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Contradictions of Global Fiscal-Monetary Policies

November 2, 2013 by jackrasmus

The following is an excerpt from this writer’s just published, ‘The Slowing Global Economy’, explaining why QE, austerity, fiscal stimulus packages, and record low central bank interest rates, are failing to generate a sustained global economic recovery after 4 years–and why the same policies are now beginning to have the opposite effect on global recovery.

“QEs, massive liquidity injections by central banks, token fiscal stimulus policies followed soon by austerity fiscal stimulus withdrawals represent the recovery policy ‘mix’ for the US since 2008. In similar form, albeit with different emphases, the same monetary and fiscal policies have been adopted by other main capitalist sectors of the global economy. Those economies, from the Eurozone, UK, to Japan and elsewhere are also experiencing a ‘stop-go’ economic recovery trajectory. The outcome has been more or less the same everywhere: a bailing out of the banks, an acceleration of investors income and corporate profits, a shift toward speculative financial investment, growing income inequality, declining relative real investment, inability to generate full time employment and wages, declining real disposable incomes for median family households, stalling consumption, and a sub-par historical, ‘stop-go’ economic recovery.

The US driven policy package of QE-unlimited liquidity, plus token fiscal stimulus followed by austerity and initial stimulus withdrawal, has been converging across all the capitalist economic sectors globally. All sectors, with perhaps the exception of China, have been following the US fiscal-monetary policy lead. This has been especially so with regard to QE and monetary policy which has been the main policy level of choice for capitalist economies and governments worldwide since 2008.

But fiscal-monetary policies globally are not only failing to generate a normal, sustained economic recovery; they are now also beginning to have a contradictory, counter-productive economic impact.
The growing contradictions in monetary policy are several.

First, it is clear that after five years of QE, investors are becoming addicted to QE and virtually interest free money from the Fed and central banks. When the Fed attempted to signal a future withdrawal from QE this past June, financial markets reacted severely. In a matter of weeks, stocks, bonds and financial asset prices plummeted and interest rates rose quickly. The Fed then backed off, re-signaled again in August, with the same response. It may prove significantly difficult for the Fed, and other central banks, to begin suspending QE and withdrawing liquidity without interest rates rising rapidly and provoking a serious real economic contraction. At the same time, continuing liquidity and low rates has a decreasing positive effect on the real economy.

Second, it appears the capitalist economies are becoming increasingly interest rate increase sensitive as they have become interest rate decrease insensitive.

Third, the continuation of massive liquidity injections via QE and other means has begun to exacerbate currency wars. One sector engages in QE, driving down its currency’s value, lowering in turn the cost of its exports at the expense of competitors. Others then respond similarly. Currency volatility results across the board, which creates uncertainty for real investment. Economies subsequently slow. What was competitive devaluations during the great depression of the 1930s via declaration, now occurs via currency exchange rate movements via QE and liquidity.

Efforts by the Fed and other central banks to withdraw from QE result in massive capital flight from emerging markets, as hot money that was pushed into those markets when QE was growing now sloshes back to the US and Europe when liquidity is reversed. Capital flight from emerging markets forces those economies to raise interest rates to lure back the capital, but doing so slows their real economies that causes even more capital to flow out of emerging markets. The process destabilizes the global financial system in turn.

QE and excess liquidity spills out in global financial markets. Far more money capital is available that can be profitably invested in real production. Investors turn to short-term financial asset investments.

Speculative investing and financial asset prices and profits rise, drawing capital from real asset investment into financial assets. Capital flows increase in magnitude and frequency across countries, destabilizing the global financial system still further.

Not least, as already noted, the accelerating financialization of the global economy provoked by QE and unlimited liquidity injections by central banks leads to accelerating financial profits, income, and wealth by investor households that in turn results in growing income inequality and problems sustaining non-investor household consumption.

To summarize, monetary policies since 2008 are breeding dependency on free money from central banks, super-sensitivity to interest rate hikes, currency wars, competitive devaluations by means of exchange rate volatility, capital flight from emerging markets, excessive speculative investing and declining real investment that slows the real economy making it difficult to create jobs, reduce unemployment and sustain household consumption, and in general exacerbate hot money flows globally that destabilize the global financial system.

Contradictions in Fiscal Policy are no less significant.

Fiscal policies are also becoming less effective in generating real economic growth. Contrary to what liberal economists argue, deficit spending per se does not stimulate economic growth. The composition of that spending is key, not just its magnitude (business tax cuts vs. direct spending by government). Business tax cuts don’t create many jobs any longer since, in a global economy, they are easily diverted offshore or into financial investments by corporations today; or used to buy back stocks, pay dividends, retire debt; or just hoarded as retained earnings in offshore tax havens or in companies’ foreign subsidiaries. What economists refer to as tax multipliers have thus declined significantly in the 21st century global capitalist world, rendering fiscal stimulus policies less effective.

Not just tax multipliers, but government spending on subsidies to states, rather than on direct federal job creation, results in a smaller multiplier effect than in the past, producing fewer jobs as state and local governments, like corporations, don’t hire but pay down debt or hoard cash. Conversely, government deficit spending cuts and austerity fiscal policies have a larger negative multiplier effect, as government entities prefer to lay off workers and reduce spending on programs in lieu of committing cash to spending.

A further reason why multiplier effects have declined is household consumers have become more ‘fragile’—that is, they have accumulated excessive debt loads and face stagnating or declining income gains. Government spending and tax cuts targeting consumer households thus get diverted to retiring debt or paying for inflationary increases for essential goods and services that was once covered by rising wage incomes.

To summarize with regard to fiscal and austerity policy, government spending and tax cuts no longer have the same positive effect on economic recovery they once had. Greater household debt and stagnating incomes reduces the effect of fiscal stimulus. That same debt and income stagnation makes austerity fiscal policies in turn more effective in terms of reducing consumption. Austerity multipliers are greater, while fiscal stimulus multipliers are smaller. Austerity serves to contract the economy, but does so more effectively than tax cuts and spending stimulate the economy. In order for fiscal stimulus policies to return to past effective levels, major structural changes will have to occur in the economy: incomes will have to be redistributed from the wealthiest households and toward the middle and working classes by means of a number of measures, while debt levels will have to be reduced or debt expunged.

(NOTE: The complete article on the Slowing Global Economy is available on the website, http://www.kyklosproductions.com, accessible from the sidebar of this blog. The article with accompanying graphs and charts is available at ‘Z’ magazine’s November 2013 issue).

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The Slowing Global Economy

November 2, 2013 by jackrasmus

Contrary to month to month economic data, the US and Global Economies reflect a longer run slowing of economic growth since the short, shallow recovery of 2009-10 following the financial crash and ‘epic’ contraction of economies worldwide in 2008-09.

For my just published, November 2013 article, reviewing the current state and trends within the global economy, as of late summer 2013, go to my website at http://.www.kyklosproductions.com/articles.html. Or access the website from the sidebar on this blog.

Included are assessments of the US, Eurozone, UK, Japan and China economies. While recoveries appear in the short run, in this or that global region, the recoveries are short and shallow and thus unsustainable. The article explains why traditional fiscal-monetary policies, including a primary focus on QE and liquidity injections by central banks and reluctant and insufficient fiscal stimulus packages, have been unable to propel the global economy and its various regions onto a sustained growth path. Weak multiplier effects for fiscal policy due to excess debt and stagnant incomes and inverse elasticities and return to financial speculation in lieu of real asset investment, are offered as explanations for the growing failure, and contradictions, increasingly evident by traditional fiscal-monetary policies being employed worldwide.

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Myth Busting the Smear Campaign Against Social Security

October 24, 2013 by jackrasmus

STATEMENT ISSUED BY THE GREEN SHADOW CABINET USA
October 24, 2013
By Dr. Jack Rasmus, ‘Shadow’ Federal Reserve Chair

“With the interim ‘debt ceiling/government shutdown’ agreement reached last week between the Obama administration and the Teaparty-driven U.S. House of Representatives, the real negotiations on deficit cutting—aka Austerity American Style—are about to begin again.

A long campaign peddling falsehoods around social security and medicare has created a myth that they are facing a budget and fiscal crisis. This claim will be rolled out by Democrats and Republicans alike, to justify cutting programs for the poorest Americans, while handing tax breaks to the richest corporation.

Both Obama and the Republicans in the House were agreed last summer, before the Teaparty faction upset the negotiations agenda by injecting the Obamacare issue, to proceed toward cutting ‘entitlements’ and seeking Tax Code Overhaul. With the Teapartyers in temporary retreat, Boehner and the Republicans have now returned to their initial strategy of of demanding entitlement cuts for a budget deal, and Obama has indicated that he is prepared to meet them halfway.

At the center of coming negotiations will be hundreds of billions of dollars in proposed cuts to social security and medicare, in exchange for a longer term debt ceiling extension beyond the November 2014 midterm congressional elections. In the ‘ mix’ for an agreement will also be big corporate tax cuts in exchange for token, ‘smoke and mirror’ tax loophole closings, as Tax Code legislation moving through Congress comes to a concurrent vote.

Obama recent record on social security and medicare cuts includes his 2014 budget – where he cut $630 billion. On the flip side of this austerity for the poor is Obama’s largess for business, and his support for dropping the top corporate tax rate from 35% to 28%.

It is important to make clear that neither social security or medicare are facing a long term financial crisis.

A closer look at the 2014 budget and at reports by social security-medicare trustees shows that problems exist for financials of Social Security Disability Insurance (SSDI) within the social security program, however, the retirement benefits program in social security does not suffer these issues. Nevertheless, Obama is proposing to cut future social security retirement benefits. The ‘fix’ goes beyond the problem.

Similarly, problems exist with funding for Part D prescription drugs program within Medicare, which has never been funded by a tax since its inception in 2005. Under the program drug companies are allowed to price gouge everyone on drug costs – so there is need for reform. However, Medicare’s basic hospital and physicians programs – Part A and Part B, are fully funded for the next decade, and these programs should not be painted with the same brush.

It is time to get the facts straight, before the hype and lies start to flow once again in the run up to the next deficit cutting-tax cuts for the rich deal that is now on the agenda once again.

For more analysis of Obama’s 2014 Budget follow link to this June 2013 interview, on the Progressive Radio Network.

~ Jack Rasmus serves as the Chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States

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What’s Happening to the $1.2 Trillion ‘Sequester Cuts’?

October 24, 2013 by jackrasmus

What’s Happening to the $1.2 Trillion “Sequester Cuts”?

Alternative Visions Radio Show, Oct 23, 2013 on Progressive Radio Network

“Dr. Jack Rasmus provides an update on last week’s interim ‘Government Shutdown-Debt Ceiling Extension’ deal in Washington and explains the real role and strategy of the Teaparty faction in recent months and going forward to the 2014 elections. With the Teaparty no longer the driving force, now the real negotiations begin (again) between Obama/Congressional Democrats and Congressional Republicans, returning to the ‘well orchestrated dance 2.0’ laid out this past summer before the Teaparty’s intervention. Rasmus predicts there will be a government funding deal by the next January 2014 budget deadline, and there will be no repeated debt ceiling crisis on February 7, 2014. The coming Obama-Republican deal will now include major cuts to social security and medicare, and possibly more tax cuts for corporate America as well. In addition, the $500 billion in proposed sequester defense spending cuts will be further restored in the coming deal, and that restoration has in fact already begun. ”

(For a 35 min. video presentation on “Why Social Security and Medicare Are Not in Crisis”, download Jack’s presentation at: http://www.kyklosproductions.com/videos.html

Also available at http://alternativevisions.podbean.com

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Social Security & Medicare in the Cross-Hairs Again

October 21, 2013 by jackrasmus

With the interim ‘debt ceiling/government shutdown’ agreement reached last week between the Obama administration and the Teaparty-driven US House of Representatives, the real negotiations on deficit cutting—aka Austerity American Style—are about to begin again, now that the Teaparty has retreated on its demand to defund Obamacare.

A committee will now recommend further spending cuts by December 13, with a deadline in January 2014. The next debt ceiling deadline has been pushed even further out, to February 7, 2014. That means the parties will clearly now focus specifically in the coming months just on deficit cutting.

At the center of coming negotiations will be hundreds of billions of dollars in proposed cuts to social security and medicare, in exchange for a longer term debt ceiling extension beyond the November 2014 midterm congressional elections.

In the ‘ mix’ for an agreement may also be big corporate tax cuts in exchange for token, ‘smoke and mirror’ tax loophole closings, as Tax Code legislation moving through Congress comes to a concurrent vote.

Both Obama and the Republicans in the House were agreed last summer, before the Teaparty faction upset the negotiations agenda in September by injecting the Obamacare issue, to proceed toward cutting ‘entitlements’ and seeking Tax Code Overhaul.

With the Teapartyers in temporary retreat, Boehner and the Republicans have now returned to their initial strategy of this past summer of demanding entitlement cuts for a budget deal. And Obama is prepared to meet them half way, already on record to date to cut social security and medicare in his 2014 budget by $630 billion, as well as on record to cut the top corporate tax rate from 35% to 28%.

For my analysis of Obama’s 2014 Budget—which includes hundreds of billions in social security-medicare cuts—listen to my June 5, 2013 radio show, Alternative Visions, commentary at the following url:

http://prn.fm/?p=5807

See also my June 2013 blog entry and analysis of Obama’s Budget, plus the longer historical piece on US deficit cutting entitled, ‘Austerity American Style’.

It is important for readers to know that neither social security nor medicare are facing a long term financial crisis. A closer look at the 2014 budget and at reports by social security-medicare trustees shows that problems exist for financial of Social Security Disability Insurance (SSDI) within the social security program, but do not the retirement benefits program in social security. Nevertheless, Obama is proposing to cut future social security retirement benefits. Similarly, problems exist with funding for Part D prescription drugs program within medicare, which has never been funded by a tax since its inception in 2005 and under which drug companies are allowed to price gouge everyone on drug costs. But Medicare’s basic hospital and physicians, Part A and Part B, programs are fully funded for the next decade.

For a clarification of the real status of social security and medicare, watch my 35 minute video presentation earlier this year to the Progressive Democrats of America in San Francisco, on this topic. That video is available on my website at:

http://www.kyklosproductions.com/videos.html (note: click on the TV icon that is second from the top, for the PDA presentation).

It is time to get the facts straight, before the hype and lies start to flow once again in the run up to the next deficit cutting-tax cuts for the rich deal that is now on the agenda once again.

Dr. Jack Rasmus
October 21, 2013

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My Radio Show Commentary on ‘Debt Ceiling Deal 2.0’

October 17, 2013 by jackrasmus

Readers interested in a more detailed, in depth analysis of the debt ceiling deal reached October 16, 2013, can listen to my 10-16-13 radio commentary by accessing the url:

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

(or at alternativevisions.podbean.com)

The following is the summary introduction to the content of the show, the duration of which is 55 min.

“Dr. Jack Rasmus focuses on the latest debt ceiling-government shutdown negotiations in Washington, and his prediction of the past weeks that a deal would be reached. That deal appears will occur today, October 16, 2013—at least the first phase. The real negotiations now begin, Rasmus predicts, involving trading off major spending cuts targeting social security and medicare—plus more corporate tax cuts in the pending “Tax Code Overhaul” bill moving through the US House—for a still longer term debt ceiling and government budget agreement that will all occur early next year. Dr. Rasmus explains how Obamacare was never a real issue in the negotiations, and how the real strategy was deficit cuts for debt ceiling. Also explained is how the current settlement is a repeat of the August 2011 debt ceiling 1.0 agreement, cutting spending by $1 trillion, and the 2012 fiscal cliff settlement cutting spending by another $1.2 trillion (the sequester) along with $4 trillion in permanent extension of the Bush tax cuts. It represents what Dr. Rasmus calls the “Well Orchestrated Dance” (2.0) between the two wings of the ruling capitalist party. (see Dr. Rasmus’s blog, jackrasmus.com, for prior articles on the fiscal cliff of December 2012 and debt ceiling 1.0 deal of August 2011).

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The Coming Debt Ceiling Settlement 2.0

October 14, 2013 by jackrasmus

History repeats itself, but always in combinations of past events.

What today’s debt-ceiling/government shutdown dual crisis represents is a telescoping, within a time period of two months, of similar events that rolled out over an extended two year period in 2011-2012. What took two years to conclude previously, between 2011-2012, in a prior debt ceiling + deficit cutting settlement is now happening in the course of two months, September-October 2013, in today’s repeat of debt ceiling + government budget fight.

Today’s debt-ceiling 2.0 + refusal to approve a government budget October 2013 is similar to events of 2011-2012—i.e. the debt ceiling fiasco of August 2011 and the Fiscal Cliff ‘crisis’ of December 2012, consisting of trillions of dollars of sequestered spending cuts and Bush tax cut extensions.

The prediction here is that, in the settlement to the current crisis coming in the next few days, or week or so at the most, the final terms and details will likely prove remarkably similar to that concluded in August 2011 and December 2012: Massive social spending cuts combined with tax cuts for the few, in exchange for an extension of the debt ceiling and a political ‘armistice’ for Obama and Democrats until after the next Congressional elections.

The differences between the 2011-2012 and today’s 2013 settlement will be the particular focus of tax cuts and spending cuts in exchange for extending the debt ceiling.

In August 2011 the settlement was debt ceiling extension in exchange for an immediate $1 trillion in social program only spending cuts, plus another $1.2 trillion in the so-called ‘sequestered’ spending taking effect January 1, 2013. That was more than $2.2 trillion—or more than twice Obama’s original 2009 stimulus spending of $787 billion. Overlaid upon the August 2011 deal was the permanent extension of $4 trillion of the $4.6 trillion Bush tax cuts that also took effect January 1, 2013. Together the two—sequestered cuts and Bush tax cuts extension—were referred to as the ‘fiscal cliff’.

What the Republicans and its House Teaparty faction together got out of the 2011-2012 debt ceiling plus fiscal cliff settlements was a total of $6.2 trillion in spending cuts and Bush tax cuts (80% of which benefited wealthy households and investors)—$2.2 trillion in spending and another $4 trillion in tax cuts.

What Obama and the Democrats got out of the 2011-2012 deal was a politically convenient agreement in August 2011 from the Republicans not to raise the debt ceiling issue again until after the November 2012 national elections. What Obama and Democrats didn’t get was any tax hikes on the rich in August 2011 they had said was a deal breaker.

What Obama got from the December 2012 fiscal cliff part of the settlement was mere $60 billion a year in tax hikes on wealthy investors. (Actually, it was not even $60 billion, as the fiscal cliff deal included a generous liberalization of the inheritance tax for multimillionaire households, a liberalization of the Alternative Minimum Tax for them, and the ‘super-sweetener’ of the remaining $4 trillion in tax cuts now made permanent forever). Obama and democrats also failed to achieve any reduction in the $1.2 trillion sequestered spending cuts that they had expected, not believing the Republicans would allow those cuts, involving defense spending as well as social programs, to take effect. But those sequestered cuts began taking effect in March 2013. Now, post-October 2013, they are beginning to have their full negative impact on the economy.

No wonder the Teapublican faction in the Republican party eventually went along with both the 2011 debt ceiling and 2012 fiscal cliff deals. They got a big bite of the apple, and a chance for another down the road today. The Obama-Democrat ‘cave-ins’ on both the August 2011 debt ceiling agreement and subsequent fiscal cliff no doubt emboldened the faction to take the even more aggressive stance they have recently assumed in today’s crisis.

Notice in the foregoing remarks there is no reference to cutting Obamacare as key to the settlement deal today. It never was part of any deal. Last August 2013 the Republican strategy was to use the debt ceiling extension as a hammer to further pound out social spending, especially entitlements like social security and medicare, cuts that were left out of the 2011-2012 spending reductions deal of $2.2 trillion. Another difference in today’s repeat of the debt-ceiling debacle will be that the corresponding tax cuts eventually agreed to probably will focus on corporate taxes instead of individual wealthy taxes—the latter now being set up in the tax code overhaul bill moving rapidly through Congress. That tax cut part of today’s deal may also not be made public in an eventual deal, but will be agreed to in principle by the parties for when the legislation on corporate tax cuts (keyword: Tax Code Overhaul) reaches the House and Senate for a vote.

That 2011-2012 Republican-Teapublican strategy resurrected again by the Republican leadership this past August 2013 was essentially the same as its prior 2011-2012 strategy. What happened was the Teapublican faction of the party intervened in September 2013 and injected its pet provision of defunding Obamacare into the mix, thereby upsetting the timetable and the process for another second debt-ceiling/spending reduction deal this second time around. Negotiations since September may therefore be viewed as attempts by the Republican, Obama and Democrat leadership—with massive corporate lobbying and pressure in the background—trying to get the negotiations back on track with the original process and objective of debt ceiling extension for entitlement cuts plus corporate tax reduction.

The recent Teaparty grandstanding on Obamacare has been for the media and public, with the goal of enhancing their 2014 midterm election results within the Republican party as well as in general. They have now accomplished this. The Obamacare issue was never a serious possibility. They will now retreat.

In the past week a shift back to the original strategy and process—of trading off debt ceiling extension for spending (entitlement) cuts and taxes (cuts for corporate America) has begun to emerge. A weekend ago Boehner signaled such in his round of TV press show appearances. Teapublican presidential candidate, Paul Ryan, trying to keep a foot in both Teapublican and Republican leadership camps, followed Boehner with a similar focus of ‘lets focus more on general spending and entitlement cuts’ in a lengthy Wall St. Journal editorial. Even Corporate radicals like the billionaire Koch brothers, supporters and funders of various radical right causes, published a widespread commentary that Obamacare was not the real issue—that spending and tax cuts for corporations were the key issue.

And today, Senators of both parties are trotting out to give press interviews to the same effect. As conservative Republican Senator, Bob Corker of Tennessee, declared today to a Bloomberg interview: “for the past two months we’ve been focused on the wrong subject”. That correct focus “is spending cuts”.

On Monday, October 14, the real bargaining and ‘end-game’ to the current crisis began. Obama held closed door meetings with Boehner and Senate Republican leader, Mitch McConnell, and with Senate-House Democrat leaders, Harry Reid and Nancy Pelosi. Now the real deal details and terms will be hammered out. It will, this writer predicts, result in more spending cuts, especially social security, medicare and Medicaid, as well as an understanding and consensus to cut corporate taxes when the tax code overhaul bill comes to votes in Congress and for Obama’s signature.

One should not forget that Obama has been, and continues to be, a strong advocate of cutting the corporate tax rate from 35% to 28% and providing ‘relief’ for multinational corporations’ tax rates. Obama has also already indicated cuts of $630 billion in social security and medicare in his 2014 budget. This is the starting point for the ‘original process’ negotiations that have been temporarily derailed by Teapublican grandstanding, now coming to an end.

The deal may include some token concessions to Teapublicans in the House as well. Perhaps the already offered repeal of the medical device tax. Perhaps some further exemptions to Obamacare for business and wealthy individuals. A long list of such concessions to exempting and postponing parts of Obamacare have already been unilaterally made by Obama since the beginning of this year. Difficulties in the rollout of Obamacare may encourage him to agree to more. There may even be a short delay of a few months in the implementation deadline for the Obamacare act.

But the final deal to be struck in 2013 will appear more like the prior 2011-2012 deal of spending cuts and tax largesse for the wealthy. This time seniors and retirees will be the primary target of the spending cuts, while corporations get the tax cuts instead of wealthy individuals.

As this writer wrote in late 2012 when the fiscal cliff fears were being whipped up by both parties and the press, what was going on at the time was a ‘Well Orchestrated Dance’ between Obama and the Republicans. (see ‘Fiscal Cliff: A Well-Orchestrated Dance’, December 18, 2012, at the blog jackrasmus.com). A deal was inevitable by year end 2012, it was predicted.

Today the leadership of the two wings of the single corporate party have entered into final negotiations again, after a brief interruption by the Teapublicans ‘cutting into’ their cozy dance. The latter are about to leave the dance floor, however, and the well orchestrated dance now begins anew.

Dr. Jack Rasmus
Monday, October 14, 2013

Jack Rasmus is author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press, and host of the weekly online radio show, Alternative Visions, on the progressive radio network. His website is http://www.kyklosproductions.com, his blog, jackrasmus.com, and twitter handle @drjackrasmus.

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On Janet Yellen as Federal Reserve Chair

October 10, 2013 by jackrasmus

On October 9, 2013, President Obama announced his nomination of Janet Yellen, current vice-chair of the Federal Reserve, as the new Fed chair, to replace Ben Bernanke expected to retire at year’s end.

Obama’s appointment, subject to Senate confirmation that is likely, comes after a general consensus in recent weeks that Yellen would be the President’s choice. That followed weeks of heated public debate and maneuvering, identifying Yellen as the favorite of liberals in and out of Congress, and Larry Summers the prefered choice of Obama administration staffers and insiders. Summers withdrew his candidacy several weeks ago, however, under pressure from conservative elements, who viewed his role as former Obama adviser, as too liberal on fiscal spending in Obama’s administration, and liberal elements, who viewed his role as former Clinton administration Secretary of the Treasury as too accommodating to bankers and financial deregulation.

It has been interesting to watch how liberals, within and without the Obama administration in recent weeks organized aggressively on behalf of Yellen. Yellen was the ‘Fed Dove’, willing to continue Ben Bernanke’s generous free money policies of QE (quantitative easing) and near zero interest rates. In contrast, Summers was the monetary ‘hawk’ that would likely accelerate a withdrawal from QE faster. Of course, both profiles were mostly spin.

Noted liberal economists, like Paul Krugman of the New York Times, fell completely into the Yellen camp, praising her policies and more liberal credentials. Even progressives of the moderate persuasion fell for the ‘Yellen as Fed Dove’ fiction. But a closer inspection would have revealed that neither Summers nor Yellen would have departed much, if at all, from current chair Bernanke’s policies.

Those policies, in the form of QE and ‘zero bound interest rates’, since 2009 have had little if any impact or effect on the real economy—and therefore on housing recovery, jobs, or middle class incomes.

In the course of four years of both QE and zero rates, the Federal Reserve has pumped more than $13 trillion in liquidity (money) into the US and global banking system (and shadow banking system) to bailout the banks. In terms of QE alone, this occurred in at least three versions—QE1, QE2, and now currently QE3—which together will have provided by year end 2013 (along with QE 2.5—called ‘operation twist’), nearly $4 trillion of liquidity injections to bankers as well as individual wealthy investors seeking to dump their collapse subprime mortgage bonds on the Federal Reserve.

QE and the $13 trillion resulted in record booms in the stock and bond markets in the US and globally. Much of that likely flowed out of the US into the global economy, serving to stimulate real growth in emerging markets and generating financial asset speculative bubbles around the world. There is in fact a very high correlation between the announcement, introduction, and conclusion of QE programs and stock-bond, derivative, and other financial asset booms and declines since 2009. Conversely, there is virtually no such connection between housing, jobs, and other real sectors of the US economy.
Bernanke Fed monetary policies have thus boosted financial capital gains and in turn the incomes of the wealthiest in the US and globally, as real disposable income for US households has consistently declined for four consecutive years.

As recent data on income distribution from studies of economists at the University of California have shown this past summer: The wealthiest US 1% households have accrued for themselves no less than 95% of all the income gains in the US since 2009.

Yellen has been perhaps the strongest supporter of out-going Fed Chair, Ben Bernanke’s policies of QE and zero bound rates, which have directly resulted in this lopsided income inequality. So why were liberals so impressed with her as the preferred choice for next Fed chair? It certainly wasn’t for her policies. Or was it?

Perhaps some still labor under the false notion that, in the world of 21st century global finance capitalism, low interest rates create jobs. But that academic economics fiction no longer has evidence in reality. It belongs in the same trash bin with other fictions, like business tax cuts create jobs. Or that more free trade agreements , like the pending Trans-Pacific Partnership, pushed by the Obama administration and liberals, will create jobs. Here again, the empirical track record shows that neither have, or will, create jobs. Liberals nonetheless adhere to these false notions, in essence believing in the various forms of ‘trickle down’ economics. Regardless, Yellen was given the ‘dove’ tag, and therefore the liberal endorsement.

Yellen as Fed Chair will continue policies no different in content than has Ben Bernanke. Yellen will continue to pump QE into bankers and investors, stocks and bond markets, global speculators and offshore investors, as had Bernanke. If she really were liberal, she’d take the $1 trillion given them in just the past year of QE3 liquidity injections and use it to fund a government direct job creation program. That would create 20 million $50k a year jobs, and jump start the economic recovery overnight.

But the Bernanke-Yellen policy of giving that $1 trillion (and $12 trillion more) to bankers and investors will instead continue to prop up the stock, bond and other speculative financial markets. Just as Bernanke ‘chickened out’ this past summer when he rapidly backed off suggesting the $85 billion a month QE3 injections might be reduced by modest $5 billion, so too will Yellen.

There will be no fundamental change, in other words, from a Bernanke Fed to a Yellen Fed. The US Federal Reserve under its current structure and leadership is an institution serving bankers and wealthy investors. Before the Fed can ever begin serving the rest of the economy, the country and its citizens, it will have to be radically restructured.

The Federal Reserve will have to be democratized and become an institution that functions as a ‘public banking entity’, not a private banking conduit. It will then provide low money cost loans to households, small businesses, students, and workers—instead of wealthy investors, bankers, and speculators.

Instead of issuing QE for the 1%, the Fed could issue QE designed to create jobs, raise incomes, and generate a sustained economic recovery for all. But that won’t happen under a Yellen Fed. The false ‘hawk/dove’ options for leadership in the Fed Reserve reflects the U.S. political system – a dual one-party system with corporate interest at its heart. It will take a new, grassroots movement calling for real choice, and real democracy to fix our government, and institutions like the Federal Reserve.

~ Jack Rasmus serves as the Chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States

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The Economic Consequences of a US Debt Default

October 9, 2013 by jackrasmus

The economic ignorance of the Teapublican faction of the Republican party in the US House and Senate is perhaps exceeded only by the similar ignorance of its economic advisers.

Appearing in the public press in recent days is the latest ‘brilliant’ Teapublican view that a default by the US government on paying interest on its debt would not have a negative impact on the US or global economy.

Both the US and global economies are already slowing noticeably, with the Federal Reserve in the US continuing to downgrade and lower its estimates of future US growth, and the IMF doing the same for growth rates in China and the rest of the world. The Teapublicans claim a US debt default would not impact these already negative trends.

While it is true that the US government will not completely run out of money with which to pay its debts on October 17, 2013, as Treasury Secretary, Jack Lew, has publicly stated, it is equally true that it will definitely do so sometime between October 24 and early November. Thereafter, some funds will continue to come into the government, but not nearly enough to pay all its bills. That will force the Obama administration to choose between what it will pay: either bondholders who own US debt or grandma and grandpa on social security. Teapublicans no doubt want to force Obama to make that ‘Hobsons’ Choice’ (i.e. damned if you do and damned if you don’t). Teapublicans will argue he should pay the bondholders first, and forego paying social security. It’s their way to start cutting social security before they even negotiate an official reduction in it with Obama.

To quote one Teapartyer’s statement today, Republican Representative, Joe Barton, of Texas: “We have more than enough cash flow to pay interest on the public debt, so there is no way we’re gong to default on the public debt unless the president of the United States intentionally does so”.

Such statements by lesser known Teapublicans were followed up today in the business press with an article by Teapublican notable, Paul Ryan. Ryan made it clear that the focus of the debt ceiling discussion was to provoke further concessions by Obama on Social Security-Medicare cuts. US House radicals thus are attempting to put Obama in a negotiating box: either he agree to cut Obamacare or to cut Social Security-Medicare.
What the Teapublican faction in all their economic ignorance don’t understand, however, is that the psychological effects of a default—or even a near default—on the US and global economy will prove significant. One does not have to wait for a complete default for that to happen.

What then are some of the possible impacts?

First is the prospect of rising interest rates. Interest rates have already begun to rise, starting on a base that has already risen since the US Federal Reserve’s bungled attempt to signal over the past summer its intent to begin reducing (tapering) its Quantitative Easing (QE) $85 billion a month liquidity injections. That Fed ‘faux pas’ has already driven up long term rates by more than 1%, thereby causing an abrupt halt to a very timid US housing recovery earlier this year. In the past month banks and mortgage servicing companies have already announced thousands of layoffs in their mortgage departments, signaling the virtual end of that housing recovery. Further interest rate hikes, short and long term, on top of the Fed’s recent bungling—which will now certainly occur as the default approaches—will all but ensure the end of any housing recovery in the US.

Short term rate increases will most likely accelerate further throughout the month of October. That includes, in particular, Treasury bill rates which will in turn impact other rates. ‘Other rates’ include the critically important ‘Repo Market’ rates. Destabilizing the repo market is a dangerous game. It is likely the locus for the next financial crash, the analog to the subprime market that was the center of the last financial crash. Teapublicans are thus playing a dangerous game, one that may well in a worst case scenario precipitate another financial instability event on the scale of 2008.

Rising interest rates also mean the end of the latest stock price and junk bond booms. In itself, that doesn’t affect average folks much. But the psychological impact of a rapid decline in asset prices can, and does, spill over to consumer and business spending. That leads to layoffs, in a US job market that is, at best, producing only part time, temp, and low paid jobs as it is.

Rising rates and an even weaker job market in November-December will translate into slowing consumption, which is already showing signs of weakness in August-September. Retail sales in general will weaken still further as a consequence of the debt ceiling default, as will an already ‘long in the tooth’ auto sales cycle.

The negative impact of debt default on consumption is already becoming evident in recent weeks. A Gallup Poll in recent days showed consumer confidence dropping precipitously. While some argue confidence surveys are typically volatile and unreliable as indicators of consumer spending, that is not as true for abrupt and significant movements in confidence indicators. That may now be happening, as the public begins to focus on the dual crises events.

The recent Gallup poll in question fell to -35 from a prior -15. This compares to -56 during the August 2011 worst period of that prior debt ceiling debacle. During the worst period of October 2008 the index was -66. Already falling significantly early in the current crisis, one can estimate where the -35 current poll will be by October 17-24 should the crisis not be resolved by then. We will almost certainly be in the August 2011 territory, when the third quarter US GDP nearly went negative (and did so if the GDP deflator was substituted with the CPI index for that quarter).

Globally, the approaching debt ceiling crisis has already provoked widespread public responses by foreign governments, warning a potential default by the US would have dire consequences for US debt holdings and future purchases. China, Japan, and the IMF have all raised warnings in recent days. If default occurs, then US bond rates will rise even further and faster than at present, raising a real question whether they will continue to purchase US Treasury debt when the price of their holdings are declining significantly in the wake of a default.

There are also important implications of a default (or even near default) for the Eurozone’s own current economic recovery and its still very fragile banking system.

Yet another negative impact globally will be a decline in Euro exports. A default situation would result in the US currency losing value, causing a further rise in the already fast appreciating Euro currency. That trend would challenge German and Euro export growth and therefore that region’s tepid 0.3% last quarter’s recovery.

Another problem potentially to grow worse is the Euro banking system. The Eurozone’s version of QE-the LTRO liquidity injection policy of the past year amounting to more than $1.5 trillion-will soon need another LTRO II injection by the European Central Bank in a matter of months. In addition, more than $1 trillion of the LTRO I will need to be refinanced soon. Nearly all the major banks in Italy, for example, have yet to repay anything of their share of the LTRO $1.5 trillion and will need further liquidity in coming months. Rising interest rates from a debt default in the US will spill over to Europe, thus raising the costs of LTRO II, as well as the financing of much of LTRO I. That will cause further fragility in the Euro banking system and economic recovery there, especially for the highly fragile Italian banks.

For Japan, its recent export gains would also slow, at a time when it has decided to raise taxes while suspending structural economic reforms.
Currency volatility in emerging markets would also intensify from a debt default in the US, likely causing a retreat once again in real growth in those markets, just a few months after their recent ‘stop-go’ provoked by US Fed QE policy uncertainties this past summer.

Throughout the past 18 months, this writer has forewarned that a fragile US economic and global recovery-not nearly as robust as some maintain-is susceptible to a ‘double dip’ recession in 2013-14 should one or more of the following negative ‘tail events’ occur: first, a renewed banking crisis in the Eurozone or elsewhere; second, significant further deficit cutting in the US; and thirdly a continued drift upward in US long term interest rates as a consequence of QE tapering or other events. While it appears the Euro banking crisis has temporarily stabilized—except for Italian banks perhaps—the deficit cutting and interest rate trajectory in the US are very real and serious trends that may yet precipitate a descent into a double dip condition in the US economy.

And if the Teapublican faction in the US House of Representatives managers to prevent a resolution of the debt ceiling issue into the latter part of October, then the economic consequences for both the US and global economies will be severe, and may even prove sufficient to precipitate a double dip recession in the US.

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How the Debt Ceiling Affects US Economy & Markets

October 6, 2013 by jackrasmus

Transcript of Radio Interview: October 4, 2013

How Will the US Government Shutdown Impact Markets?

As the government shutdown, the stock market largely shrugged. Yesterday the Dow Jones actually rose 62 points suggesting investors don’t see the current shutdown as a long-term problem. Here with more analysis is Jack Rasmus. He’s a Political economist as well as the author of “Obama’s Economy: Recovery for the Few”

Rob Sachs, Host of Russia Radio American Edition:

‘This shutdown occurs and the stock market actually gains a little bit. It doesn’t seem to be congruent with the thoughts of what stock market would do. Why did they gain?’

Dr. Jack Rasmus:

The stock markets are more concerned with what is happening with the Fed taper of its QE and on September 17th the Fed made it very clear it was going to continue pumping 85 billion a month into the economy. That is their first and foremost major concern. Second, the markets are concerned about real data on economies in the US, Chinese, Eurozone economies, jobs, retail, sales; and what is happening with banks in Eurozone, Italy, China, manufacturing exports, emerging markets etc. Third in line of concern at the moment, I would say would be the debt ceiling situation . But that is still several weeks off, plenty of time to deal with that.

In contrast, the government shutdown really doesn’t affect markets that much, which is not surprising. The last time we had a government shutdown in 1995-1996, stocks and bond markets were totally unaffected by it and were hardly impact at all by the crisis. So it is not strange that we see the same development going on here today.

Now the real risk is if the shutdown continues for whatever reasons, which I don’t think it will, for another 2-3 weeks, and then it converges with the debt ceiling deadline. That deadline for the debt ceiling is probably closer to the end of October than the October 17th date, the Obama administration is now saying. Then you have a different scenario in terms of impact on financial markets and the US economy.

Rob Sachs:

‘We came to that before when we had this debt ceiling debate and people were saying this would be Armageddon, it is outrageous – the idea that the US would not pay its debts. But what was the role of Wall Street before in preventing that from happening? What can Wall Street do now to urge congressmen and those on Capitol Hill to come to some type of agreement?’

Dr. Jack Rasmus:

I am sure Wall St. and its lobbyists are putting increasing pressure already on politicians to come to some kind of agreement. Last time we had a debt ceiling confrontation, in August 2011, they waited till the last minute and didn’t leave themselves enough time to really lobby. But now I am sure there is a lot of intense lobbying going on at this particular stage before the October 24th or so ceiling deadline, when the government may not make an interest payment on its debt, which creates a default. That’s when a technical default happens.

I think an indicator of how things may be going as we approach that deadline will be what starts to happen with short-term interest rates. If you see the bank-to-bank federal funds rate, short term Treasury bills, or especially the bank repo market began to rise, then those rising rates will have an impact on stocks and bonds. That’s what investors are concerned about. That’s what will cost them money—not the government shutdown that impacts mostly workers and households. But I don’t see that happening at this stage. Not yet.

Rob Sachs:

‘When you look though at what is at stake, a lot of people say the shutdown is not so much a big deal but what really gets people nervous when we talk about inaction on Capitol Hill? Is it something more than just not getting a legislation passed?’

Dr. Jack Rasmus:

What makes the markets (i.e. banks and investors) nervous is they can’t necessarily count on getting paid their interest at the time it comes due should a default occur. If you don’t get paid for your investments, then you are not going to make investments. When interest rates rise in anticipation of, or a result of, a default by the government, that reduces the demand for government bonds that spills over and so forth and causes problems with rising interest rates in general. It is the translation of all this into rising rates that is important in terms of impact.

That is the key and we already see that the US economy is becoming increasingly sensitive to increases in rates, bond rates and so forth. We saw that over this past summer with the Fed trying to taper its QE buying, and how long-term interest rates immediately shut up over 1% and caused serious problems in the US and global economy. With emerging markets capital flight and so forth and the slowing of the housing market in the US. So, the global system is extremely sensitive right now to interest rate hikes after 5 years of QE. Not just long-term rates but as we will see with the debt ceiling issue, also with short-term rates if it comes to a crisis. It could all have a significant impact and more quickly than people think right now.

Rob Sachs:

‘Your book “Obama’s Economy: Recovery for the Few” talks about a lot of the benefits that we’ve seen have not been spread out and when we think about this economic recovery we’ve had, it has really not been felt in the middle class. Is that something where if we default, it is going to be impact on the middle class the most, or is this something where the stock market, these kinds of things are for investors to worry about and those who are throwing around tens of millions of dollars each day?’

Dr. Jack Rasmus:

It will primarily affect stock and bond markets and the investor class in a very short term that has a little effect on the real economy and real folks. But what could happened over time is that when investors pull back, then you have business investment pulling back, which is not that great in the US right now anyway. That starts to affect jobs, which are not really rising much at the moment, and incomes for the middle class and so forth, which are already falling in the US. For most US household we already have real disposable income declining at 1 and 1.5% per year for the last 4 years. And as recent data shows, the wealthiest 1% have accrued 95% of all the additional income gains since 2009. So, we are already growing increasingly income lopsided and consumers have a hard time spending, as we are now seeing with retail sales struggling in the US. So, this debt ceiling thing can have a important psychological impact. It can have a psychological impact on consumers and consumer spending and on businesses and business spending, and that is how it will mostly transmit into the real economy. The psychological impact is really important.

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