Posts Tagged ‘Eurozone’

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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Last Friday, Sept. 14, the US Federal Reserve announced its latest version of massive liquidity (money) injections into the US banking system. Called ‘Quantitative Easing 3’, it follows earlier QE1, QE2, and QE2.5 money injections, that already amounted to $2.75 trillion of direct purchases of mortgage and other bonds from investors by the Fed, since early 2009 nearly four years ago.

The Fed’s immediately preceding QE 2.5 program introduced in 2011 (costing $400 billion) had not yet finished and the Fed nevertheless announced its latest successor version, QE3.  Even potentially more generous than its predecessors, QE 3 will be an open ended tab of free money to banks and investors, amounting to $40 billion a month for an undetermined number of months to come. It could therefore be an even greater subsidy to banks and investors, in terms of magnitude, than previous QEs.

The Fed and the US press reported the new QE3 as necessary to boost the stagnant labor market in the US today–which has not been able to create jobs sufficient to even absorb the entry of new workers into the labor force–and to boost the housing market that continues to languish for years now at depression levels. True unemployment today hovers around 23 million, where it has remained consistently now for several years. Housing continues to ‘bump along the bottom’ in terms of nearly all indicators, as it also has for the past three years.

But QE3 will have no more effect on job creation, housing, or general economic recovery than has its predecessor QEs. QE is not about boosting jobs, housing, or the real economy. QEs are about subsidizing investors and boosting stock, bond, derivatives, and commodity futures markets and therefore the capital incomes and returns of investors, both individual and corporate.

In my article written last December 2011, ‘Economic Predictions; Present and Past’, which appeared in the January 2012 issue of Z magazine (and is available on this blog and on my website, kyklosproductions.com accessible from this blog’s sidebar), I predicted nine months ago that even though QE 2.5 (called ‘Operation Twist’) had just been introduced by the Fed last October–it would be followed by a subsequent QE3 sometime in 2012.

This prediction was based on the analysis last November, appearing in my April 2012 book, “Obama’s Economy: Recovery for the Few (also available this website), in which I showed data indicating an extremely high correlation between the introduction of QE programs and surges in stock and other financial markets: i.e. when markets begin to falter, QEs are introduced, and markets surge once again. Table 5.1 on p. 90 of my ‘Obama’s Economy’ book shows that as soon as the stock market begins to slow and decline, another QE is introduced. Following that introduction, the stock market takes off once again. When the QE in question begins to conclude and wind down, the stock market begins to falter once more, leading to talk again and eventual introduction of another QE–which again results in a resurgence of the stock market. The table 5.1 identified this relationship for QE1 and QE2, which amounted to more than $2.3 trillion injected by the Fed into banks and investors’ pockets, in the form of buying from them various subprime and other mortgages and securities at their full purchase values instead of their current depressed values in many cases. In other words, investors and banks were subsidized as a result of Federal Reserve QE money.injections.

Banks and investors then take this ‘windfall’ from the Fed and invest it into stocks, junk bonds, derivatives, commodities (oil futures being a favorite), emerging markets’ exchange traded funds, foreign exchange futures, etc.–i.e. various speculative financial instruments. Or, in the case of some banks, they just take the money and hoard it. Whether hoarded or funneled off to speculators, the QE injection is not loaned to real businesses to create jobs. In other words, what they don’t funnel offshore, or into financial securities, they just hoard, which now amounts to around $1.7 trillion in excess bank reserves the banks are simply sitting on. Bank lending to small-medium businesses stagnates or even declines. Very few jobs are the result of the trillions pumped into them by QEs that are either hoarded or diverted to financial speculation.

Nor do QE programs have much impact on housing recovery. They may reduce mortgage rates a little, but low rates are not the solution to the lack of housing recovery to date. Banks may publicly report available low mortgage rates but that doesn’t mean banks actually lend at those rates except to a very very small, select group of buyers. Despite low rates, banks the past three years have imposed numerous and onerous non-rate terms and conditions for getting a mortgage loan for most home-buyers. A buyer can get a 3.75% mortgage loan, but only if he puts 40% down, has a perfect 800 plus credit score, excess monthly income, and keep $100k in accounts in the bank’s branch.

So QE means little housing and jobs recovery, does nothing to ensure banks will actually lend to small businesses and consumers, and results either in cash hoarding by the banks or in lending to speculators (hedge funds, etc.) who then use the loan to buy up stocks, junk bonds, speculate in spot oil futures (driving up gas prices at the pump) or industrial commodities, derivatives of all kinds, foreign exchange, etc.

QE is for investors, in other words, not for homeowners or unemployed or small businesses.

Pressure for the Fed to introduce its latest QE3 began this past summer, as the stock market began to lag once again. As it became increasingly possible the Fed would introduce another QE in recent months, the stock market began to surge. And once the Fed did announce QE last week, the markets exploded. The Dow and S&P 500 are today almost where they were in 2007 before the financial crash. Stocks have surged (driven largely by 3 QEs the past three years) by almost 150%–i.e. more than doubled. Junk bond returns have been even greater. We’ve had three oil and commodities price bubbles since early 2009, and unknown fortunes have been made as well from speculative derivatives trading (unknown because they aren’t reported anywhere). In contrast, housing, jobs, and general economic recovery in the US for the rest of the non-investor/corporate population has stagnated, bouncing along the bottom, relapsing three times in as many years (also as predicted in the ‘Obama’s Economy’ book a year ago).

Fed QE policies combined with additional free money in zero interest loans available to banks (called ZIRP) together have totaled more than $10 trillion to date in what amounts to Fed subsidized money given to banks and investors–all of which has been designed to bail out the banks and investor community. But bailing out the banks does not in turn mean that the economy recovers. Bail outs to banks don’t necessary result in lending to businesses and consumers. Why? Because the bail out money is either hoarded (i.e. remains bottled up in the banks in the form of record excess reserves amounting to $ trillions) or is loaned by the banks mostly to professional speculators and investors who realize highly profitable, quick returns in speculative markets (stocks, junk bonds, derivatives, commodities futures, ETFs, etc). The Fed’s QE money injections thus do not produce sustained economic recovery for the general economy.

What we are now beginning to witness, moreover, is a growing further shift by all the major  central banks globally toward a greater reliance on QE-like policies as the primary strategy for addressing the continuing slowdown of the global economy. Not just the US Federal Reserve, but the European, Japanese, and UK central banks as well. The US today can barely generate a 1.5% economic (GDP) growth rate and is slowing, Europe is already in a recession that is deepening, and China and other once fast growth economies (India, Japan, Brazil, etc.) are all slowing rapidly now as well. The central banks are preparing to stabilize their private banking systems in anticipation of a continuing global real economic slowdown that promises to make those private banking systems even more unstable.

A growing convergence and coordination of central banks worldwide has thus begun. The European Central Bank, ECB, last week also announced another round of its version of QE as it moves toward trying to become a mirror image of the US Federal Reserve in other aspects as well. The Bank of England will soon do another QE, as it has been waiting on the Fed and the ECB first. As the Japanese economy has now begun to show signs of slowing further as well, the Bank of Japan will follow suit. In other words, central banks around the world are trying to jointly head off another banking crisis pre-emptively to avoid a repeat of 2008. That’s what’s behind the growing coordination of QEs and the continuing massive, money injections by central banks into their private banking systems now growing unstable again by the month.

But QEs, even coordinated, will do little to nothing to stop the slowing of the real economies in the US, Europe, Japan and even China that is now underway. Central bank policies, whether QE or other, cannot stop the real economic slowdown and drift toward another synchronized global recession. QE and monetary policies in general are not a solution because all the money and liquidity in the world can be pumped into the banking system by the central banks and it will still not necessarily result in lending, and therefore investing in jobs, and consequently economic recovery.

The global capitalist system today is becoming increasingly addicted to speculative forms of investing, to chasing quick returns from such investing instead of lending to real businesses that make things, employing real people, and generating real disposable income to drive the consumption necessary for real sustained economic recovery. When not investing in speculative financial securities, banks today are intent on hoarding the cash and, when not doing so, then waiting to do so. Or, if not funneling money into speculators, or waiting to do so, banks may perhaps lend offshore (the US, Europe, Japan) into emerging markets. But the latter are now slowing as well. So increasingly its hoard the QE and central bank cash, or jump in and out of speculative markets to generate quick, short term profits, and/or wait.

What this all means is that there is no shortage of capital today–whether in the US or globally– that could be invested to create jobs and a sustained economic recovery instead of the current slide toward global recession. As noted, US banks alone are hoarding about $1.7 trillion according to reports. Non-bank big businesses (many of which are also in part banks themselves and invest heavily in derivatives, stocks and the like) are hoarding another $2.5 trillion. And US multinational corporations are holding $1.4 trillion in offshore subsidiaries–money that they refuse to repatriate by law to the US and pay taxes on (until, of course, they get another corporate tax cut ‘deal’ from the president and Congress promised by both Republicans and Democrats after the November elections).

The US is not ‘broke’. Neither is the UK, Europe, or Japan. The money is there to invest and generate jobs and recovery. It’s just bottled up by those who have it and won’t spend (i.e. loan or invest) it. Ditto for the Eurozone and Japan. In the meantime, as policies drift toward convergence on the central bank side, so too does it appear a kind of convergence is also taking place–in the US, Europe, UK, and Japan–on the fiscal side in the form of continued fiscal ‘austerity’. (i.e. what is called the ‘fiscal cliff’ in the US). That means cutting government spending on social programs and government investment, selling off government properties wherever possible (privatization), and raising taxes on everyone except investors and corporations.

The significance of the Fed’s QE3 move therefore is there will continue to be free money in unlimited amounts to banks and investors to hoard or to speculate and play with, while it’s cuts in spending and disposable income for the rest of us. But ‘QEs for them’ and ‘Austerity for the rest of us’ will mean continued economic slowdown and recession, accelerating in Europe, more slowly coming in the US, and increasingly on the horizon for even Asia.

Dr. Jack Rasmus
Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”, available on this blog and his website at discount. (see also the new offer for the book with a DVD presentation and 60+ powerpoint slide presentation). His blog is jackrasmus.com and website: http://www.kyklosproductions.com. Follow Jack and his guests on his new forthcoming weekly radio show, ALTERNATIVE VISIONS, on the progressive radio network, every wednesday at 2pm New York time, af PRN.FM, or progressiveradionetwork.com

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Last Friday, May 4, the U.S. labor department released its jobs numbers for April, confirming a prediction made by this writer this past winter that employment creation would once again slow this spring – for the third time in as many years. Jobs created in April declined to only 120,000, less than half the average monthly gains this past winter. Only days before the release of the April jobs numbers, GDP growth for the US economy as a whole were also released. The fourth quarter GDP growth rate of 3% declined to 2.2% in the first quarter, January-March 2012.  The slowing of the US economy now underway is evident not only from the GDP and jobs data, but from a host of other indicators reported in recent weeks: business spending, durable goods orders, construction activity, services spending, slowing wage growth, to name but the most obvious.

The jobs numbers for April and other economic data thus suggest a continuing slowdown of the US economy has begun in the current second quarter of 2012. That decline will likely continue further in the months immediately ahead, to possibly as low as 1.5% the second quarter, April-June 2012.

The hot air trial balloon floated by the press and pundits this past winter – that the US economy was finally, after a third try in as many years, about to take off on a sustained growth path in 2012 – is thus once again about to deflate.  The US economy remains mired in the stop-go trajectory that has characterized it since early 2009: short shallow rebounds punctuated by brief relapses and slowdowns – a condition and prediction this writer raised nearly three years ago with the publication of the work, Epic Recession, and reiterated last November with a latest work, Obama’s Economy: Recovery for the Few’, just published this April.

Obama’s Fundamental Strategic Error

The partial, stop-go recovery in the US, which has benefited stocks, bonds, corporate profits, CEO pay, and bankers’ bonuses, but virtually nothing else is the direct consequence of failure of fiscal-monetary policies of the Obama administration.  Republican policies, from Reagan to Clinton to GW Bush, caused the economic crash of 2007-09. But Obama policies – policies that favored the banks and corporate America the first two years and then tail-ended teaparty radicals in Congress since 2010 – are clearly responsible for the failure to generate a sustained recovery ‘for all but the few’. Republicans and corporate America clearly created the mess; but Obama and corporate America have clearly failed to clean it up.

Obama policies since 2009 amounted to more than $1.5 trillion in tax cuts that mostly benefited business and investors plus another $1.5 trillion in spending that has been largely subsidies to states.  Less than $100 billion was allocated for long term infrastructure spending, of which only $64 billion has been spent to date. Less than $50 billion was directed to rescuing homeowners and resurrecting the housing sector. Meanwhile, more than $9 trillion was provided in bank bailouts by the US Federal Reserve central bank.

The fundamental strategic error of the three Obama recovery programs since 2009 was to bailout the banks without ensuring that bailout directly result in lending to small and medium businesses; to provide massive tax cuts, mostly for businesses, without any guarantee it would result in immediate business investment and US jobs creation; and to provide subsidies to the states without proof and assurance of job creation.

The Obama strategy was to put a floor under the collapse of consumption for one year, to buy time for the tax cuts and bank lending to get going. After a year, the more than $400 billion in 2009 subsidies spending would be used up, and business (‘the market’) was supposed to take up the slack, to lend, to invest, and to create private sector jobs. The job creation would then reduce the rising foreclosures, restart the housing sector, raise local government tax revenues, and reduce the federal government’s deficit – the major cause of which has been the lack of recovery and tax revenue restoration. It all depended on corporations and banks taking the lead in recovery after a year.

But it didn’t happen that way. Although Obama provided the massive subsidy stimulus for a year, Big Corporations took the tax cuts and sat on them, accumulating a cash hoard of more than $2.5 trillion. Banks in turn took the $9 trillion in zero interest loans from the Federal Reserve, recovered profits, paid themselves bonuses, and either hoarded the remaining more than $1 trillion excess reserves, or lent it to speculators, and loaned it to emerging markets abroad – none of which did anything for small-medium business investing and recovery in 2010 and beyond. In short, Obama’s ‘market’ strategy broke down as banks and big businesses hoarded the bailout.

Obama compounded the problem in a second recovery program in late 2010 that provided another $802 billion in tax cuts only and a mere additional $55 billion more in subsidies. That didn’t work either. In mid 2010, he turned over his jobs creation program to big multinational corporations. That resulted in more corporate tax cuts, new free trade agreements, and more business deregulation that created a dribble of jobs. He then scuttled the States’ efforts to stop the 12 million and still growing foreclosures problem and guaranteed banks’ limited liability for the robo-signing foreclosure scandal. Meanwhile, local governments’ finances continued to deteriorate, as they laid off hundreds of thousands more workers, slashed benefits, cut services, and raised fees.

Instead of taking the ‘bailout to Main St.’ in mid-2010, before the midterm elections, he deferred to his new corporate advisers taken into the White House that summer. The result was a loss of Democrats’ control of Congress in the midterm elections, and a shift in policy in Washington from recovery to deficit cutting. Obama conveniently let the Teapublicans take control of the policy agenda thereafter in 2011, and attempted to compete with them as a still bigger deficit cutter than they by offering to cut social security, Medicare and Medicaid by more than $700 billion.

All past recoveries from recessions in the US were characterized by job creation of 300-400,000 a month for at least six consecutive months; by a robust recovery of the housing sector leading the way; and by local government hiring to offset private sector job loss during the downturns. None of this has happened since 2009. To the contrary, government has taken the lead in job destruction, laying off nearly half a million people; housing has lingered in depression conditions and local governments across the economy continue to layoff, cut services, and raise taxes.

It is not surprising, therefore, that US recovery has been an anemic ‘stop-go’ affair. Late in 2011 a still third feeble ‘rebound’ began to occur, as evidenced in GDP statistics for that quarter. But what lay behind those fourth quarter stats? What followed in the first quarter 2012? And what may we look forward to, especially after the November elections?

The Over-Estimated Fourth Quarter 2011 Data

The fourth quarter 2012 GDP number of 3.0% was hyped at the time as a predictor of future accelerating recovery, but a closer inspection of the 3% clearly showed it was built upon temporary factors that could not be sustained – as this writer pointed out in a previous article:

Briefly revisiting those factors showed the following limitation of that 3%. First, a full two thirds of the 3%, or 1.8% of it, was due to business inventory building. This inventory investment was a recouping of third quarter 2011 collapse in inventories. So two thirds of the activity represented delayed prior quarter growth. Second, non-inventory business spending growth in the fourth quarter was 5.2%, but it reflected end of year investment claims of tax cuts that were going to end. Consumption spending was also up. But it was driven by auto sales made possible by auto companies’ year-end deep discounting and nearly free credit to borrowers. In other words, by debt. Credit card debt spending also rose significantly, as banks began throwing cards at customers in a way reminiscent of pre-2007 practices. Not least, non-credit based consumer spending was driven by spending fueled by household dissavings.

A more fundamental, healthy consumer spending trend required real income gains for the bottom 80% households. But that was conspicuously missing. Throughout 2011, wages, the most critical source of household income for the bottom 80%, rose only 1.8% while prices rose 3.5% – continuing the trend of a 10% decline in household income over the decade.

Also on the negative side, government spending at all levels continued to decline in the fourth quarter: Federal spending fell by –6.9% and state and local government by –2.2%, serving as major drags on the economy in the quarter as they had all year long.  It is not surprising that these factors – temporary in character – did not continue into the first quarter of 2012 at the same level.

1st Quarter GDP Data: Further Slowing To Continue

So how did each of these above elements behind the preceding quarter’s 3% growth perform, thus resulting in the decline to 2.2% for January-March 2012?

As predicted, inventories slowed significantly: from contributing two-thirds of the prior quarter’s growth to only 0.59% of the 2.2%, or about a fourth of the latest quarter’s growth. And that contribution will continue to decline in future quarters.

Business spending fell by –2.1% after the prior quarter’s rise of 5.2%.  Commercial building plummeted by –12% and the important equipment and software segment fell to only 1.7%. The only improvement was residential housing. But that was mostly apartment building and driven by highly untypical warm weather conditions.  As far as consumer spending was concerned, the conditions worsened as well. Nearly 50% of all consumer spending was paid for out of dissaving, as the savings rate fell from 4.5% to 3.9% in just one quarter. That kind of spending was, and remains, unsustainable. Auto sales, a major support of spending in the fourth quarter, began to fade by April 2012 as well.  Meanwhile, both federal and state-local government continued their downward trajectory in the first quarter 2012, declining by another –5.6% and –1.2% respectively.  Finally, a new negative element began to appear: manufacturing exports grew more slowly than imports, resulting in an additional decline in GDP that will likely continue into the second quarter as well.

What this overall six month scenario shows is that the US economy is not only NOT on an ascending growth path and recovery in the current election year, but is rather clearly on a descent in terms of economic growth. The factors that produced a very modest fourth quarter 3% GDP growth clearly weakened across the board in the first quarter 2012. They will mostly continue to weaken into the second.

Meanwhile, the Obama administration’s primary reliance on Manufacturing and exports to drive the US economy toward recovery are beginning to weaken. With the slowing global economy in Europe and even China and elsewhere, exports will not drive manufacturing any more than manufacturing is capable of driving the US economy. Manufacturing represents barely more than a tenth of the US economy and accounts for only 11.8 million out of 154 million jobs. Manufacturing jobs and manufacturing share of the economy, moreover, has not grown at all for the past decade. Since putting General Electric Corp’s CEO, Jeff Immelt, in charge of his manufacturing and jobs recovery programs two years ago, Obama has given Immelt and friends everything they’ve asked for: new free trade agreements, new tax cuts, backing off of foreign profits tax reform, patent protections, business deregulation, etc.. In return, manufacturing has added less than 15,000 jobs a month on average since mid-2010 and many of those jobs at half pay and no benefits.

During this past winter, press and pundits were not only arguing the US economy was on a sustained growth path, but that the US was about to lead the global economy to sustained recovery as well.  Forget the obvious facts at the time of an emerging recession in Europe or a slowing of the Chinese, Brazilian and Indian economies. Europe, they predicted, would experience a historically mild downturn. And the Chinese, Brazilian and Indian economies would experience a ‘soft landing’. In recent weeks, however, it appears the Eurozone is headed from a deeper, more serious recession and the Chinese and other BRICS economies are headed for a ‘hard landing’ rather than soft.

Events and conditions unfolding the last nine months are showing China and the BRICS economies have proven unable to ‘decouple’ from the continuing global economic crisis that is still far from over.  So too will the US economy prove unable to grow – i.e. ‘decouple’ – while the Eurozone descends into a serious contraction and the BRICS slow faster than anticipated. ‘Decoupling’ of any economy from the global, dominant trends is ultimately impossible. GDP stats in the US may go up and down for the remainder of the year over the short term, but the long term trend is toward a further ‘stop-go’ trajectory and a continued ‘bouncing along the bottom’ in terms of economic recovery.

As a consequence, Obama may be headed toward a repeat of the ‘Jimmy Carter Effect’. Carter failed to resolve another major economic crisis in the 1970s. He too turned toward corporate support and policies after 1978.  Corporate America took his handouts, turned on him, and dumped him in 1980.  Reagan did not ‘win’ the election; Carter lost it. Should GDP and economic recovery continue to falter in 2012, Obama may well end up repeating history.  If so, however, he will have lost not in 2012, but in policies introduced (and not introduced) in 2010 – when he made a deeper turn toward corporate influence instead of turning to extend the bailout and recovery to Main St.

Jack Rasmus

Jack is the author of the April 2012 book, OBAMA’s ECONOMY: RECOVERY FOR THE FEW, Pluto Books and Palgrave-Macmillan, available now in bookstores, online, and from the writer’s website at discount at: www.kyklosproductions.com. His blog is jackrasmus.com

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