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Federal Reserve Policy: Past Failures & Future ‘Tail Risks’

September 6, 2013 by jackrasmus

The following is an excerpt from a longer feature article–“Larry Summers–Next Fed Chair?”, which can be accessed this weekend on my website, http://www.kyklosproductions/articles.html.

“The Fed soon plans to ‘taper’ its existing policy of QE after its next September 18 meeting. A Summers at the Fed helm will represent no major change from this. The Fed without doubt will taper later this year, but very very slowly. Instead of $85 billion a month in ‘free money’ for banksters, speculators, stock and bond traders, and the very high net worth individuals—i.e. those folks that drive the financial markets globally—the Fed may reduce that to $75 or $65 billion. Big deal. Or the Fed may try to indirectly cut back on the free money spigot by a policy of ‘reverse repos’ (don’t worry, no need to understand that financial legerdemain). But none of that will stop the banksters and company from using the remaining mountain of virtually free cash to speculate in stocks, junk bonds, foreign exchange, and derivatives to keep the ‘global money parade’ going.

The ‘wildcard’ in this monetary policy poker deck, of course, is what’s happening with the emerging markets right now. Just the talk of the Fed tapering has driven bond rates up by nearly 100% in the last few months. The 10 year T-Bond was 1.6% this past spring; it’s now 2.9% and will almost certainly go higher.

That rapid rate shift is now resulting in the trillions of dollars of Fed money injection of the past five years flowing into emerging markets, especially Indonesia, India, Brazil, Turkey and So Africa (now referred to as the ‘BITTS’). Now that mountain of liquidity (money) is flooding back to the US and Europe. That reversed flow—precipitated by the Fed’s upcoming QE policy shift—is resulting in currency collapse in these emerging markets, massive capital flight back to the west, worsening trade deficits, commodities price deflation, coming oil price inflation, and in turn what will prove a significant slowing of these countries’ real economies that will in turn further exacerbate all the above.

In other words, the locus of the global economic crisis is now quickly shifting—from Europe in particular to Asia, emerging markets, especially the BIITS (Brazil,India, Indonesia, Turkey, So. Africa).

This growing instability may result in the Fed moving toward a ‘tapering’ of QE even more carefully and slowly. But it doesn’t matter who’s leading the Fed. Whether Bernanke or Summers, or even someone else, the Fed policy will not change significantly. Again, forget any ‘Summers Effect’. Summers will do as he always has done for the banksters: ensured their interests are protected—whether offshore or in the US.

In conclusion, whomever assumes the role of Fed Chair—Summers, current Fed Vice-Chair, Janet Yellen, or some compromise candidate like Fed governor, Kohl—will have to address a new ‘tail risk’ domestically, as well as globally (e.g. emerging markets crisis).

The domestic tail risk may prove to be a US economy and economic recovery that is highly sensitive to interest rate hikes, already having risen more than 1% since June for mortgages and other loans. US monetary policy makers have experienced nearly five years during which lowering interest rates to record levels has produced very little recovery in the real economy—i.e. housing, jobs, or real investment in the US—even as those record low rates produced a boom and bubble in financial securities investments, in stocks, bonds, derivatives, etc.

It may soon be revealed that the US economy is extremely sensitive to increases in interest rates, just as it has been largely insensitive to reductions in interest rates the past five years. The markets having become addicted to free money and super-low rates for five years may act like junkies without their fix if the Fed goes ‘cold turkey’ on them. If so, and interest rates in the US rise even moderately, then the US economy’s latest tepid rebound will quickly result in yet another ‘relapse’.

Jack Rasmus, copyright, September 2013

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Interview with ‘Moral Mondays’ North Carolina Organizers

August 30, 2013 by jackrasmus

As an addendum to my just posted article immediately preceding, ‘Defending Democracy: North Carolina’s ‘Moral Mondays’ vs. Washington DC’s ‘Wistful Wednesday’–listen to my Alternative Vision radio show interview of August 28, 2013, with organizers of the Moral Mondays movement in North Carolina:

Download and listen to interview at: alternativevisions.podbean.com

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Defending Democracy: North Carolina’s ‘Moral Mondays’ vs. Washington DC’s ‘Wistful Wednesday’

August 29, 2013 by jackrasmus

On Wednesday, August 28, 2013, the 50th anniversary celebration of Dr. Martin Luther King Jr.’s 1963 March on Washington, commemorative speeches spilled out over the DC mall. From President Obama and other carefully selected political ‘notables’, speakers sought to identify themselves with King and the historic event of 1963.

In a series of carefully scripted speeches—in some cases closely edited, according to reports, to avoid any indication of calls for grass roots action or a new civil rights movement—speakers talked mostly of the great achievements in civil and democratic rights in America set in motion by the historic 1963 event.

While politicians strained to identify themselves with, and wrap themselves in, the achievements in democratic rights set in motion by King and the 1963 march, none had much to say about what practical steps should be taken to address the growing assault on democratic, civil and labor rights rapidly gaining momentum today across the land.

While some speakers lamented in general terms the growing attacks on voting and other democratic rights now spreading from state to state, most had little to say about what should be done. Instead, they mostly patted themselves on the back, saying in effect, ‘we’ve come so far, haven’t we’? ‘Yes, there’s still more to do, but we have achieved so much’.

But as they applauded and offered little, the greatest attack on democracy in America in at least a half century has continued to gain momentum.

Washington’s ‘Wishful Wednesday’

While speakers and politicians mostly congratulated themselves in Washington, in state after state laws continue to be passed and implemented imposing new limits and restrictions on democratic rights—not just for minorities but for students, the poor and the millions still effectively disenfranchised. State governments also now increasingly run roughshod over local and city-level democratically determined decisions. And at the federal level, as President Obama hailed King’s contribution to democratic rights on Wednesday, his own administration continued its daily assault on the US Constitution—in particular the 1st and 4th amendments of the Bill of Rights ensuring freedom of speech and prohibition against unnecessary search and seizure.

Attacking Voting Rights

At the forefront of the attack on democracy in the US today is the proliferation of voter rights suppression legislation at the state level. From Texas to North Carolina and beyond, attacks on the fundamental right even to vote have been spreading the past two years. But the attackers have been given a further ‘green light’ to suppress voting rights by the US Supreme Court this past June 26, 2013, in its Shelby v. Holder decision.

In that decision, the court decided the Federal government must withdraw its oversight of States’ voting procedures, as was previously required under the 1965 voting rights law. The decision has since opened a political ‘pandora’s box’, encouraging more states to introduce legislation to suppress voters’ rights and states with such laws to make them even more draconian in the future.

The Supreme Court’s June decision was more than a little ironic. In one sense, the court’s action marks the end to what might be called ‘voting rights reconstruction’ in the US, contained in the form of the 1965 voting rights act. As speakers on the mall on Wednesday, Augusts 28, 2013 were hailing the achievements of the 1963 march that led to the voting rights act, the Supreme Court just weeks before was gutting the same act just across the street from the mall.

The Supreme Court’s recent decision is historically ironic in yet a further sense. Its ending of ‘voting rights reconstruction’ embodied in the 1965 voting rights act is reminiscent of the Supreme Court’s decisions in the 1870s that bought to an end the effort to politically ‘reconstruct’ the southern confederate states following the Civil War to provide democratic rights for all. The 1870s ‘end of reconstruction’ meant a general retreat from enforcing the 13th and 14th amendments to the US constitution. Similarly, in 2013, the US Supreme Court in effect abandoned the effort to ensure voting rights for all. The attack on voters rights of course predates the Supreme Court decision. But that decision nonetheless has now provided significant encouragement to States to expand and deepen the limits on voters rights.

Key elements of voting rights suppression introduced state by state in recent years (now soon to expand no doubt) include new forms of voter ID requirements. Elimination of the right to pre-register to vote. Abolishing of Party line voting, thus ensuring conservatives and business interests get to effectively negate any third party, progressive or even liberal candidates getting nomination from their party. And new forms of ‘poll taxes’. (For example, denying families claims for dependent tax deduction for a student if the student votes at the college location instead of the parents’). For a litany of the possible tactics and measures involved in voter suppression, readers should take a look at North Carolina’s recent 50 page voter rights suppression legislation.

Many of these voting rights suppression measures are in fact ghost-written by billionaire-funded right wing organizations like ALEC, the American Legislative Exchange Council. Holding regional level conferences throughout the US during the year, ALEC essentially writes the voting rights suppression legislation, pays for state legislators and their staffers and families to come to the conferences, instructs them how to write the bills, and even provides them with the legislative boilerplate to take back and pass. If anyone thinks the power of lobbyists in state houses and Washington is a major problem, forget it. Who needs lobbyists to influence the drafting of legislation in State houses and Congress when you can write the bills for them beforehand? That’s ALEC.

But no direct or immediate challenges to the Supreme Court, to ALEC, or to the growing state level implementation of voter suppression were called for in the speeches on the Washington mall on Wednesday. Just generalities and faint references in passing to the growing problem amid grand statements as to ‘how far we’ve come since 1963’. No specific calls to direct resistance or civil disobedience—i.e. the heart of Dr. Martin Luther King’s message in 1963. Trust the politicians in Washington, we’re told. They’ll later address the problem of disappearing democratic rights in America.
They’ll protect us… But don’t bet on it.

The defense of democracy will only come from the source and location from which it originates in the first place—from the grass roots. From relying on our own independent political action—not on politicians who today are more in the employ of the wealthy and their institutions than ever before in recent memory.

Attacking Rights Beyond Voting

The growing attacks on democratic and civil rights now in the US involve not only the roll back of voting rights. Local forms of democracy are also under direct attack in the US. Cities and local jurisdictions in growing numbers are being deprived of their own basic democratic rights by governors and state legislatures from Michigan to California to North Carolina. Decisions by local citizens or their locally elected representatives are being reversed by dictate by state politicians, who more often than not are bought by wealthy and business campaign contributors or lured by the prospect of some future ‘revolving door’ job with corporate America.

Nor is the problem of democracy under increasing attack in America limited to state and local government. At the federal government level, the US Constitution’s Bill of Rights itself is increasingly the target.

Professional journalists’ first amendment rights and freedom of the press are under assault on multiple fronts by the federal government today as never before in recent memory. Obama’s own Justice Department is at the forefront of this effort, subpoenaing and forcing journalists to testify in criminal court to reveal sources—especially those associated with government employees’ whistleblowing. Once protected by law, but no longer, whistleblowers and their press contacts are subject today to a ‘full court press’ by the Obama administration. Not merely coincidental, this offensive against 1st amendment freedom of press is being orchestrated in Washington DC and the 4th district Appeals Court in the Virginia-Maryland area where the CIA, NSA, and other government security agencies reside.

The government offensive against freedom of the press has already had a chilling effect on investigative journalists, the press, and whistleblowers attempting to reveal the abuses of government. That in turn is contributing to the further ‘timidification’ of the journalist caste in the US. Is it any wonder then, given the retreat of the press from investigating the government, that citizens like Bradley Manning, Snowden, and others have chosen to act directly as whistleblowers? In times past, their whistleblowing might have been picked up by the press and communicated to the public. But no longer. At great personal risk and harm to themselves, with the public press no longer a partner, the Snowdens and Mannings have had to ‘go it alone’, fulfilling the role the public press once played in America—but does no longer.

Fourth amendment rights are also under intensifying assault at the federal level. Protections against unreasonable ‘search and seizure’, clearly protected under the 4th amendment, are being abused en masse as the federal government illegally seizes emails, phone calls, and who knows what else—for purposes yet to be fully revealed. Moreover, the National Security Agency, the NSA, and other government agencies leading this assault are busy concocting even more grandiose plans—like the yet to be fully reported ‘Gorgonstare’ program that would enable the government to video real time every person on the street in Washington DC at the same time.

As the federal government and the courts continue the attack on 1st and 4th amendment Bill of Rights guarantees, President Obama gives hypocritical speeches in Washington about the need to honor the voting rights contributions of Dr. Martin Luther King. As the Obama Justice Department initiates a token legal challenge to the attack on voter rights only in Texas, the Supreme Court’s decision goes unchallenged and more states attack local democracy and voters rights elsewhere along an expanding front.

If you want to watch democracy being rolled back, go to Washington DC. If you want to hear generalities without specifics and what won’t be done, listen to speeches on the Capitol mall. But if you want to know how people at the grass roots are actually fighting back to defend their democratic, civil, and voting rights, then go to North Carolina.

North Carolina’s ‘Moral Mondays’ Movement

As Washington politicos were applauding themselves on August 28, 2013, and wrapping themselves in the accomplishments of Dr. Martin Luther King and the 1963 March, the real fight for democracy and voters rights was taking place in protests and marches on the same day, August 28, 2013, across 13 cities in North Carolina.

Protestors and demonstrators there have formed their own independent political movement, loosely referred to as the ‘Moral Mondays’ movement. Growing out of the demonstrations in the state capitol eight years ago, grass roots popular resistance has been taking form and growing there for several years.

The recent takeover the state by a right wing governor and legislature, and the passage of a new voter rights suppression law, has energized the grass roots and the movement in North Carolina as never before in recent memory. The Moral Mondays movement now leads the fight for democracy in North Carolina and serves as a model for other similar movements now forming, or about to form, in other states that are also in the ‘cross-hairs’ of the attacks on Democracy in general and voter rights in particular.

The Moral Mondays movement in North Carolina is interesting in that while it is very localized, those local efforts have formed a federated organization. Little known and hardly reported elsewhere in the US, the protestors have engaged in a clever ‘flexible’ occupation of the state capitol that ‘occupy movement advocates’ elsewhere would do well to look into. The loosely federated groups comprising the movement consist of religious organizations, labor organizations, and other community groups, each acting independently but also uniting in common demonstrations and direct actions. They are protesting, sitting in, getting arrested and otherwise engaging in peaceful civil disobedience, proving by action and word they are the true inheritors of Dr. Martin Luther King Jr. and the true spirit of 1963—not the politicians and speakers in Washington at the commemoration on August 28. The ‘Moral Monday’s folks are the real deal. They are currently in the process of electing ‘local city-by-city assemblies’ and reaching out to others elsewhere, and have publicly announced a 14 Point Program.

In short, they have organization, they have strategy and tactics, they have a program that unites them in principle and objectives, and they are politically independent.

Based on this writer’s conversations with some of them, the North Carolina protestors know that the current attack on Democracy and voter rights in their state is about preventing resistance to the economic crisis and austerity measures being imposed on the poor, minorities, workers in that state—and the further austerity measures yet to come. Stop democracy today and you can stop resistance to the measures tomorrow, seems to be the strategy of the right wing governor and legislature in North Carolina.

The attack on Democratic rights there is both political in form and economic in objective, in other words. While draconian suppression of voting rights is taking place in North Carolina, so too is education under attack, with proposals to reduce their pay and jobs. On the employment front, more than 70,000 workers have thus far been denied unemployment insurance in the state and another 100,000 are due the same come January 2014. Meanwhile, politicians raise regressive taxes and end tax credits for lower income families while cutting taxes for corporations and businesses. Education budgets are cut by millions of dollars while vouchers are given to attend private schools. North Carolina is also a state where the governor and legislature refuse to embrace the expansion of Medicaid provided by the 2010 health care act, thus denying countless thousands of necessary health care services.

Readers interested in the 14 Point Program of the North Carolina ‘Moral Mondays’ movement, should go to the movement’s website at HKonJ.com, and see for themselves what the real fight for democracy today looks like—and then compare that to the phony Washington DC politicians and their false promises of maybe doing something some day once they are re-elected again.

Readers are also welcomed to listen to the archived interview by this writer with several leaders of the Moral Mondays movement, which also took place on Wednesday, August 28. That hour long interview is available on the Progressive Radio Network where this writer’s weekly radio show, Alternative Visions, is archived and available for download. Go to alternativevisions.podbean.com for the August 28 interview, or to the archive of the Progressive Radio Network itself.

Dr. Jack Rasmus
August 29, 2013

Dr. Rasmus is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto Press. He blogs at jackrasmus.com and his website is: http://www.kyklosproductions.com. He is the host of the Alternative Visions radio show on Wednesdays on the progressive radio network. Follow him on twitter at @drjackrasmus.

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The ‘Stop-Go’ US Economic Recovery

August 13, 2013 by jackrasmus

For the past several years, the US press, pundits, and apologists for both liberal and conservative politicians in the US have jumped at every slight indication of this or that monthly economic indicator showing improvement. The hype that followed typically declared the ‘recovery was now solidly underway’. That has been the media ‘mantra’ now for the past four years. Each time, the temporary good news was reversed, however, revealing the US economy was not on a trajectory of sustained economic recovery, but instead ‘bouncing along the bottom’, growing at a rate typically half that of recession recoveries in the past.

This summer 2013 has been no exception. Once again the drum beat continues, with press, pundits, and politicians grasping at straws to find the slightest evidence of improvement in the economy, which is subsequently spun to represent the view that a sustained economic recovery has begun. This latest view that once again ‘recovery is underway’ has been bolstered by a major redefinition of Gross Domestic Product (GDP) by the Bureau of Economic Analysis, the US government agency responsible for issuing GDP data, this past July 2013. With a ‘stroke of the pen’, GDP for 2012 was boosted by $559 billion, and the GDP rate of growth for 2012 by almost a third.

But a closer look of the US economy over the past year, July 2012 to July 2013, reveals a longer term trend of the US economy weakening, not growing—and that despite even the recent upward revisions of GDP on paper by the US government’s Bureau of Economic Analysis, BEA.

The US Economy 2012-2013

When GDP for the calendar year 2012 is considered, the US economy grew at a rate of only 2.2%–i.e. about half to two-thirds of what is considered normal growth 39 months after the official end of the recession in June 2009, compared to the 10 prior recessions in the US since 1947. Moreover, even after the revisions to GDP this past month, the US economy grew the last twelve months—between July 2012 and June 2013—at a still weaker 1.4% annual rate.

After a 3.1% growth rate in the third quarter last year, 2012, the economy nearly stalled completely in the subsequent fourth quarter 2012, October-December, when it grew a paltry 0.4%. This was followed in the first quarter 2013 by a 1.1% GDP annual rate and in the most recent 2nd quarter, April-June 2013, by 1.7%. The latter, preliminary GDP estimate, will almost certainly be revised downward to less than 1.7% in subsequent second and third GDP adjustments to come.

It is worth further noting that the very weak, declining, 1.4% rate over the last 12 consecutive months would have been even much lower had special, one-time developments not boosted GDP temporarily in the final two quarters of 2012.

For example, in the 3rd quarter 2012 GDP rose by 3.1%. But the growth was heavily determined by a one time major surge in government spending, largely defense expenditures. Politicians typically concentrate spending before national elections and 2012 was no exception. That one time surge in defense federal spending was clearly an aberration from the longer term government spending trend since 2010, which has been declining since 2011 every quarter. The same pertains to state and local government spending.
The 3rd quarter 2012 defense spending surge reverted back to its longer term trend in the 4th quarter 2012. The economy and GDP then quickly collapsed to a meager 0.4% GDP rate, after being upward revised from a -0.1% actual decline. Whether -0.1% or 0.4%, when averaged with the preceding quarter’s 3.1%, the result was about 1.7%–which has been the average annual growth for the past two and half years.

The 4th quarter would have been even lower were it not for a surge in business spending on equipment in anticipation of a possible tax hike with the ‘fiscal cliff’ negotiations scheduled to conclude on January 1, 2013. But that late 2012 business equipment spending surge also proved temporary as well, flattening out and declining in the first quarter 2013.

Another one-off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which accounted for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP (henceforth revised down to 1.8% and again to 1.1%). That one time exceptional event of inventory accumulation subsequently disappeared too in the 2nd quarter 2013.

The 2nd Quarter 2013

During April-June 2013, the US economy grew at a slightly faster 1.7%. That growth was concentrated mostly in the business investment sector of the economy, which was significantly boosted by the GDP definition changes by the BEA that focused primarily on investment changes. Investment rose by 4.6% in the second quarter. How much of that was actual investment, and how much due to government redefinition of investment, remains to be seen. But with the GDP revisions adding $559 billion to 2012 US GDP, it is likely the 2nd quarter 2013 GDP data of 1.7% growth was significantly due to the BEA’s GDP redefinitions.

Consumer spending also contributed to the most recent second quarter’s 1.7% still below-normal growth. Its contribution was driven largely by auto spending and by residential housing construction. But neither housing nor auto consumption appear will continue at prior growth rates going forward into 2013. Here’s why:

Residential housing ‘hit a wall’ in mid-June 2013, in response to Federal Reserve policy announcements and mortgage rates shooting up by more than 1% in a matter of weeks. Since mid-June, home mortgage applications have fallen for seven consecutive weeks and home refinance activity collapsed by 57% to a two year low. It may be that the contribution of residential housing to GDP hereafter will decline sharply, slowing growth in the rest of 2013. Meanwhile, commercial and government construction activity continued its 5 year stagnation and decline.

In terms of auto spending, what was a robust growth in spending on autos appears recently in July to have pulled back sharply. Only truck sales are growing, stimulated by the prior housing expansion which, as noted, may be coming to an end as interest rates almost certainly will rise further in 2013. So truck sales can be expected to slow as well.

The most fundamental, important determinant of consumer spending is wage and income growth, and that continues to decline longer term, as it has for the past four years for all but the wealthiest households. By 2012 wages share of total national income had fallen to a record low of 43.5%, down from 50% in 2000. Thus far in 2013 the decline has continued.

The most important determinant of wage growth—and consumer spending—is employment. But here the picture is not particularly positive, despite all the hype about job creation this year in the US. For the first seven months of 2013, January through July, there were about 900,000 jobs created. That is about the same number of new entrants into the US labor force, which occurs at 150,000 a month. So the economy is just barely absorbing new entrants. However, the real picture is worse in terms of job driven wage growth and consumer spending. About two-thirds of that 900,000 job growth represents part time workers, who receive half pay and no benefits. The US economy is generating low pay, service, part time and temporary jobs. Full time permanent jobs, at higher pay and with benefits, declined since January by more than 250,000. This explains much of the declining wage and income share for working class households despite the modest wage growth. To the extent consumer spending has occurred, that spending appears mostly credit and debt driven.

That leaves business Investment as the major factor in the 2nd quarter 2013 US growth picture and its already weak 1.7% growth rate. However, as previously noted, it is unclear how much of that Investment is real and how much is the result of ‘the redefinition of the meaning and magnitudes of investment activity’ as a result of government changes to GDP definitions this past month.

Two other major segments of the US economy, apart from consumption and investment, are government spending and what’s called ‘net exports’ (exports minus imports). Here the government spending picture is even less positive. Combined federal and state-local government spending continued to decline in the latest quarter, as in preceding quarters. Anticipated additional deficit cutting later in 2013 and another debt ceiling debacle, should it occur, will only add to this sector’s drag on the US economy and counter claims of sustained US economic recovery on the way.

A Scenario for the Remainder of 2013

The factors contributing to US economic growth thus far in 2013 were primarily consumer spending on residential housing and auto sales, and the aforementioned revisions to GDP investment in the second quarter.
Both housing and auto sales now face significant headwinds with rising interest rates, show initial signs of slowing, and therefore are questionable as major contributing factors to further US economic growth for the remainder of the year—especially should interest rates rise once again. Should the US Federal Reserve begins to slow its $85 billion a month money injection, as most market analysts predict will soon happen, US interest rates will rise still further.

That will not only slow consumer spending and investment further, but will raise the value of the US dollar relative to other currencies, subsequently slowing US exports and the latter’s already weak contribution to US GDP in coming months as well.

Rising rates will also dampen business investment, at a time when businesses show little interest in expanding inventories of goods on hand from current lows.

It is worth noting that the mere suggestion of the Federal Reserve reducing its $85 billion a month money injection this past June 2013 provoked a major contraction of financial markets. The US 10 year Treasury bond in real terms rose 1.3% in a matter of a few weeks. That benchmark rate has significant impact not only on housing mortgages but auto sales and other rates negatively impacting consumption and investment. Should the Fed actually start ‘tapering’ its $85 billion in coming months, as is highly likely, that will almost certainly result in a further reaction by financial markets, possibly much worse, and this time perhaps enough to slow consumption, investment and the economy still further.

Added to all this, Government spending continues to be negative force and may even worsen significantly with another round of deficit spending cuts later this year. The very strong likelihood of another fight over the deficit, Obama’s budget due October 1, funding the federal government, and over extending the debt ceiling once again, will have further negative psychological effects on the US economy in coming months.

The US economy may thus, in the immediate months ahead, confront a dual problem of Fed ‘tapering, rising interest rates, more deficit cutting, and a renewed debt ceiling fight with its negative psychological impact similar to that witnessed in 2011 during a similar event.

Finally, unknown ‘tail events’ in the global economy cannot be ignored either. The often heard prospect that the US economy will soon pull the rest of the world onto a sustained growth path is wishful thinking. The Euro economy as a whole continues to ‘bounce along the bottom’, with little or no growth in its northern ‘core’ and continuing depression in its periphery. China appears headed for a hard landing, as its own long term growth rate continues to slow and the potential grows for a real estate bubble bust of major dimensions. Other BRIC economies (Brazil, Russia, etc.) continue to struggle with a 1% average growth rate and are also ‘bouncing along the bottom’. And what was heralded as the new growth sector in the global economy only a few months, Japan’s growth rate has again slowed significantly in the most recent quarter.
In short, the longer term trend indicates the US economy is ‘bumping along the bottom’, growing most likely at no more than 1%-1.5% annually—hardly a rate to cheer about or to claim sustained economic growth has finally arrived. Contrary to the continued hype about a robust ‘snap back’ about to occur in the second half of 2013, there is little sign this will happen. The factors that have been responsible for that weak barely 1% longer term growth rate are themselves showing signs of slowing: housing spending, auto car sales, wages and household income, and government spending. And other major headwinds in terms of fiscal and monetary policies in the US, and in the broader global economy, are emerging on the horizon.

Nevertheless, the US economic recovery ‘spin machine’ continues to grind on—as it has for the past four years—declaring this time will be different and the ‘light at the end of the tunnel’ is real and not just a locomotive coming down the track.

Jack Rasmus, August 2013

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Will the AFL-CIO Restructure to Add Community Groups?

August 8, 2013 by jackrasmus

On August 8, my radio show, ALTERNATIVE VISIONS, on the Progressive Radio Network, interviewed 3 long-time union officers and activists (Steve Early, Zach Robinson, Jim Moran) in Richmond, CA, Greenville, North Carolina, and Philadelphia respectively, about AFLCIO President, Richard Trumka’s, announcement that the AFLCIO, the major union federation in the US, was in discussions with national community organizations like the NAACP, La Raza, Sierra Club to discuss allowing membership of community organizations directly into the AFL-CIO. As reported in the US press, the decision on including community organizations as federation members is scheduled for consideration at the upcoming September 2013 convention of the AFL-CIO.

According to a recent article in the July 27 Wall St. Journal, the potential organizational change will include granting community groups “decision making power” within the AFLCIO.

Dr. Jack Rasmus and guests discuss the strategic significance of the possible decision and organizational change at the top level of the AFL-CIO, raising the question: Is this a major shift in the AFL-CIO and American Union Movement that portends greater cooperative action between organized Labor in the US and community groups? Or is it just a fascade for cooperating on lobbying and electing Democrats in the 2014 midterm elections?

American unions are in deep trouble today. In 2012-13, nearly 2 million jobs were created—albeit mostly part time and temp jobs at low pay. But union jobs declined at more than 500,000 in 2012. Weekly earnings of American workers continue to decline yearly. Union defined benefit pensions continue to disappear as businesses convert them to phony 401k plans under the cover of fake corporate bankruptcies. The crisis in Detroit shows the practice is now spreading to the public sector. Union negotiated health insurance plans are under direct attack as well, as Obama’s health care law proposes a ‘tax’ of 40% on such covered plans by 2018 and employers have already launched an offensive to ‘cap’ all contributions to negotiated health plans in anticipation of the tax. Right to work anti-union laws are being pushed at state levels. Union labor may well disappear as we know it in another decade.

Jack’s guests will discuss not only the proposed changes in Union-Community cooperation by the ‘top level’ suggested by the possible changes at the coming AFL-CIO convention, but also developments at the local level in labor-community alliances and action in their geographic areas—in California, North Carolina, and Pennsylvania.

The interviews and discussion, on Dr. Rasmus’ Alternative Visions radio show, may be heard at: http://alternativevisions.podbean.com now. (And subsequently on the Progressive Radio Network, now undergoing server maintenance).

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A Final Note on U.S. GDP Revisions

August 2, 2013 by jackrasmus

On Wednesday, July 31, the Bureau of Economic Analysis, undertook a major revision of GDP statistics. The result was a major upward revision of GDP numbers for the 2nd quarter and for 2012. While the BEA revises numbers and its methods every five years, this time the revisions were extraordinary and particularly significant.

GDP for 2012, as I pointed out in my prior article, ‘Economic Recovery by Statistical Manipulation’, was raised by almost 33% as a result of the BEA revisions–from the 2.1% annual growth to 2.8%. Moreover, the consensus forecasts by economists for the recent 2nd quarter 2013, which averaged 0.9% according to the Reuters survey, came in at nearly twice that, at 1.7%, due to the revisions. This is not a normal upward revision, most of which made in previous years by the BEA had very little effect on GDP numbers.

Changes made by the BEA to the contribution of investment to GDP were especially important. As I noted in my previous article, nearly all other areas of economic sectors that make up GDP were flat or declining in the 2nd quarter. In other words, the massive upward revision to GDP in the 2nd quarter, as reported by the BEA, appears largely attributable to its revisions to how investment is defined. If how we define investment can have that big an impact on GDP, the changes should not be accepted without challenge.

My article has raised some hackles in some quarters, including among some segments of the ‘liberal left’ that continues to be apologetic for the Obama administration despite its abysmal record economically, in terms of civil rights, wars, concessions to corporations, and so forth for the past five years.

Some among them claim I am arguing there is a ‘conspiracy’ to falsely boost GDP by the Obama administration. But I nowhere raise the charge of conspiracy in my article. Notwithstanding that, those who charge me with such are rather naïve if they think that the BEA bureaucrats, before they reported such numbers, didn’t check it out first with the Obama administration and get its ok. And that it is quite likely there was even more to it than mere reporting of things to come. Who knows for sure. But with what’s going on with data these days in Washington, it’s not realistic to assume the BEA changes had nothing to do with politics. Perhaps not overtly, but tacitly and maybe even covertly.

Much of the increase in investment by the BEA’s redefinition is associated with research and development expenditures by business. The BEA previously considered R&D an ‘expense’. Now it’s an investment. Where does the slippery slope of redefining expenses as investment stop? Obama has proposed in his 2014 budget to significantly increase tax credits to businesses for R&D expenses. That will significantly boost R&D investment. That spending in turn will boost GDP still further in months to come. Does anyone naively think the two developments are completely unrelated? It’s not paranoid to raise the point. Nor is it conspiratorial. It’s just politics, in this day and age when Washington is intent on providing benefit after policy benefit to its corporate friends.

Nevertheless, my critics—some New York left liberal types in particular—insist on defending the BEA and the administration. My insistence that the 33%-50% boost to GDP numbers is not a ‘normal’ revision is dismissed as ‘paranoid’ and ‘conspiracy’ theory. They argue that the changes to investment by the BEA, producing the 33%-50% GDP increase, are reasonable. But are they?

These critics think that adding more than $500 billion to 2012 GDP is normal. They point out that the BEA revisions had little effect on long run GDP since the 1960s. That’s true. But the changes have had a big impact on GDP since the so-called end of the Great Recession in 2009, and especially in the latest 18 months. They are ‘frontloaded’, in other words, having their greatest effect on GDP during the ‘recovery’ period since 2009, during which time it has become clear neither fiscal or monetary policies have done much to generate a sustained economic recovery. So that the 33%-50% boost to GDP in the last 18 months does result in making the failure at recovery appear significantly less so. To point that out is to engage in ‘agitprop’, I’m told.

Critics also pooh pooh my point that gross domestic income, GDI, is rising faster than GDP, even though the likes of Bernanke, chair of the Federal Reserve, does not think the trend is unimportant—as I quoted him in my original article. Something of import is going on here, between gross domestic income (GDI) and gross domestic product (GDP). The historical ratios between the two are changing in the last decade. But why so, we should ask? In reply to my critics, of course incomes from capital gains, dividends, etc. are not directly included in GDP calculations. But the BEA revisions, by increasing investment, do raise corporate profits (as Dean Baker has correctly pointed out, by more than $250 billion in 2012 alone). Corporate profits then get distributed to shareholders in the form of dividends and other capital gains. Raising investment by redefinition raises profits, which raises the distribution of those profits in the form of dividends, capital gains, etc. Ok, that direction of causation is clear.

But should we raise the possibility that the direction may be reversed as well? To explore that point: it is a fact that multinational corporations, for example, now earn on average 25% of their total profits from what is called ‘portfolio investment’—i.e. from financial speculation. Some like General Electric even more. Could it be that corporations are counting more of such profits in the totals reported to the BEA, that then gets reported in GDP-GDI calculations? Doing so might permit them to claim tax reductions on those portfolio profits, just as they do on production profits. So there could be a motive for counting profits from financial speculation as part of GDI, which might explain why BEA corporate profits (and GDI) are running ahead of GDP in recent years. It’s a legitimate question to raise, and doing so is not to suggest ‘conspiracy’ or reflect ‘paranoia’.

There are serious problems with GDP reporting if GDI is somehow rising faster than the value of those goods and services themselves. But critics of my view believe that to raise such questions is to ‘insult their friends at the BEA who are all skilled and honest servants’, as one of my ‘left liberal’ critics puts it in a recent reply to my article.

There are many things wrong with GDP as a measure of how the US economy is doing. But when GDP is revised upward by a stroke of the pen by such a significant amount, we should not be overly defensive of those responsible, or of the politicians who either collude in the process or let it happen.

To say now, as the BEA is saying with its recent GDP revisions, that ‘expenses’ constitute investment is a major shift of definition of GDP. It has resulted in a record upward revision of the numbers, and a slippery slope to further false upward revisions that will follow no doubt. Perhaps the ‘expenses’ incurred in derivatives investing by multinational corporations will soon be considered ‘investment’ in the next round of BEA revisions.

Government data should not be accepted on its face value. We should be challenging it, especially when changes to it are so significant as the case of the recent GDP revisions. Doing so should not critiqued on a personal level, calling those who raise challenges ‘paranoid’ and ‘conspiracy theorists’. That’s just juvenile. We should debating these issues, not polemicizing over them.

Jack Rasmus, August 2, 2013

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

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‘Postscript’ to: Economic Recovery by Statistical Manipulation

July 31, 2013 by jackrasmus

The following is a follow up, postscript, to the US GDP numbers reported today by the US government. The postscript confirms the analysis of the preceding blog post, ‘Economic Recovery by Statistical Manipulation’.

‘Postscript’ to ‘Economic Recovery by Statistical Manipulation’

My recent article, ‘Economic Recovery by Statistical Manipulation’, written July 29, 2013, forewarned that revisions to US GDP data due on July 31 for the April-June quarter would likely show a larger GDP and growth for the US for the quarter, as well as for earlier years. GDP data published today, July 31, 2013 by the US government’s Bureau of Economic Analysis (BEA) have confirmed that prediction.

A poll of dozens of economists by the Reuters international news agency prior to the 2nd quarter GDP data release showed professional economists were collectively forecasting no more than 1% GDP growth for the 2nd quarter. As noted in our previous article, some were forecasting GDP as low as 0.5% for the quarter. The BEA’s GDP first estimate for the 2nd quarter indicates a 1.7% GDP growth. What happened to explain such a great divergence from forecasts and the BEA data?

As Reuters notes, in a follow up to the BEA release, “comprehensive revisions to the data cast the economy in a better light than previously.” Not only has the most recent quarter of GDP been boosted, from 1.1% in the first quarter of 2013 to 1.7% now in the second (compared to forecasts of 1%), but GDP for all of calendar 2012 has been revised upward as well, from the prior official 2.1% to 2.8%. That’s a 33% upward revision.

Today’s GDP revisions—which will continue henceforth to boost future GDP numbers—focus largely on boosting the contribution of business investment to GDP. The revisions have resulted in significant increases in the estimates for business investment and will continue to do so in the future. It is not necessary to bother readers with the arcane details; suffice to say that the boosts to investment totals have to do with changes in how depreciation is calculated, pension accounting, and other items. The changes in depreciation in particular have resulted in GDP upward revision.

GDP is part of what’s called the ‘National Income Accounts’. Like all accounting, there are two sides to the ledger. GDP measures the value of goods and services produced in the economy; the other side of the accounting ledger is GDI, or gross domestic income, which measures the corresponding income generated from that production. That means that the upward revision based on depreciation-driven business investment translates into an upward revision of business income in GDI.

As economist, Dean Baker, has noted in his commentary on the revisions today, “The new measure added $250 billion to depreciation in the corporate sector for 2012” and that “the profit share of net corporate output (as percent of GDP) rose to 25.5 percent in 2012, the fourth highest share in the post-war era.”

A closer inspection of the 1.7% US 2nd quarter GDP number shows almost all of the major gains in the economy came from business investment. There are four major ‘areas’ of GDP: government spending, exports in excess of imports, consumer spending, and business investment.

The Reuters commentary on today’s GDP release indicated that consumer spending (70% of the US GDP) slowed in the second quarter significantly from the first. So it doesn’t explain the 1.7% unexpected GDP rise. Similarly, government spending (typically 24% of the economy) contracted for the third straight quarter. So nothing there to justify the 1.7%. Exports rose, but imports rose faster, which translates to a negative contribution to GDP. It was mostly “a turnaround in investment in nonresidential structures and gains in outlays on equipment and intellectual products”, according to Reuters, which explains the 1.7%.

Not surprisingly, that’s the precise area in which the GDP upward revisions have been focused.

Change the way depreciation is defined, adding to corporate profits in addition to the already record growth for profits, throw in new categories of what constitutes business investment—and now you have a 30% or more higher GDP.

If you can’t generate a sustained real economic recovery for five years with past and current economic policies—then just redefine the definition of recovery itself.

Jack Rasmus
Copyright July 31, 2013

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Economic Recovery by Statistical Manipulation

July 30, 2013 by jackrasmus

Tomorrow, Wednesday July 31, 2013, the US government will release its data for US GDP for second quarter, April-June. As part of the release, it will redefine GDP and upward revise GDP results going back to 1929. It will make GDP appear larger than it really is. Read the following analysis for how and why the changes are being made, and the consequences for fiscal and monetary policies in upcoming months.

“Facing the prospect of a 2nd quarter GDP report showing economic growth less than 1% (some professional forecasting services predict as low as 0.5%), and a year to year growth of the US economy likely to come in at barely 1%–compared to a 2011-12 already tepid 1.7%–the Obama administration on Wednesday, July 31, will announce a major revision of how it calculates GDP which will bump up GDP numbers by as much as 3% according to some estimates. That’s one way to make it appear the US economy is finally recovering again, when all other fiscal-monetary policies since 2009 have actually failed to produce a sustained recovery.

Wednesday’s GDP definition revisions is not the first time that politicians, failing in their policies, have simply rewritten the numbers to make the failure ‘go away’. But this time, the GDP revisions will be made going all the way back to 1929. So watch for the slowing US economy GDP numbers from last October 2012 onward to be significantly revised upward.

Instead of an actual, paltry 0.4% GDP growth rate in the fourth quarter of 2012, a weak 1.6% in the first quarter 2013, and the projected 0.5%-1% for the 2nd quarter 2013—all the numbers will be revised higher in the coming GDP estimate for the 2nd quarter 2013. The true GDP growth rate of the most recent April-June 2013 period, projected as low as 0.5% by some professional macroeconmic forecasters, might not thus get reported.

President Bill Clinton played fast and loose with economic statistics as well at the end of his term, redefining who was uninsured in terms of health care coverage. The total of 50 million uninsured at the end of the 1990s, was reduced to 40 million—after having risen by ten million during his eight years in office. Today, they still claim there are only 50 million without health insurance coverage, despite the ten million more becoming unemployed since the Great Recession began in 2007, tens of millions of population increase in the US, and millions more having left the labor force.

Similarly, under President Reagan in the 1980s a raft of government statistics were ‘revised’. Unemployment in particular was revised downward by various means to make it appear fewer were jobless in the wake of the 1981-82 recession. Changes were made to inflation data as well to make it appear lower than it was, and to how manufacturing was defined to make it appear that the mass exodus of manufacturing ‘offshoring’ of jobs was not as great as it was in fact.

This writer has been forewarning of this radical shift in GDP definition since earlier this year, in a series of analyses on US GDP numbers over the past year, July 2012-June 2013, in which the warning was raised the US economy was slowing significantly—from its already weak historical 2011-2012 annual growth rates of less than 2% to around half at 1% (see my blog entries at jackrasmus.com). The point was raised the Obama administration appears may use the 5 year scheduled GDP revisions to boost the appearance of the slowing US economy.

The government agency, the Bureau of Economic Analysis, responsible for the GDP numbers will explain the GDP methodology changes this week, and this writer will provide a follow up analysis of the revisions. Some initial indications have appeared in the business press as to how and why the changes are being made in GDP.

One explanation is that Gross Domestic Income (GDI) has been running well ahead of GDP (Gross Domestic Product). GDP is supposed to measure the value of goods and services produced in the US, while GDI is a measure of the income generated in the US. They are supposed to be about equal, with some adjustments for capital consumption and foreign net income flows. The idea is whatever is produced in terms of goods and services generates a roughly equivalent income. However, it appears income (GDI) is rising faster than GDP output. The BEA revisions therefore appear aimed at raising GDP to the higher GDI levels.

But income is rising faster because investors, wealthy households (2%), and their corporations are increasing their income at an accelerating pace from financial securities investments—that don’t show up in GDP calculations which consider only production of real goods and services and exclude financial securities income like stocks, bonds, and derivatives. So instead of adjusting GDI downward, the BEA will raise GDP. It appears from early press indications it will do this by reducing deductions from GDP due to research and development and by now counting some kinds of financial investments as GDP.

When GDP was developed back in the 1930s, economists purposely left out financial assets’ price appreciation in the determination of GDP. Such assets did not reflect real production of goods and services, it was determined. But today in the 21st century, massive gains in capital incomes increasingly come from financial asset appreciation. Even many non-financial corporations now accumulate up to 25% of their total profits from what are called ‘portfolio investments’—i.e. financial asset speculation. Like profits from real production, that gets distributed to shareholders in the form of capital gains, dividends, stock buybacks, etc. That corporate profits and other forms of non-corporate business income also ends up in reported ‘Gross Domestic Income’, or GDI. As GDI rises in relation to GDP, the government’s answer is to conveniently revise GDP upward to better track GDI. But that doesn’t represent real economic growth and does represent a false recovery when measured in terms of new GDP revisions.

If GDP is revised upward, a host of other government data will have to revise up as well. That will likely include employment numbers as well. How reliable will be future jobs numbers, not just GDP numbers, is therefore a reasonable question.

Apart from making it appear the US economy is doing better than it in fact is, what are the motivations for the forthcoming redefinition of GDP, one should ask?

For one thing, it will make it appear that US federal spending as a share of GDP is less than it is and that US federal debt as a share of GDP is less than it is. That adds ammunition to the Obama administration as it heads into a major confrontation with the US House of Representatives, controlled by radical Republicans, over the coming 2014 budget and debt ceiling negotiations again in a couple of months. It also will assist the joint Obama-US House effort to cut corporate taxes by hundreds of billions of dollars more, as legislation for the same now moves rapidly through Congress in time for the budget-debt ceiling negotiations.

Revising GDP also enables the Federal Reserve to justify its plans to slow its $85 billion a month liquidity injections (quantitative easing, QE) into the banks and private investors. This ‘tapering’ was raised as a possibility last June, and set off a firestorm of financial asset price declines in a matter of days, forcing the Fed to quickly retreat. But the Fed and global bankers know QE is starting to destabilize the global economy in serious ways and both, along with the Obama administration, are looking for ways to slow and ‘taper’ its magnitude—i.e. slow the $85 billion. Redefining GDP upward, along with upward revisions to jobs in coming months, will allow the Fed to revisit ‘tapering’ after September, when the budget-debt ceiling-corporate tax cut deals are concluded between Obama and the US House Republicans. (see my lengthy article, ‘Austerity American Style’ , on this).

The Fed has stated it will begin to reduce its QE when the economy shows more growth and unemployment numbers come down to 6.5%, from the current roughly 7.5% low-ball estimate. (Other government data show unemployment at more than 14%, but politicians and the press ignore that number). Revising GDP upward will thus provide the Fed with an argument to start ‘tapering’. Fed Chairman, Ben Bernanke, is quite aware of the usefulness of the projected revisions, moreover. In his recent testimony to Congress he specifically noted that the economy was growing better than (old) GDP numbers indicate if the higher Gross Domestic Income (GDI) is considered.
It is ironic somewhat that what we are about to witness with the GDP revisions is a recognition that the economic recovery since 2009 has been a recovery for corporate profits and capital incomes, stock and bond markets, derivatives and other forms of income from financial speculation—all now at record levels—while weekly earnings for the rest continue to decline for the past four years. What the GDP revisions reflect is an attempt to adjust upward GDP to reflect in various ways the gains on financial side of the economy, the gains in income for the few and their corporations.

When you can’t get the economy going otherwise, just change the definitions and how you calculate it all. Manipulate the statistics—just as Clinton did before and Reagan even before that.

Dr. Jack Rasmus
July 29, 2013

Jack is Professor of Political Economy at St. Marys College and the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, Pluto books, and host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network. His blog is jackrasmus.com, website: http://www.kyklosproductions.com, and twitter handle, #drjackrasmus.

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Obama’s Speaking Tour: More ‘Talk the Talk’ Again

July 22, 2013 by jackrasmus

This coming week and next, President Obama is reportedly planning to make a series of speeches on the economy. The deeper purpose of his coming speaking tour, however, is to stake out his position for the upcoming budget and deficit cutting battle that this writer has been predicting will occur within the next few months, as both the new budget year begins October 1 and a new ‘debt ceiling’ extension deadline concurrently approaches .

The hiatus in deficit cutting—aka ‘Austerity American Style’—that has characterized recent month is now coming to an end. A new round of austerity negotiations between the administration and radical conservatives in the US House of Representatives is about to begin. (For a deeper analysis, see this writer’s recent article entitled ‘Austerity American Style’ in the July issue of Against the Current magazine, as well as on the blog, jackrasmus.com).

Obama’s new Treasury Secretary, Jack Lew, provided the administration’s first ‘shot across the bow’ last week, announcing that the administration would not tolerate another ‘debt ceiling crisis’ in the coming months like that which occurred in August 2011. Once again, as in the past, House Republicans simply shrugged, having recently cut food stamps for millions and engineering a phony agreement on student debt interest payments.

In the first August 2011 debt ceiling fight, the crisis was ‘resolved’ by the Obama administration agreeing to cut $2.2 trillion in spending-only—$1 trillion of which took immediate effect and another $1.2 trillion implemented this past March 2013 in the form of the ‘sequester’ spending-only cuts. In between the two $1 trillion and $1.2 trillion in spending cut events, Obama agreed to raise personal income taxes a mere $.6 trillion on just the wealthiest 0.7% households instead of on the wealthiest 2% he promised during the 2012 elections.

As part of the token $.6 trillion in tax hikes for the wealthiest 0.7%, Obama agreed to eliminate the Alternative Minimum Tax altogether and to reduce the Inheritance Tax even more than under George W. Bush. The $.6 trillion, or $60 billion a year, tax hike on the super-wealthy will thus prove over the coming decade to be no more than a ‘smoke and mirrors’ increase in the personal income tax on the wealthy—with additional massive tax cuts still to come for the wealthy and their corporations forthcoming with the Tax Code overhaul now working its way through Congress.

To date the total deficit reduction therefore amounts to $2.8 trillion. That leaves a remaining $1.6 trillion in deficit reduction to go in order to reach Obama’s original Simpson-Bowles 2010 Deficit Commission’s recommendations of $4.4 trillion in deficit reduction for the next decade.
However, this past March Obama’s 2014 initial budget proposed to cut another $630 billion in Social Security and Medicare, thereby raising the total in deficit reduction enacted or conceded by the administration to $3.4 trillion. Safely assuming at least that much will occur in further social security and medicare spending reduction, that leaves about $1 trillion minimum in still further cuts to be negotiated in the renewed deficit debates that will soon unfold in the next few months.

As this writer argued in numerous blog entries the past seven months, the temporary hiatus in deficit cutting occurred as both parties—House Republican radicals and Obama and Senate Democrats—await the historic tax code change legislation now working its way on a fast track through the House Ways & Means Committee.

That tax code bill will include massive additional cuts in corporate income taxes, especially in the top corporate tax rate and in taxing of multinational corporations, who are currently hoarding $1.9 trillion in cash in their foreign subsidiaries in order to avoid paying corporate taxes. Corporations want—and Obama agreed during the recent national elections—to reduce their top corporate rate from 35% to 28% or less. They argue that the 35% rate is the highest among advanced economies. What they don’t say, and the press conveniently ignores repeatedly, is that US corporations’ actual effective rate is a mere 12% of total profits—i.e. the lowest among advanced economies. Or that that 12% rate is about half that which they previously annually paid between 1989-2008.

Notwithstanding all that, both Obama and the House radicals will agree on a massive tax code change in the coming months that will include hundreds of billions more in tax cuts for Corporate America. That in turn will mean that more than $1 trillion ($4.4 Simpson-Bowles target minus $3.4 spending cuts to date) will be demanded by House Republicans. That means more than Obama’s already proposed $630 billion in social security-medicare cuts will be on the bargaining table, and that significant middle class tax hikes will be as well.

More spending cuts and middle income tax hikes are thus on the agenda. They will come at a time that the US economy is clearly faltering once again and the global economy continues to weaken even more as well.
Contrary to the continuing media hype since the beginning of 2013, the US economy has been slowing significantly over the past year, growing on average less than 1% annually when special, one time effects like a pre-election defense spending surge last July-September, and a similar one time inventory spending blip January-March 2013, are backed out of US GDP results this past year.

In the next few weeks, 2nd Quarter GDP results will show an economy growing at less than 1%, as this writer forecast last May. (See ‘Predicting the US and Global Economy’, Z Magazine, July 2013, and in previous blog analyses of US GDP trends over the past year.)

US Federal Reserve missteps this past June 2013, attempting prematurely to reduce the $85 billion in monthly free money injections to banks, investors and stock-bond market speculators resulted in mortgage interest rates rising by more than 1% in just a matter of weeks, bringing the very fragile US housing sector recent recovery to a virtual halt. And despite the Fed turning on the free money spigot in July once again, banks will almost certainly keep mortgage interest rates at the higher rate, thus ensuring a further slowdown in residential housing that stalled last month and the continuing depression in commercial construction that has been the rule since 2009.

Meanwhile, US manufacturing and exports continue to follow the global downward trend, and household consumer income continues to decline in real terms, now showing up once more in stagnating retail sales. The much-hyped recent US job creation is, upon deeper inspection of trends, almost totally part time and temporary jobs since January 2013. Of the approximate 750,000 new jobs created, more than 550,000 were part time (and at least another 100,000 temp jobs)—all of which mean low paid and no benefits. Over the same period, more than 240,000 full time jobs were eliminated. Not surprising, recent studies show that 60% of jobs lost since the recession have been high paid (over $18hr) while 58% of the jobs created have been low paid (less than $13.hr.). No wonder union membership (higher paying jobs) fell by 500,000 the past year as several million low quality jobs have been created.

On the business front, as recent data shows, business spending on inventories continues to decline sharply, fixed investment is diverted to offshore or to financial securities speculation, and corporations’ multi-trillion dollar cash hoard is spent on dividend payouts to stockholders, stock buybacks to raise stock prices to still further record levels, or diverted to overseas subsidiaries to avoid paying US taxes.

In this context of slowing US economy across the board, the Obama administration and House Republican radicals again approach another round of deficit spending cuts and still more tax cuts for the rich and their corporations. Social Security, Medicare, Medicaid and Education cuts will be high on the agenda, as well as ‘broadening’ the tax base—i.e. tax hikes on middle class households. As Obamacare appears to encounter increasing problems of implementation, and the administration itself begins to retreat on its implementation, renewed efforts by House Radicals to dismantle it piece by piece will no doubt intensify and become a major item of further spending cuts as well in upcoming deficit negotiations.

As this writer has argued the past 18 months, another major round of deficit spending cuts in the US and/or banking crisis in Europe will all but ensure the US descent into a double dip recession in 2013-14. And as recent Federal Reserve attempts to ‘taper’ the $85 billion free money injection show, an emerging third factor potentially precipitating another recession could be a renewed effort by the Federal Reserve after September 2013 once again to try to withdraw the free money ‘cocaine’ to which bankers and investors appear now increasingly addicted.

Anyone who believes the US economy is about to enjoy a sustained recovery had better think again, and look to the real details and not the hype about the US economy by media and politicians. They had better prepare for a deeper attack on social security, medicare, and education spending in the coming months. They had better resurrect the fight for ‘medicare for all’ as the only solution as Obamacare continues to unravel by 2016, or else accept the inevitability of Republican radicals’ drive for full privatization of healthcare, vouchers, and health services rationing for all but the wealthy. They had better make up their minds if they want a ‘new normal’ economy with only part time and temp low paid jobs and declining real incomes for the vast majority of households, while the wealthy continue to reap ever higher incomes from continuing record gains in stocks, bonds, and other financial investments.

In his forthcoming speeches and tour, Obama will talk in generalities about helping the middle class, inadequate incomes, hype up false job gains, refer to what is a fictitious housing recovery, brag about declining government deficits, and tell us how he won’t tolerate another debt ceiling debacle. But we’ve heard the same talk now for five years. Yes, the Republican House is much to blame for the continuing stagnation of the US economy and the falling incomes and wages for all but the wealthiest households. But so too is Obama and the Democrats, having backed off and conceded time and again to House Republicans’ retrograde demands and policies—too often making concessions unilaterally to appease conservatives and radicals. Expect more of the same, notwithstanding the optimistic ‘speech-talk’ that Obama will soon deliver yet again, as a prelude to his concessions once again that will undoubtedly follow.

We’ve seen his ‘talk and no walk’ scenario now several times since 2008. There’s no reason to assume the ‘leopard will change his spots’, so to speak. To continue the metaphor, the latest leap from his tree to snatch a small piece of political prey will result in abandoning the opportunity once again when challenged, scurrying back to a safe place out on some limb.

Meanwhile, the US economy slips slowly further toward the precipice of recession in 2013-14. Should that happen in 2014, another mid-term election fiasco for Democrats will likely follow next November 2014. It is quite possible, and increasingly so, given that far more Democrats are up for election in the next round that Democrats will lose control of the Senate. Then the real attack on the middle class, retirees, unions, healthcare, education, and workers in general will begin that will make recent events since 2010 pale in comparison.

As in the fall of 2010, this fall, 2013, represents a key juncture in economic and political events that will have implications for years to come. Obama’s adoption of corporate-driven policies in the summer of 2010, especially on the jobs and housing front, led to his major defeat in the 2010 midterms, resulting in losing control of the House of Representatives with consequences we have been experiencing ever since in terms of austerity for the majority in the US amidst record gains in incomes for the rich and corporate profits. A similar historical repeat may occur in the coming months, with a consequent loss of the Senate and even worse consequences.

If so, it will prove conclusively that the only way out of the continuing crisis is independent political action and new forms of national and local political organization.

Jack Rasmus,
July 22, 2013

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, Pluto books, 2012, and host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network. He blogs at jackrasmus.com. His website is http://www.kyklosproductions.com and twitter handle, #drjackrasmus.

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On Fed Chairman Bernanke’s Testimony to Congress

July 19, 2013 by jackrasmus

 

On Fed Chairman Bernanke’s Testimony to Congress

July 19, 2013 by jackrasmus

Federal Reserve Chairman, Ben Bernanke, testified to both houses of Congress this week. The focus was his plan concerning continuing current Quantitative Easing (QE 3) policies, or to begin ‘tapering’ (reducing) the $85 billion a month of printed money injection into the financial system and prospects for continued low interest rates.

Dr. Rasmus was interviewed by the Voice of Russia radio on friday, July 19, to provide his analysis of what Bernanke said.

Dr. Rasmus noted his analysis of Bernanke’s testimony confirms his predictions of March 2012 (see his blog, March 2012, entry at jackrasmus.com, ‘Are Capitalists Addicted to Central Bank Free Money’), which maintain that financial investors (banks, shadow banks, investors) have become increasingly addicted to free money from the Fed.

In the interview with Russia Radio, Dr. Rasmus notes that just a month ago, in June, Bernanke suggested that QE 3 purchases by the FED may have to be slowed at some point in the future. The response of investors to just the prospect of ending the free money (QE3) was to set off a near panic in stocks, bonds, and other financial asset prices. Financial asset prices fell across the board rapidly, and interest rates in turn rose across nearly all asset classes by a percent or more in just a matter of weeks.

In response to the possibility of a more sustained financial asset price collapse, Federal Reserve governors, colleagues of Bernanke at the Fed, quickly reassured financial markets within days that the Fed was not going to reduce the $85 billion, as Bernanke implied in June.

Markets quickly again turned around, surging to new highs in July. As Dr. Rasmus pointed out in the interview, Bernanke confirmed his Board of Governors’ statements in recent weeks, in his own testimony to Congress this past week.

In response, financial bubbles continue to move ahead once again as a result of Fed and other central banks’ continuation of free money policies for bankers and investors. The same policies in turn are becoming increasingly ineffective in stimulating the real economy, while provoking bubbles on the financial side. It is a situation that cannot be sustained, argues Rasmus in the interview. As he notes: at some point the Fed will once again have to confront the prospect of reducing QE and raising interest rates. That will likely provoke another asset price contraction of major proportions, as occurred in June, at some future date and result in turn in an additional negative impact on the real economy in the US and globally, with Europe already stagnating in recession and depression in the periphery, China growth rates slowing significantly, and the US GDP growth slowing to less than 1% in the most recent April-June 2013 period(as forthcoming GDP figures will soon reveal).

The central policy tool–monetary policies of QE and near zero interest rates–of US and global capitalist policy makers is running out of steam and becoming more counter-productive by the month. Meanwhile, degrees of austerity fiscal policies in the US and EU continue. The prospect for future US and global economic recovery is growing increasingly questionable.

FOR THE FULL INTERVIEW WITH RUSSIA RADIO, click on the following url:

http://voicerussia.com/radio_broadcast/61124198/118222702.html

 

Dr. Jack Rasmus,

‘Shadow’ Chairman for the FED, Green Shadow Cabinet

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