion in 2008. In other words, derivatives and their potentially extreme financial destabilizing effects—which were clearly revealed in the 2008-09 crisis, have not been reduced. In fact, they have grown continually. And new forms of financial speculation involving derivatives have been created as well. An example of such is the ‘swaptions’ market for credit default swaps, or CDSs. It represents betting on the movements of CDS. The latter are a kind of a ‘bet’ that financial assets will deflate significantly, in which case a ‘payoff’ for the CDS is made. But swaptions take it one step further: betting on the broad index of CDSs as a financial security itself.

Derivatives trading is growing rapidly, having reached record levels in 2014. Previously largely concentrated in the USA and UK, it has begun to grow as well in Southern Asia—in particular in Thailand, Singapore, Malaysia. Japan has begun significant volumes of derivatives trading. Europe is attempting to promote it. And China will open a trading section in Shanghai in 2015.

T listen to Jack Rasmus Alternative Visions Radio Show of February 12, 2016, and his latest analysis of the consequences for global instability of Central Banks globally shifting to negative interest rates (including US plans), download the show at:

http://www.alternativevisions.podbean.com

or at:

http://prn.fm/category/archives/alternative-visions/

SHOW ANNOUNCEMENT:

Jack reviews US Federal Reserve Chair, Janet Yellen’s, testimony to Congress this past week. Her overestimation of the health of the US economy and underestimation of the crisis in the global economy are noted, and special attention given to her statement that ‘negative interest rates’ are being prepared for in the US. The logic behind the $6 trillion in negative rates to date in Europe and Japan is debunked. And the negative consequences for the global economy from negative rates are explained. Central banks have gone too far, too long and are now trapped by their own policies, making the global economy worse by the day. Jack reviews evidence of the banking system beginning to crack in Europe (key banks there in trouble) and provides a summary of the ‘global financial fault lines’ from chapter 11 of his recent book, ‘Systemic Fragility in the Global Economy’, and his take on the most vulnerable financial markets. Also addressed is why the US working class is orienting toward Trump (45-54 age group) and Sanders (18-34) with serious implications for the Democrat and Republican establishments.

(For a more detailed analysis of how central banks are responsible for rising government debt, growing economic instability, and the next financial crisis, read Chapter 14 of Jack’s recent book, ‘Systemic Fragility in the Global Economy’. Click on the book logo on this blog for free select chapters of the book.)

How U.S. Congress and Presidential Candidates keep the cash flowing to corporations and investors.

By: Jack Rasmus

Published 1 February 2016 in Telesur English Edition

“From 2001 to 2016 US politicians have cut taxes on corporations and wealthy investors by no less than US$10 trillion. Another US$10 is coming.

Proposals for more tax cuts now pending in Congress – plus proposals supported by Trump, Cruz, other Republican presidential candidates – will add another US$10 trillion in tax cuts. And, as from 2001 to 2016, the latest proposals will once again benefit mostly US big banks, big corporations, and the wealthiest investors – i.e. the 1 percent and, even more so, the 0.1 percent and 0.01 percent.

Bill Clinton Opens the Door: 1997-1998

It is little known, but the trend toward massive investor and corporate tax cutting in recent decades began with Bill Clinton and his 1997-98 tax cut legislation. The 1997 Act cut taxes by US$400 billion. The wealthiest 20 percent households received 75 percent of the tax cuts or US$300 billion. The Clinton cuts reduced capital gains and estate taxes, cut gift taxes and the corporate alternative minimum tax, and opened up corporate tax loopholes while limiting the IRS ability to investigate wealthy tax evasion. Forty-eight million of the lowest income households got no cuts or saw their taxes actually increased. Another 48 million households got tax cuts averaging US$300. Capital gains taxes were cut by US$200 billion benefiting the wealthiest 1 percent households (1.2 million) who received an average cut of US$16,187, according to the Center for Tax Justice. A follow up tax act in 1998 further restricted the IRS from investigating tax fraud by the wealthy and corporations, while expanding capital gains tax provisions still further. The modern era of tax cutting for the wealthy and their corporations thus begins with Bill Clinton.

George W. Bush ‘The Great Benefactor’: 2001-2008

George Bush wasted no time in blowing open the door unlocked by Clinton. In a succession of annual tax cuts starting in 2001, personal income taxes under Bush were reduced by US$3.3 trillion, according to the independent research source, ‘Tax Notes.’

In 2001, as the ultra-conservative think tank, the Heritage Foundation, admitted the 2001 Bush cuts in personal income taxes mostly benefited capital incomes and the 4.7 percent wealthiest households; 95 million U.S. taxpayers received no reductions at all from Bush’s US$1.35 trillion 2001 cuts. Roughly three-fourths of the US$1.35 trillion – i.e. US$1 trillion – went to the wealthiest households, according to the National Tax Journal’s analysis. In 2001, the wealthiest 1 percent households also received another US$138 billion tax windfall in the reduction of Estate and Gift taxes.

In 2002, Bush turned to reducing corporations’ taxes. Faster business depreciation write offs (a tax cut) and more corporate tax loopholes, like ‘net operating loss’, added another US$1 trillion in tax cuts.

In 2003, it was back to more tax cuts for wealthy individuals. Cuts in capital gains and dividend taxes, from 39.5 percent to 15 percent were enacted, faster tax rate cuts at the top levels, and even more generous depreciation and business tax cuts, cut taxes for businesses by another US$400 billion and for mostly wealthy individuals by another US$800 billion.

In 2004 it was tax cuts benefiting mostly the largest U.S. multinational corporations. The 700 page Corporate Tax Reduction Act of 2004 produced, according to the Center for Tax Justice, “the largest business tax relief program in more than a decade”. Many of the dozens of offshore tax sheltering corporate tax loopholes that exist today were born in the 2004 Act, which also provided a ‘tax holiday’ that saved multinationals US$195 billion in back taxes owed, a US$80-$100 billion in export subsidy tax rebates to corporations, deduction of foreign taxes from U.S. taxes, and scores of special tax cut provisions for industries like tech, pharmaceuticals, banks, aircraft leasing, beer and wine, film and entertainment and other special interests. Estimates are the 2004 corporate reductions amounted to another US$500 billion for the decade.

Bush cuts for just his first term in office, add up to wealthiest households, investors, and businesses getting approximately US$3.8 trillion in tax cuts. No wonder U.S. tax revenues from corporations declined to only 6 percent of total government tax revenues, compared to previous averages as high as 20 percent.

With the 2008 crash, Bush and the Democratic Congress passed another US$168 billion emergency tax cuts to try to slow the recession, with little effect. It added another US$50 billion in business tax cuts, along with emergency rebates to consumers.

Obama ‘The Generous’: 2009-2015

Obama’s initial emergency stimulus bill of 2009 called for US$787 billion, about US$315 billion of which were tax cuts and at least US$200 billion in business and investor cuts. Democrats in Congress at the time proposed an additional US$120 billion in consumer household tax cuts, but Obama agreed with his business advisers and Republicans and cut it out of his 2009 stimulus proposals.

In 2010, the Bush tax cuts of 2001-03 were scheduled to expire. However, Obama supported the extension of the cuts for another two years. That resulted in US$450 billion in further tax cuts for investors and corporations.

In August 2011, the Congress cut $1 trillion in spending on education and other social programs, and scheduled another US$1 trillion for cuts starting in 2013 – half of which as for defense and half for more social programs. A ‘fiscal cliff’ crisis, as it was called, loomed for 2013 as the US economy slowed. A deal was struck at year-end 2012 between Obama, U.S. House of Representatives Republicans, and conservatives in the U.S. Senate to avoid the so-called ‘fiscal cliff’. As part of that deal, no less than US$4 trillion more in tax cuts were passed – entrenching the Bush tax cuts benefiting corporations and investors with US$3 trillion more for the next decade, and at minimum US$3 trillion forever as the Bush era cuts now became permanent.

Meanwhile, throughout the Obama era, multinational corporations continued to hoard profits offshore and not pay U.S. taxes. Un-repatriated corporate taxes due but not paid rose from US$700 billion during the Bush years to more than US$2.1 trillion by 2014. If one averages the offshore tax avoidance by U.S. multinationals over the Obama years, it averages approximately US$1 trillion a year. If U.S. multinationals had paid the required 35 percent corporate tax rate, if the numerous loopholes created since 2002 were removed, if the ‘tax inversion’ scams since 2014 were not allowed, it would have meant US$350 billion a year for the eight years, or about US$2.8 trillion, in additional taxes paid by multinationals. Or, US$2.8 trillion in what amounts to de facto tax cuts since they were allowed by Bush-Obama and Congresses over the past decade and a half.

Thus, under the Obama regime a total of roughly US$6.5 trillion has been added in tax cuts for wealthy households, investors, multinational corporations, and U.S. business in general. Summing up, that’s US$300 billion from Bill Clinton, US$3.8 trillion from Bush, and US$6.5 trillion under Obama – for a total of at minimum US$10.6 trillion!

However, that mind-boggling total is not the end of it. Candidates now running for office for president of the United States are proposing trillions more in tax giveaways to the 1 percent and their corporations.

The Republican Presidential Candidates: ‘More Is Not Enough’

All the main republican presidential candidates propose cutting wealthy and corporate taxes by well more than US$10 trillion. Here’s just a few of the main proposals of the top 3 Republican candidates:

Ted Cruz: Reduce the personal income tax from 35 percent to 10 percent. Then end the corporate income tax altogether and replace it with a 16 percent business value added tax (VAT) – most of which business would obviously then pass on to consumers to pay. Businesses could also deduct every penny they spend on investments from their taxes owed. Invest it all and pay no taxes whatsoever, in other words. The conservative Tax Foundation has estimated Cruz’s plan would amount to US$768 billion in tax cuts for corporations and the wealthy 1 percent, the latter of whom would see their take home income immediately rise by 30 percent. Other detailed provisions would push it well over US$10 trillion for the next decade.

Marco Rubio: End all taxes on capital gains, dividends, and interest. Reduce the top rate for business incomes from 39.5 percent to 25 percent. (For wage incomes reduce it only from 39.5 percent to 35 percent). The Rubio proposal would have meant the US$5 trillion paid by corporations in stock buybacks and dividends since 2010 would have been totally tax-free for wealthy investor households. So too would the more than US$1 trillion a year in total capital gains every year since 2012. In other words, just the end of capital gains would mean a trillion dollars minimum a year for every year forever. Add to that the 15 percent rate cuts for business income and high end CEO salary tax cuts.

Donald Trump: the Tax Foundation and other sources estimate Trump’s tax cut at US$12 trillion over the coming decade: US$10 trillion in personal income tax cuts and another US$1.5 trillion in corporate tax cuts. Trump reduces the personal income tax top rate from 35 percent to 25 percent and corporate income tax to 15 percent. Trump would eliminate the estate tax (another US$238 billion), the Alternative Minimum Tax that hits the wealthy, and the 3.8 percent Obamacare tax on the wealthiest.

Other ‘wannabe’ Republicans – Carson, Paul, Christy and other assort ‘goofies’ – parrot the same, and more, US$10 trillion in new tax giveaways to the wealthiest, investors and businesses across the board.

It may have taken 15 years to give the first US$10 trillion away. But it looks like it will take less than half that to give the next US$10 trillion.

Jack Rasmus is author of the just released new book, ‘Systemic Fragility in the Global Economy’, by Clarity Press, 2016. His blog is jackrasmus.com.

This content was originally published by teleSUR

Listen to Dr. Jack Rasmus’s latest Alternative Visions Radio show of 1-29-16 on topics of latest US GDP numbers and coming ‘relapse’ in US economy–plus evidence on growing problems in China, Europe, Japan, and global oil and currency markets worldwide.

go to:

http://www.alternativevisions.podbean.com

or to:

http://prn.fm/category/archives/alternative-visions/

SHOW ANNOUNCEMENT:

More indicators show growing instability in the global economy, as US economy now appears to be slowing rapidly as well. Jack disassembles US 4th quarter 2015 initial GDP numbers, showing durable goods falling at the fastest rate since 1992, as business spending and inventories and exports continue to pose a problem into 2016. Jack predicts yet another ‘economic relapse’—the fifth in as many years—on the horizon for the US for 2016. Elsewhere, global instability continues to rise: Japan announces surprise negative interest rates, pre-empting Europe’s soon announcement of another QE expansion—which will intensify global currency wars further. China capital flight reaches $1 trillion, and Jack predicts inevitable Yuan devaluation coming. Italian banks in big trouble with more than $350 billion in non-performing bank loans (Europe more than $1.5 trillion). Why economists are confused about the correlation of stock price and oil price collapse occurring now. Jack’s view of unreliability of China stats confirmed by sacking of its statistics director this week, Wan Baoan. Japan stats with resignation of Akira Amani as well. Jack reviews billionaire speculator, George Soros’, predictions at interview at Davos last week, confirming China ‘hard landing’ underway and threat of spreading deflation, which Jack predicted in his book, ‘Systemic Fragility in the Global Economy’.

The destruction of unions in the US has been going on for decades, steadily intensifying since the 1970s. But recent, and pending, U.S. Supreme Court decisions are now leading a new, intensive attack on unionization in the U.S.

The latest is the pending decision by the US Supreme Court in the case, “Friedrichs vs. California Teachers Association,” which targets teachers and other public workers and their unions. The decision immediately affects 10.7 million teachers in the US, and potentially a further 10 million state and local public workers who are, or might be, in unions.

The Friedrichs case is but the latest in a decades-long effort to deny unions in general – both public and private sector – necessary financial resources to effectively represent members in bargaining, and especially to undermine their ability to engage in political action like lobbying or support for pro-worker political candidates.

In the Friedrichs case, which has already heard by the US Supreme Court, with a decision coming down any day now, teachers unions won’t be allowed to use union dues or now even equivalent “agency fees” for union spending on what is the primary target of Friedrichs – i.e. political action, lobbying, candidate support, and political advocacy in general.

Teachers and other public sector unions rely heavily on mobilizing politically in support of their collective bargaining demands. They spend significant financial resources to try to elect government representatives, their bargaining partners, who are sympathetic to their interests in terms of wages, jobs, and benefits; or to defeat or remove those elected politicians who are not. They also spend heavily to lobby government and politicians after elections. Should the US Supreme Court rule in favor of Friedrichs, which is reportedly highly likely, it would mean teachers and public unions could no longer spend financial resources on such activities as they had been. They will have fewer financial resources with which to do so. And fewer financial resources translates into less political mobilizing, less political influence, and therefore less effective bargaining thereafter in the longer run.

The Friedrichs case therefore represents an important shift and intensification of anti-union efforts, this time targeting teachers and other public workers and their unions. But the attacks on private sector unions in the US have been going on for decades.

Destruction of Private Sector Unions

Since the 1970s, corporate efforts to destroy US unions have primarily targeted private sector workers and their unions in manufacturing, construction, and transport – i.e. industries where once 60-70 percent or more of the workforce were once organized before 1980 but where, today, the number of workers in the private sector in the U.S. that are unionized has declined to barely 6 percent.

The 6.7 percent unionization of private sector work force that remains in the US today represents roughly 10.5 million out of a total 157 million in the labor force in the US today. Had the percentage of unionized in the US remained the same today as it was in 1980, at 22 percent, instead of today’s 6 percent, private sector unions today would have a total membership of 35 million instead of the actual 10.5 million. Union labor has thus declined by an actual and potential 25 million members as a consequence of the corporate offensive since 1980.

The destruction of unions in manufacturing, construction, and other private sector industries has been the result of a multi-sided corporate attack on a number of fronts: virtually eliminating the right to strike, government-legal support for outright union-busting, establishing more and more obstacles to union organizing, eliminating the right to have union hiring halls, free trade and corporate tax incentives to move jobs offshore, targeting and removal of militant union leaders, allowing 40 million part time, temp, and contract workers to be exempt from union representation, expanding to 25 states what is called “right to work” laws in the US, which prevent unions from requiring workers they represent to join the union or pay any union dues.

Another element of anti-union strategy targeting manufacturing, construction and other private sector unions has been to impose more and more restrictions on how unions may spend their members’ dues and financial resources on political action and mobilizing. New rules in recent decades, for example, requires unions to “refund” back to a member his or her share of what the union would have spent on political action. That means less resources for unions to spend on bargaining or political action. Up to now, the member has had to request to “opt out” of the spending to get the dues rebated. But this too may change soon, if the Friedrichs case is approved and then is extended to the private sector unions.

All of this imposing of more limits on unions spending for political action is rather ironic, given that the US Supreme Court has been approving laws like Citizens United since 2010 allowing corporations unlimited resources to spend on political action. What’s clear is that corporate interests are increasingly developing ways to inhibit and reduce unions’ ability to engage in political advocacy and action—in both public and private sectors.

Public Workers Unions Now the Target

A key element in the Friedrichs case is this question of “opt out” or “opt in.” The case reportedly will decide whether to change the practice of ‘opting out’ where now the member has to request the union not spend a portion of his dues or agency fee on political action and return that portion to him, the member. Should Friedrichs be approved, the member will automatically “opt out” and the union has to request of him to “opt back in.” Should that rule accompany the Friedrichs decision, it will mean massive loss of dues equivalent funds for the teachers union in this case. That precedent will like quickly apply to all other teacher unions, in other states and at the college level as well, and thereafter to public workers in cities and states in general.

This precedent could well even expand to private sector unions as well. With the major “right to work” offensive gaining momentum, where in 25 states so far workers can decide to pay no dues or equivalent, the “opt in” responsibility placed on the union will almost certainly result in further loss of financial resources for political action.

Public sector unions have been under attack since 2009 in other ways as well. Conservative governors have been making public workers pay for state government deficits by cutting their pensions and health care and other benefits. This has occurred even as the same states continue to cut business taxes as their deficits grow. In other states, outright limits on collective bargaining have been imposed. The Friedrich’s case is but the latest development in what will likely mean even more new initiatives to undermine public workers unions and their members’ rights and benefits.

At the same time, the attacks continue to intensify against private sector unions. More free trade and offshoring is in the works, more categories of workers legally exempted from right to unionize (for example the “gig” or “sharing” economy job trend), and the growing “right to work” corporate funded movement at the state level all represent major initiatives ongoing against private sector unions.

What it all represents is a “legal web” has thus been woven around the Labor “Gulliver” in the US, a cocoon of laws that have been spun by corporate interests and their lobbyists, a silken coffin of the law that has virtually immobilized union labor in the U.S. To break through the web, workers in the US will have to soon start over, to rebuild their unions from the ground up. That will require a different form of grass roots organization and collective action.

Jack Rasmus is the author of the just published book, ‘Systemic Fragility in the Global Economy’, Clarity Press, January 2016.

What’s happening in China? Is it becoming the locus of the next financial crisis? Some well positioned capitalists are beginning to suggest so, including no less than that guru of global hedge fund and financial speculators, George Soros. The Bank of Central Banks, the Bank of International Settlements (BIS) in Geneva, is saying the same; so too are a growing list of research departments of major global banks ,like UBS and Societe General in Europe.

China today is facing a convergence of several major forces that threaten not only to drive its economy and financial system into further and faster contraction and instability, but threaten as well to destabilize the rest of the global economy, especially emerging markets.

Instability #1: Imploding Stock Markets

In early January 2016, China’s main stock markets, the Shanghai and Schenzen, fell steeply to levels that required the government to suspend trading, i.e. to shut them down. Since December 22, 2015, in just two weeks, China stock markets have contracted by more than 20 percent, in what is a third ‘leg down’ since China’s markets began first imploding last June 12, 2015.

Initially having risen by 120 percent to bubble levels in 2014-2015, China’s markets contracted -32 percent by early July. Intervention by its central bank and government thereafter briefly stabilized prices. China then devalued its currency, the Yuan, in late August and the markets fell a second time, by -42 percent. After a short recovery last fall, a third and most recent collapse of 20 percent in early January 2016 has resulted in stock values falling about -50 percent from their previous May-June 2015 highs.

After three intervention efforts requiring US$500 billion by China’s central bank and government over the past six months to stabilize the stock implosion, it has become clear that China authorities cannot prevent the markets from imploding still further. Analysts predict China’s stock index will fall to 2000 from its current 2900, and its June 2015 highs of more than 5000. That’s about a -65 percent fall, which is roughly equivalent to the collapse of U.S. stocks in 2008-09.

That kind of stock market collapse suggests China may be beginning to experience a financial crisis roughly equivalent to the U.S. financial crash of 2008-09. Stock market crashes of such dimensions are signs of either actual, or impending, near-depression conditions.

Instability #2: Currency Decline & Capital Flight

With a stock market collapse underway, wealthy Chinese investors, speculators, and China’s more than 6,000 estimated shadow banks (there were no shadow banks in 2008), are all desperately selling stock. Stock sales in Yuan are then being converted to dollars and other global currencies. The money is then sent out of China to invest abroad. Estimates of capital flight from China last year in 2015 are estimated at around US$1 trillion.

To try to stem the outflow, China authorities have been intervening in global currency markets to try to keep currency values from falling precipitously. More than US$100 billion was used to prop up the currency in December 2015 alone. But like the US$500 billion spent the past six months to intervene to stop the stock price collapse, China central bank and government attempts to prop up China’s currency have proved equally ineffective at stemming the decline in its currency, which has already devalued since last summer by 6 percent to the dollar, as pressure continues to build for still more devaluation.

Unable to prevent both its stock market implosion and further devaluations, the impression globally is growing that China is progressively losing control of growing economic instability.
The stock selling and collapse is feeding the currency devaluation and vice-versa. Investors and speculators are selling stock converting Yuan to dollars and driving down the currency’s value; in turn the declining currency is encouraging investors to sell stocks in a currency that is falling in value. In other words, a mutual downward spiral is underway.

Instability #3: Slowing Real Economy

Behind the stock-currency spiral is China’s real economy that is slowing faster than China official statistics indicate. China’s real economy, measured in GDP, is slowing far more rapidly than the government’s estimated 6.9 percent. Independent sources looking at rail and freight traffic, electricity usage, manufacturing output, and other such indicators, suggest China’s growth rate may in fact average around 5 percent. Some estimates are suggesting as low as 3 percent annual growth today. Its manufacturing sector has contracted every month throughout 2015. Export growth is negative. Industrial production and real investment growth rates are half of what they were in 2014. Prices for industrial goods are deflating and for consumer goods and services rapidly disinflating.

China’s slowing real economy means corporate profit declines and even defaults, which encourages investors to dump and sell stocks; stock and currency translates by various channels into further corporate profits decline. The problem is particularly acute among state owned and old ‘industrial’ enterprises, which have become massively indebted since 2009 and increasingly unable to secure financing even to continue production operations.

Thus these three elements—slowing real economy, stock implosion, and currency devaluation—are now feeding back upon and exacerbating each other. The downward spiral is intensifying.

Overlaid on all the three elements are the slowing global economy and slowing demand for China exports, the global currency wars intensified by recent Europe and Japan QE programs which will expand still further in 2016, and spreading recessions in emerging markets, barely growing or stagnating economies in Europe and Japan, and the concurrent collapse of global oil prices, now at US$29 a barrel and in some places, like Canada, as low as US$15.

In other words, growing fragility in the global economy outside China makes the global economy today more sensitive to growing instability within China itself, and vice-versa. China and the global economy are feeding off each other negatively as well: China destabilizing the rest of the global economy and that destabilization negatively impacting China as well.

Instability #4: Corporate Debt and Non-Performing Loans

This China-global interaction is taking place, moreover, on a tinderbox of debt in China, as well as globally. Total global debt, mostly business debt, has increased by no less than US$50 trillion since 2009. China’s total debt represents no less than half of that US$50 trillion, having risen from US$7.4 trillion in 2007 to more than US$30 trillion today. Moreover, even more ominous, about US$2.5 trillion of its US$19 trillion corporate debt represents non-performing business loans in China today.

As stock markets and currency declines, as old industrial companies slide deeper into trouble and can’t raise money capital, and as revenue from exports slows for China, it means China corporations (and local governments) will face increasing difficulty making payments on the massive debt that has accumulated since 2007. Defaults are inevitable, which in turn will make both China’s real and financial economy even more unstable.

In short, a bust in coming in China and it will spill over to the rest of the global economy with serious consequences—first for emerging markets and thereafter inevitably as well for advanced economies like the US, Europe and Japan.

China government and state banks will have to bail out the over-indebted private sector. The government has massive reserves of US$3 trillion with which to do so. But it has already spent approximately US$1 trillion dollars thus far to support stocks and its currency. How much more will it commit to bail out its falling stock market, to halt the decline of its currency and capital flight, and eventually to bail out defaulting corporations and local governments as well? And what happens to China, and the global economy, should it even balk at doing so?

The next major global financial crisis will most likely not occur in the U.S. or other advanced economies of Europe and Japan. It will originate in emerging market economies, precipitated by instability events in China. China may be able to weather the crisis, given its huge reserves. But other emerging markets, many already in recession, will find it far more difficult to do so. As China and emerging market economies enter a deeper crisis in 2016-17, the U.S, Europe and Japan, already essentially stagnating, will not prove immune as well.

Jack Rasmus is author of the just published book, ‘Systemic Fragility in the Global Economy’, available from his blog, jackrasmus.com, and website, http://www.kyklosproductions.com, as well as from Amazon.

For a half hour explanation of the basics involved in China’s growing stock, currency, real economy instability, listen to Jack Rasmus’s January 10 interview with KGO 810AM Talk Radio, covering all of northern California.

For interview go to: http://www.kyklosproductions.com/audiocds.html

SHOW ANNOUNCEMENT:

Jack Rasmus is interviewed by Northern California Talk Radio, KGO-810 AM host, Pat Thurston. Jack explains the recent renewed stock market crisis in China and what it means in 2016. He also explains the relationship between China’s currency decline, economic slowdown, and the Shanghai stock market’s recent plummet, how oil prices now will fall below $30/barrel, and what are likely responses of Emerging Markets, Japan, and Europe to the growing instability in global financial and real economies. Jack describes how his new book, Systemic Fragility in the Global Economy, predicted these developments.