Posts Tagged ‘austerity’

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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This writer has recently had published an 8,000 word pamphlet, ‘Austerity American Style’, that expands in depth on prior posts on this blog on ‘Obama’s Budget’ , sequestration, and fiscal cliff. The article-pamphlet provides a summary of deficit cutting in the USA, aka ‘Austerity American Style’, since 2010 and predicts further upcoming austerity measures in the US later this year, including cuts in social security, medicare, tax hikes on the middle class, and massive tax cuts for corporations as part of the deal. The pamphlet concludes with recommendations for independent political action, including formation of nationwide ‘social security defense clubs’ and a march on Washington DC to protest and stop the measures. For the full length pamphlet-article, go to the author’s website at:


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It’s now been more than a week since the Cyprus banking crisis erupted, and patterns are beginning to appear for the Eurozone and greater global financial system that are of some interest.

As predicted by this writer in a commentary on the Cyprus crisis earlier in April , the condition in Cyprus continues to worsen by the day.  What was initially estimated to cost 7 billion Euros to Cyprus  in order to obtain an additional 10 billion euro bailout by the European ‘Troika’ (i.e. Euro Commission, IMF, and ESM fund), rose last week to a 13 billion Euros cost to Cyprus.  ‘Cost’ means the government of Cyprus must raise taxes, increase spending cuts, and accelerate the sell off of government assets. 

But that’s not all. Since the Cyprus crisis represents not just a government debt crisis but clearly, first and foremost, a banking crisis, the additional cost required by the ‘Troika’  is to make depositors in Cyprus’s two main banks pay for the bailout in part as well—in the form of an expropriation of their savings deposits.

The Cyprus situation therefore represents a strategic shift by big Euro bankers, by their executive committee the Troika, and by Euro government policymakers in general. It is a recognition that prior policy solutions, of austerity fiscal policies and liquidity injection monetary policies, will likely not prove sufficient in the event of another banking crisis elsewhere in Europe to keep the Euro banking system afloat.  Confiscation of depositors’ savings are therefore now projected to serve as a ‘third way’ to pay for Troika engineered banking bail outs.

When the Cyprus crisis first erupted, Eurozone financial minister, Djisselboem, let the cat out of the bag by letting it slip in a public comment to the press that confiscation of part of Cyprus depositors savings (called ‘bail ins’) now represented the ‘template’, as he put it, for future euro bank bailouts.  He quickly back-tracked, however, since to publicly admit such was to encourage an old-fashioned retail ‘run on the banks’, not only in Cyprus but potentially in the Eurozone periphery of Spain, Portugal, Ireland, Greece, and even Italy—not to mention in the latest banking instability event now emerging in Slovenia.


The Troika therefore quickly clarified Djisselboem’s statement, and amended its initial position that all Cyprus depositors’ savings would have to contribute in part to pay for bailouts, adopting the position that only depositors with 100,000 euros or more in the bank of Cyprus would have to pay. 

At last count, as of last week estimates were that only depositors with 100,000 or more Euros ($130,000) in the remaining Bank of Cyprus could expect a ‘haircut’–up to 60% of their deposit balances. 

But that was a week ago, at the beginning of April.  By mid-April the situation has no doubt deteriorated further.  That means the cost of bailout continues to rise daily, before the ink has even dried on the 23 billion Euro bailout deal.  That in turn means the 60% confiscation of depositors with more than 100,000 Euros will have to be further raised, the Troika will have to provide more than 10 billion euros bailout, or that the exemption of savers with deposits less than 100,000 euros will eventually have to start paying something as well.

The situation in Cyprus in terms of both government and bank bailouts will inevitably grow worse. Why? Because the real economy will now continue to grow worse.  Austerity will mean even less government revenue collection and thus even greater government debt cost.  More Troika bailout funding will increase that debt cost still further.  The parallel on-going bank crisis in Cyprus will also grow worse, as depositors withdraw as much money as quickly as possible from the Cyprus bank and start hoarding it and/or find ways to move it out of the country,  notwithstanding recent controls imposed on withdrawals and capital flight. 

To put it in economist jargon, money supply in the system will collapse despite the Troika bailout, as money demand and money hoarding escalate and money velocity plummets.  Bank lending to business will dry up. Further layoffs will occur. Unemployment will rapidly reach depression levels in excess of 20%, and tax revenues correspondingly fall even further.  With depression, prices will collapse. Debt and deflation will lead to more business and consumer defaults.

In a futile attempt to stem the collapse of money and the economy in the private sector, the Cyprus government in early April initially instituted draconian controls on bank deposit withdrawals and money transfer from the country.  The government has recently announced these initial limits and controls are now being tightened further, and extended to the end of May. Limits and controls on withdrawals of deposits and money transfer will remain for quite some time. That means a two tier Euro system, with Euros in Cyprus worth far less than Euros elsewhere.

Over the next six weeks the situation in Cyprus will deteriorate significantly. By this summer, the cost of the Cyprus bailout could rise to 30 billion, from the current 23 billion total.  The Troika will have to add more bailout, the Cyprus government introduce even more draconian austerity measures, and depositors will have to pay even more—or some combination of all the above.

Elsewhere in Europe, calls are consequently rising for the EU to provide additional funds to Cyprus out of the Eurozone’s  ‘structural fund’, i.e. its long term infrastructure spending assistance fund available to Eurozone members, as an emergency solution.  But such funding assistance will amount to ‘too little too late’ to make a difference to the downward spiral that will continue to hit Cyprus over the coming months.  Moreover, if and when structured funds are made available to Cyprus, much could simply be hoarded by lenders and investors, given the dire economic situation in Cyprus, and therefore have little positive effect.

Last week the Euro financial ministers met in Dublin, in part to deal with the Cyprus situation and in part to address continuing debt problems elsewhere in the periphery as well as weakening of banks in the Euro ‘core’ economies. They quickly agreed in the midst of last week’s worsening events in Cyprus to extend terms of bailout payments by Portugal, Ireland and Spain for several more years. Absence the Cyprus events, the Euro financial ministers would no doubt have been tougher with Portugal and the others, requiring them to introduce even more austerity measures in exchange for extending the debt payment schedules.  That they didn’t take that hard line is an indication they recognize the banking situation throughout the Eurozone is continuing to deteriorate.

On the agenda in Dublin as well was the question of establishing a true banking union in the Eurozone and broader EU.  Little was accomplished on that question, however. Unlike the US central bank, the Federal Reserve, or the Bank of England or Bank of Japan, the European Central Bank, ECB, is not a true central bank.  It can only engage in central bank money injection and bail out of individual banks in trouble if all the financial ministers of the Eurozone countries (i.e. their respective central banks) agree to allow the ECB to do so.  Thus, unlike the US, UK, or Japan, the ECB cannot engage in a massive liquidity injection in the form of ‘Quantitative Easing’, or QE, as a means to engineer bank bailouts. The Eurozone in part must therefore lean more toward confiscating depositors’ savings in the banks in trouble as a solution.

Last summer 2012, ECB head, Mario Draghi, promised to move forward on a banking union and the first step toward such a union, the establishment of the ECB as a true ‘banking supervisor’ of private sector banks. That temporarily quelled last year’s Euro banking crisis.  But it was apparently mostly just talk and mere talk can only last so long.  As was made clear from the recent Dublin meeting of Euro financial ministers, the Eurozone has made little to no progress toward even granting the ECB ‘banking supervisor’ powers—i.e. a necessary precondition to becoming a true central bank. Nor is that likely to happen before the next German national elections in September 2013, or even after. Germany will continue to thwart and oppose the ECB assuming central bank-like supervision powers or becoming a true central bank capable of independently introdcuing massive QE injections.  Germany in its present position can far better call the shots on the entire Eurozone economy.  Giving authority to a true ECB central bank would only dilute its present authority and role.  So don’t expect any real changes in the Eurozone, Mario Draghi’s pronouncements notwithstanding.

All that likely means that the Euro banking system in general will continue to drift toward more instability.  Watch for Slovenia as the next crisis center. And behind the scenes, investors throughout the Eurozone’s periphery are no doubt looking at Cyprus and preparing to move their money out of their own national banks in Spain, Portugal, and elsewhere in anticipation of likely ‘depositors’ confiscations’ should a banking crisis erupt in their respective countries. That money will most likely flow into Germany, New York, or even Tokyo.

Meanwhile, elsewhere globally the US, the UK, and now Japan continue their headlong rush toward ever more quantitative easing, QE—that is liquidity injection to banks, shadow banks, and wealthy private investors—by printing money. 

The US has led the way with multi-trillions of QE, continuing at the rate of $80 billion a month with no end in sight.  The Bank of Japan has just announced its equivalent, even larger than the US QE, per its GDP, and soon the Bank of England will announce another round of QE when its new chair, Mark Carney, comes on board this summer. Outside Europe, capitalists are clearly rolling the dice on QE as the solution.

It is becoming increasingly clear in fact that global policy makers and capitalists are moving toward a general policy mix of ever more QE combined with continuing fiscal austerity.  But austerity is clearly causing problems and is a drag on economic recovery. QE is also having a net negative effect on real economic growth and financial instability, contrary to its announced intent, as will be explained in a subsequent article by this writer. 

Without the option of a true QE, the Eurozone has had to rely more on austerity. In contrast to Europe, the US has relied more on QE and is only now moving toward more fiscal austerity after putting that on hold during the 2012 election year.  The UK has introduced austerity and a moderate QE policy, neither of which has prevented it from descending into recession again. Japan initially did nothing, neither QE or austerity, but is now betting heavily on a massive QE policy that has begun to roil financial markets globally and intensify an emerging ‘currency war’ via QE-driven competitive currency devaluations.

So all are major capitalist sectors globally are converging  toward ‘Austerity + QE’ as the policy solution.  But neither QE or Austerity will resurrect the global economy as it drifts toward slower growth, more recessions, and more banking instability in the months ahead.

A growing focus on confiscating depositors savings will therefore become more of an option by all over the longer run. Not just in Cyprus. Not even just in the Europe. But in the US as well. Confidential memos recently released show plans by the US FDIC and the Bank of England in a meeting last December 2012 open to the idea of confiscating depositors’ savings as yet another means by which to bail out banks in the event of another banking crisis.

But more on the contradictions of QE, ‘Austerity American Style’, and bank savings confiscations in a follow up to this article.

Jack Rasmus
April 16, 2013

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The following is the first of a 3 part serialized article by the same title that appears in the September 1, 2012 issue of ‘Z’ Magazine.







What is the Eurozone and what does it mean to say it is in ‘crisis’? The Eurozone (EZ) is the collection of 17 european economies sharing a common currency, the ‘Euro’. The meaning of the term, crisis, does not refer to a condition that is simply serious or even severe. It means a condition in which the evolution of a problem has reached a depth of difficulty that represents a fundamental turning point. And so has the Eurozone today reached such a turning point—i.e. a bona fide ‘crisis’.

The major dimensions of the EZ crisis are threefold: Starting out as what is called a ‘sovereign debt crisis’, it has progressively evolved to a EZ-wide banking crisis. The sovereign debt-banking crisis in turn has been rapidly transmitting the past year into a region-wide deep recession throughout the rest of the non-banking and non-government sectors of the Eurozone economy as well. The Eurozone crisis is thus a simultaneous triple crisis, with each of the three elements increasingly feeding off of, and exacerbating, the other.

Current structures of government finance (taxing, spending, debt management), monetary and banking institutions and relations, and policies addressing the deepening recession have all largely failed to date. A fundamental change is therefore necessary if the EZ is to extricate itself from its triple crisis. Without such change, the EZ will continue to slide into still deeper total debt, experience eventually a classical banking crash, and drift into a more protracted recession that will draw in a still wider periphery of European economies. Britain has already been sucked into the economic vortex and is experiencing a double dip recession—as have or will other economies within the broader 27 country European Union. Similarly, the crisis in the EZ has already begun to negatively impact the rest of the global economy. It has affected the already slowing economies in the U.S., as well as China, India, Brazil and elsewhere. It is the main force in the global contraction of manufacturing underway since late 2011 which has been gaining momentum in 2012.

In short, the Eurozone crisis is the focal point and weak link today in a global economic crisis that did not end in 2009 with the temporary stabilization (not recovery) of the US economy following the banking crash of 2008. U.S. policies since 2009, moreover, have not cured the global economic cancer. They have only temporarily succeeded in suspending the US economy in a state of temporary economic remission. Furthermore, U.S. policies since 2009 have permitted the economic cancer to metastasize to Europe, where today it continues to grow.

Background to the Eurozone Crisis

With the eruption of economic problems in the ‘euro periphery’ economies (e.g. Greece, Portugal, Spain, Ireland, etc.) circa 2009-10, the EZ crisis was initially represented in the press largely as a sovereign debt crisis—i.e. where governments in the euro periphery—Greece, Portugal, Ireland, Spain, etc.—had taken on too much debt. Economies in the euro periphery were thus experiencing a ‘Sovereign debt crisis’ due to their inability to repay principal and interest on prior incurred debt that grew too large and/or too expensive to repay in full and/or on time out of normal government income flows—i.e. from government tax revenue receipts.

But behind the appearance of the sovereign debt crisis has always been a maturing banking crisis—awareness of which only coming to the fore in the press over the past year as a result of a series of banking sector events that will be described shortly. The banking crisis has therefore always been a mirror reflection of the sovereign debt crisis. It is the flip side of the coin of the sovereign debt problem.

In order to avoid default on their debt—i.e. avoid failure to pay in full and on time—Euro periphery governments since 2009 have chosen to respond with the following policy alternatives: (1) borrow more debt to meet payments on the old debt; (2) restructure the old debt (reduce principal levels, change terms of payment, etc.) to enable existing tax revenues to cover debt payments in the future; or (3) introduce ‘austerity’ measures to supplement inadequate tax revenues. Austerity measures include raising taxes, reducing government spending, and selling off government (national) assets and properties. Austerity measures are designed in theory to raise governments’ income in order to help make interest debt payments coming due. In practice, all three alternatives tend to occur simultaneously for a government facing default on debt payments.

Lenders who would issue additional loans to a sovereign government unable to make its debt payments insist the sovereign, in order to make debt payments in the future, raise sufficient government cash flow by reducing government spending, raising taxes, or by selling off public assets (i.e. austerity). Similarly for those lenders who would, instead of issuing new additional loans, restructure existing debt that hasn’t been paid. Raising government cash flow by means of austerity is thus accompanied by reducing some debt principal and/or by changing terms of repayment to something less onerous for the borrower (the periphery government). In practice, some combination of additional loans and debt restructuring typically occurs, combined with some mix of the three forms of austerity policies (i.e. government spending cuts, tax hikes, government property sales).

What the foregoing scenarios all describe, however, is that debt is always a two-way street. It takes two to dance a sovereign debt tango—i.e. a borrower (sovereign government) and a lender. So who are the lenders who issue the credit and loans to sovereign borrowers that become the sovereign debt? First and foremost, it is Eurozone banks, and specifically the northern European ‘core’ banks, that loan to the periphery governments.

Bank to peripheral government lending may be direct, but most often occurs jointly with core banks participating with banks in the periphery economies. But government debt is not just composed of direct bank to government loans. When the sovereign debt crisis appreciably worsens, other Eurozone governments also loan to those periphery governments accumulating debt. This government to government lending occurs to ensure ‘their’ northern core banks continue to get paid on their prior loans to the periphery governments. So debt may be government to government in origin, as well as bank to government.

As government debt repayment difficulties deteriorate still further, at some point core government lenders decide it is better to ‘amortize’ the need for further loans to indebted periphery governments. At that point pan-Eurozone rescue funds are created to further provide loans for purposes of sovereign debt refinancing. In the case of the EZ there are two supranational bailout funds: the European Financial Stability Fund (EFSF) and the still not yet formally or fully approved European Stability Mechanism (ESM) designed to supplement the EFSF. The EFSF and ESM together have mustered about $1 trillion for sovereign debt rescues—an amount that is totally inadequate today for the deepening Eurozone periphery Sovereign Debt crisis.

The IMF is a third possible government debt bailout fund. However, its committing of loans to rescue periphery sovereign governments requires the agreement of its other international participants, like China, Brazil and others. Unable to obtain that agreement, the IMF has proven reluctant to date to provide much lending to the Euro periphery. It remains largely on the sidelines.

There is yet a potential ‘fourth source’ of government debt bail out funding. That’s the European Central Bank (ECB). It’s ‘rescue funding’ is potentially limitless, and could be applied theoretically both to sovereigns and to private banks. But the broader European Union Treaty prohibits the ECB from providing financing to periphery or other euro governments with debt problems. Nevertheless, the ECB found a way around the prohibition in 2010 and again in 2011 when the Euro government debt crisis rapidly deteriorated. But it did so only modestly, to the tune of buying only a couple hundred billion euros of the estimated trillions of euro outstanding government debt, and furthermore did so in the face of stiff German resistance to such direct government bond buying.

The sovereign debt crisis picture is one in which the cumulative government debt amounts to several trillions of dollars, but the funds from which governments in the periphery (and increasingly elsewhere in the Eurozone) amount to only somewhere between $500 billion to $1 trillion at most. The IMF as a bailout source remains on the sidelines by choice. And a political battle continues to rage over, and to what extent, national governments in the ‘core’ north and their national central banks will allow the ECB to usurp their roles as lenders to governments. Were the latter to occur, investors in national government bonds, like the German Bunds, would experience significant losses on their already issue bonds.

The preceding provides possible means by which both peripheral sovereign governments (Greece, Spain, etc.) could theoretically be ‘rescued’, or bailed out, in the event of a further deterioration of their debt and subsequent defaults and some of the problems and political obstacles preventing that from actually happening. But it doesn’t explain how that excess sovereign became a problem in the first place. Nor how that sovereign debt is part of an even larger, more potentially disrupting, private sector banking debt and crisis.

Origins of the Eurozone Crisis

The EZ crisis has its roots in the creation of the Euro as a common currency in 1999, at a time of concurrent, expanding global financial speculation.

The introduction of the common currency, the Euro, made possible a massive increase in trade and money flows between the EZ northern ‘core’ and periphery economies. More trade in the form of more purchases by the euro periphery of goods and services produced in the northern core economies (France, Germany, Netherlands, etc.) meant more profits for businesses and banks in the ‘core’ north. So northern banks were more than eager to lend to the periphery economies. Sometimes the lending went directly to businesses in the periphery. Sometimes to periphery banks and/or branches of northern banks established in the periphery. And sometimes to northern core non-bank businesses relocating to the periphery economies—much like US businesses in the northern industrial states relocated to the south and southwest in the 1970s-1980s. Money flowed from the north to the periphery, especially its southern, Mediterranean tier. GDP and income consequently rose in the periphery, especially its southern Mediterranean tier. Periphery consumers, businesses and governments then purchased more goods and services from the northern core economies; or from businesses that relocated from the north. The lending to the periphery thus came back to the core in the form of purchases of internal ‘imports’ from the north. Germany was a particular beneficiary of this arrangement. Its banks’ lending to the periphery, and its non-bank businesses relocating to the periphery in part, resulted in a major expansion of intra-Eurozone purchases of German goods and services. German banks and businesses thus prospered significantly.

Rising GDP laid the basis in the periphery economies for a real estate boom and bubble. Even more money capital flowed from banks in the north to the periphery. Heavily involved in this lending flow were French banks such as Credit Agricole and Societe General, UK banks, German Commerzbank, and others. Combined with a global shift toward financial speculation in mortgage bonds and real estate related derivatives, the real estate boom created a housing-construction bubble not unlike that which was occurring simultaneously in the USA at the same time. Still more money flowed into investments in the periphery, especially in real estate and financial speculation based on it. Meanwhile, with GDP and income rising, peripheral economy governments appeared able to afford to borrow more as well. Booming real estate required infrastructure development in the periphery. Government would borrow to finance that infrastructure. Peripheral governments further borrowed to expand social services and transfer payments to those segments of its population not directly benefiting from the investment, real estate, and financial speculation booms. Money capital flowed south and outward to the periphery to accommodate housing, infrastructure, general business, and financial speculative investing in ever larger magnitudes. Housing booms occurred not only in Spain but in Ireland and even far off economies like Latvia.

Banks in the peripheral economies, like Spain, may have done much of the direct lending to finance the local Spanish real estate bubble, and to pump ever larger amounts of loans to local governments for infrastructure and real estate expansion—but the money for such originated in loans by northern core banks to the Spanish banks or else from the national Spanish government’s budget, the latter of which became also increasingly dependent itself on loans from the north. So northern capital flowed into local real estate, local banks, local and even national governments in the periphery. The north was more than willing to do so, since rising economies and prices in the periphery meant ever greater profits in turn for northern banks and northern businesses.

This scenario raises the question: was the build up of excess debt in the periphery—bank and government debt—a result of excessive borrowing by the periphery or the result of excessive lending by the core north? Was behavior by the periphery at fault for the debt run-up? Who benefited? Clearly, the northern ‘core’ banks and businesses that lent money and/or sold their goods in ‘internal exports’ to the south and periphery. Perhaps even more than the periphery-south so if an appropriate accounting is undertaken. It’s like saying the subprime mortgage crisis in the US was due to homeowners who took on such mortgages they couldn’t afford. As if the banks and lenders of subprimes had nothing to do with the bubble that burst in 2007, dragging the rest of the highly connected network of bank credit and speculative interlocks with it.

Despite the fact that the northern European core banks and government ‘lenders’ were just as responsible as the peripheral-southern tier economies’ governments and ‘borrowers’, the Eurozone crisis was framed initially in terms of a peripheral (and especially southern tier) ‘sovereign debt crisis’. The role of core northern banks in it all was barely mentioned. It was all due to bad government practices and not bad banking practices—i.e. a line of argument that in essence serves to absolve the banking system from its responsibility in creating the debt crisis in the first place.

When the global housing bust occurred in 2008-09 it had the effect in the EZ of collapsing housing and commercial property assets there as well as in the US. The real estate bust meant losses by banks, both local banks and those in the northern core banks that had loaned to the periphery banks. Recessions that typically set in following such financial busts reduced both general business revenues as well as government revenues, especially local governments. More loans were subsequently needed to cover losses, both to local banks, businesses, and governments. National governments borrowed more, growing national debt as GDP declined. By 2010 EZ wide government borrowing ‘rescue funds’—like the EFSF—were created to accommodate the greater volume of loan refinancing needed. Austerity programs were introduced as conditions of the further lending. Austerity reduced government revenues, requiring still more emergency loans and more government debt. A vicious cycle set in: recession causing less tax revenues, requiring more loans from core governments and funds, accompanied by more austerity that deepened and prolong recession, resulting in still less tax revenues, and so on. This scenario is just what in fact happened in the case of Greece over the course of 2009-10, when its ‘debt crisis’ erupted publicly in the spring of 2010.

PART 2: EVOLUTION OF THE EUROZONE CRISIS FROM 2010 to Spring 2012 (to follow)

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Friday, June 1, is a date that marks a shift in the public consciousness of the state of the US and global economy.  What was touted for months over the past winter as a rebound taking hold in the US economy and the assertions that the US economy was ‘exceptional’ and would not suffer the slowdowns underway in Europe, China and the rest of the world – were all swept away on June 1 by the May US jobs report, a downward revised U.S. GDP numbers for the first quarter 2012, as well as by the rapidly deteriorating banking and general economic situation in the Eurozone.

Why Economists’ Jobs Forecasts Consistently Miss Their Mark

On the jobs front, Friday’s labor department data showed a growth of only 69,000 jobs, while the preceding month’s jobs numbers were revised downward for April from 115,000 to only 77,000. Both months were originally officially forecast by mainstream economists to show jobs growth of 150,000 and 180,000 respectively. A day earlier, the first quarter GDP numbers were also adjusted downward from 2.2% growth to only 1.9%, a decline that was totally unexpected by most economists, who had been forecasting that the current quarter, April-June, GDP would come in around the 2.5% to 3% range. But now will almost certainly end up in the 1.5% or even lower range, given a likely more rapid slowing in June.

One cannot miss jobs and GDP forecasts that badly without something being fundamentally wrong with forecast methodologies employed by most mainstream economists today, a point this writer has been making publicly repeatedly since last December.

The main excuse being offered today by economists for missing their recent jobs and GDP forecasts so badly is ‘the weather’.  The exceptionally good weather this past winter, it is argued, moved normal spring production and jobs up by several months into the winter numbers. Another favorite excuse now appearing is that growing uncertainty about the coming ‘fiscal cliff’ (read: excessive deficits) after the upcoming November elections has resulted in an unanticipated slowing of business spending, and therefore of new investment and consequent job creation.

But the extremely poor jobs numbers for May and April have very little to do with the ‘weather this past winter’. Nor with business confidence impacted by anticipated deficits and debt levels after the November elections. It’s just bad forecasting, the result of cherry-picking the most recent jobs data to forecast long term, but without considering the broader economic picture and ‘broad turning points’ in the US and global economy.

In part, the winter months’ jobs numbers were grossly overestimated statistically for several reasons. As this writer has repeatedly noted in this and other publications, the jobs numbers during this past winter were suspect in the first place, largely boosted by questionable statistical adjustments based on methodologies that were more relevant pre-2007, but less so today. When this past winter’s jobs reports, averaging more than 200,000 a month are ‘smoothed’ out with April and May jobs results, what remains is a picture of continuing stagnant jobs growth since the economic relapse of last summer 2011.

To the extent jobs growth did occur over the winter, that growth was due to business spending, the nature of which was clearly unsustainable beyond a few months. Very short term, temporary factors were at work at the time that were clear for anyone willing to look: (1) excessive inventory build-up after the general inventory spending collapse of last summer; (2) business one time leveraging of end-of-year tax cuts; and (3) auto sales recovering from summer 2011 supply disruptions combined with deep year-end price discounting by the auto companies. None of which were long-term sustainable, as recent data are now beginning to show. And none of all this has anything to do with ‘business confidence’ falling due to growing concern about deficits and debt levels post-November elections.

Since August 2011, including the questionable brief jobs surge over the winter, the U.S. economy on average has been creating jobs at a pace of barely 125,000 a month, i.e. not even sufficient to absorb new entrants into the labor force. The reasons for the long term stagnation of job creation in the U.S. are simple. There is still no real recovery in new housing and construction spending in the U.S.; the Obama administration’s policies subsidizing manufacturing and exports since 2010 have produced a mere dribble of new jobs (even though many jobs created are at half pay); state and local governments continue to lay off tens of thousands every month; hundreds of thousands of workers continue to leave the labor force monthly; bank lending to small businesses never really recovered from 2009 lows and is slowing once again; and real median household incomes have continued to decline in 2012, devastated in recent months a third time in as many years by rising gas, food, healthcare, education costs, and other prices.

Specifically, household consumption – the most important economic sector – continues today at best to stumble along, kept from contracting sharply only by rising credit card balances, historically cheap auto financing, rising household dis-saving, and, for the wealthiest 10%, by the ups and downs of the stock market (now in another sharp down phase until the Fed announces another ‘QE3’ program later this year). But there is no basic household income growth for the bottom 80%, nearly 100 million, households in the U.S. Median household income has fallen by more than 5% the past few years, continuing what is clearly a long term trend that began more than a decade ago in 2001, and thus far resulting in a decline of more than 10%.

Credit card, debt-driven, dis-saving-based consumption cannot be sustained. And without fundamental household income growth for the bottom 80%, combined with fundamental reduction of household debt loads, no sustained jobs recovery will occur.

The 1st Quarter GDP Statistical Revision

A similar critique applies to mainstream economists’ winter predictions that GDP would continue to rise in the second quarter higher than the first quarter’s initial 2.2% estimate.

As previously noted, GDP growth in the fourth quarter was largely inventory driven or a result of one-time year-end business spending designed to leverage business tax cuts. To the extent household spending occurred, it was debt and dis-saving driven. Both inventory spending and business spending thereafter slowed significantly in the first quarter, while government spending at all levels continued to decline significantly.  Manufacturing and exports grew only modestly in the quarter.

But economists nonetheless predicted manufacturing and exports would accelerate in the second quarter, jobs growth over the winter would raise income and household consumption, and the ‘warm winter’ construction trend finally signified a turnaround of the housing sector and its recovery and contribution to growth in the spring. But none of this happened after February.

Almost all economists underestimated the impact of first quarter accelerating gas and fuel prices on consumers’ spending.  The run-up in gas prices was largely the consequence of global speculators’ driving up the price of oil, combined with US refineries conveniently shutting down refinery plants simultaneously (which they typically do when there’s a surge in global crude oil prices), plus retail stations then holding prices at the pump up while crude and refinery prices fall. This coordinated supply chain development has occurred repeatedly since 2008. That year surging oil (and commodity) prices drove inflation to excess levels, despite a recession in the US already underway. It happened again in 2010, and again in 2011. The impact of rising gas prices on the US economy is generally underestimated by economists. The impact of the first quarter 2012 surge in gas prices on the current slowing of the US economy has been significant – and was generally unheeded by economists in their GDP growth projections earlier this year.

Nor were sanguine forecasts for the first quarter of accelerating jobs growth realized. Instead, jobs growth in April and May collapsed, as noted above – and with it, the projected income and consumption recovery. Home sales and home prices further disappointed, confirming no real recovery in construction. Finally, manufacturing and exports began to hit the wall of a global manufacturing slowdown, most serious in the Eurozone, but occurring in China, Brazil, India and elsewhere as well.

Already by June, bank research departments project a lower estimate for GDP growth for the second quarter, and even the third, July-September. But just as they underestimated the gas spike effect and the jobs collapse earlier, they are similarly underestimating the general impact of the Eurozone crisis and the global manufacturing slowdown now beginning to worsen rapidly.

The Eurozone Crisis and US Economic Contagion

 The Obama administration’s first and second economic recovery programs, costing nearly $1.7 trillion in tax cuts and spending in 2009-2010, failed to produce a sustained economic recovery by 2011. The third recovery program, dribbling out piecemeal since September 2011 and culminating in the absurd ‘JOBS’ bill and HARP 2.0 housing plan, is now proving no more effective than the previous two programs in 2009 and 2010.

At the center of Obama’s third recovery program has been a focus on manufacturing-exports, run by General Electric’s CEO, Jeff Immelt.  At the request of the big multinational corporations in 2010, Obama delivered more free trade agreements, more business deregulation, more pro-US business trade assistance, backed off from insisting they repatriate offshore profits and pay taxes, and introduced other manufacturing-centric US corporate assistance. This manufacturing-exports strategy was purportedly to generate the recovery that the 2009-10 first two programs did not. Manufacturing would ‘lead us out of the recession’, Obama and business announced. But it hasn’t – and it won’t.

Manufacturing now represents too small a total of the US economy at only 12% and employs only 11 million out of a US labor force of more than 150 million. The US dismantled and shipped its manufacturing base overseas over the past three decades. Multinational corporations admit that, in the last decade alone, they reduced employment in the US by 2.7 million jobs and hired 2.4 million offshore. Approximately 8 million jobs in manufacturing in the US have been lost just since 2000. Yet manufacturing, and the even smaller sector of manufactured exports, was supposed to generate the recovery in 2011-12 that still has not occurred.

Manufacturing did revive modestly since early 2011 but, as this writer predicted in late 2011, has now run headlong into a rapidly declining global manufacturing sector. The Eurozone’s manufacturing and exports have plummeted since late last year. Virtually all Eurozone economies’ manufacturing indicators (PMI) are also now declining. Moreover, China, Brazil and other key economies’ manufacturing and exports sectors are contracting as well. Manufacturing and exports are rapidly slowing across the world.

There is no therefore way US manufacturing and exports can continue to grow in a global economy where they are rapidly declining just about everywhere else. Meanwhile, housing and construction in the US is still bumping along a depression level bottom, with only apartment building showing any signs of growth. And state and local government spending continues to contract in most regions. Along with stagnant jobs growth, this is a scenario for slower growth in what remains of 2012, not a recovery.

Some mainstream liberal economists argue the Eurozone and China’s declining manufacturing and exports sectors will not negatively impact the US economy, since trade in goods is not that large a part of the US economy. But the flow of goods is not the key transmission mechanism for the contagion of the Eurozone’s accelerating recession impact on the US economy. The key transmission mechanism for the contagion is the banking system. Bank lending is already freezing up in Europe, as all the economies there (except Germany) have already crossed the threshold into what will prove a deep and protracted recession. Potential bank losses will likely spread from Spain and Greece to elsewhere in Europe, in particular Italy and France. Those losses and the lending freeze will spread to the US, where bank lending, already slowing to small and medium businesses again, will decline still further in the US, resulting in a slowing US economy in turn.  Meanwhile, the US corporate bond markets and bond issues are slowing, junk bonds in particular. That will result in a further US slowdown in business spending and job creation.


As this writer concluded last October 2011 in the book, ‘Obama’s Economy: Recovery for the Few’, which predicted a steeply slowing global economy in 2012 driven by the Eurozone and a ‘hard landing’ in China, Brazil, and elsewhere, “The U.S., Eurozone and U.K. economies are tightly integrated, not just financially, but in a host of other economic ways. What happens on either side of the Atlantic soon produces a similar reaction on the other.”

In the months to come, the jobs markets in the US will continue at best to stagnate; apart from seasonality factors, the housing market will continue to ‘bump along the bottom’ as it has for four years now; government spending will continue to decline; and business spending, bank lending, manufacturing and exports will continue to slow, while consumers will continue to rely on credit and dis-saving to maintain consumption. GDP as a result will continue to lag.

And when US political elites gather immediately after the November elections, both political parties’ leaders will agree by December 31 to cut $2-$4 trillion more in spending in addition to the $2.2 trillion already scheduled to begin in January 2013. But they won’t call it austerity, which is the term for the deficit cutting in Europe from Greece to the U.K that is driving their economies into a deeper crisis. US capitalists and policy makers are more clever than their European counterparts. The US code words used for austerity will be ‘grand bargain’ and ‘fiscal cliff’.

Jack Rasmus

Copyright June 2012

Jack is the author of the April 2012 published book, “Obama’s Economy: Recovery for the Few”, published by Pluto books and distributed by Palgrave-Macmillan. His blog is jackrasmus.com and website: www.kyklosproductions.com

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