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Fed Rate Hike, US Treasury Market & Crisis of Empire

Posted in Uncategorized, tagged , , , , , , , , , on September 19, 2026| 1 Comment »

September 19, 2026

By Dr. Jack Rasmus

This past week the Federal Reserve raised its benchmark short term interest (Federal Funds) rate a minimal quarter point, .25, from 3.75% to 4.00%. Expectations are strong for yet another .25 hike before the end of 2026.

Goods and services inflation in the US has recently begun to accelerate and the conventional wisdom in the mainstream media is that the Fed is raising rates in order to dampen inflation.

But is that the case? Or is there something else behind the rate hikes?

As the argument goes, Interest rate hikes dampen Consumer and Business demand for loans and thus consumption and investment in turn. Higher rates mean less spending by consumers on mortgages and big ticket items like cars; higher rates dampen business borrowing demand, so the theory goes.

It’s Supply Stupid

But the current inflation surge is not due to excess Demand. It’s a Supply problem. The Fed has little influence over supply, especially if it involves the global economy. And that’s exactly what’s driving up prices: the escalation of global oil and energy prices which translate into higher costs of gasoline for consumers, diesel for truckers and railroads, aviation fuel for airlines and much of electricity and natural gas services throughout the economy. And those prices eventually bleed into higher food prices with a lag.

To repeat: the higher energy prices driving US domestic inflation are a consequence of rising global energy prices—and those global prices in turn are the result of Trump war policies in the now spreading Middle East wars, Trump sanctions policy and tariff wars.

The Fed raising rates to dampen Demand has no effect on rising energy prices due to Supply and US war and related policies.

Current rising US inflation is a Supply problem that the Fed can do little about by raising rates and targeting Demand. Demand driving inflation are actually receding for months in the US, as real wages for households decline and unemployment rises in the Tech and now other industries. US job growth in 2026 has all but collapsed. In addition, as costs of borrowing rise—and in turn interest on credit cards, auto loans, student loans, mortgages, etc.—household Demand has slowed further.

Interest on that $18.5 trillion household debt load is a drag on household consumption. So too is the $23.7 trillion corporate and non-corporate business debt on investment. And that’s not counting the additional $43.8 total government debt, federal and state and local or the additional Federal Reserve balance sheet debt of $6.8 trillion. That’s a total combined debt of $106.2 trillion.

All that is money paid to wealthy capitalist investors that otherwise might be spent or invested on goods and services, to create jobs, and generate income for the many instead of the few. Assuming an average interest rate from all sources, that’s $7 trillion a year accruing to investors from interest alone. Interest payment on the Federal national debt alone is now more than $1.2 trillion a year.

Summing up: the problem of rising prices in the US today therefore is not excess Demand. And Fed price hikes, targeting Demand, will have no effect on inflation driven by Supply of global energy and other commodities caused largely by Trump policies.

On the other hand, the higher rates will have an added negative economic impact—as interest rates in general suck up and divert money capital from consumers, government and even some businesses to the super-wealthy investor class minority.

Fed Rates vs. Capitalism’s Financial & Global Restructuring

There’s more. Even if one assumes Fed higher interest rates will dampen consumer-business demand and thereby slow inflation, changes in the US and global economy the past quarter century show that Fed rate hikes have had a declining impact on dampening inflation. Conversely as well, Fed rate cuts have declining impact on stimulating consumption and business investment.

In economists’ parlance: interest rates have become increasingly inelastic stimulating as well as slowing the economy. Why is this so?

The ultimate causes for interest rate (i.e. monetary policy) growing relative ineffectiveness have to do with the growing financialization and globalization of the US and international economies since the 1990s. This phenomenon is addressed in more detail in my just released book, ‘The Twilight of American Imperialism’, Clarity Press, September 2026.

But to summarize in brief: lowering interest rates have been having a declining effect on stimulating economic growth because most of the rate cuts get redirected to investing in the expanding financial asset markets in 21st century  capitalism in the US and general Empire abroad. It is more profitable for businesses and investors to borrow money from the Fed’s affiliated banks (at lower rates) and reinvest that borrowed money in financial asset markets (in US and globally), rather than to invest in real assets in the US that produce goods and services (and in turn jobs and incomes). There are of course exceptions to the rule. But the exceptions represent a declining share of the real economy. Capitalism is changing and monetary policy has been declining in effectiveness as a result.  Fed rate hikes (or cuts) have had less effect in stabilizing the US economy.

For example: the Fed reduced interest rates to 0.11 to 0.40% from 2009 through 2016 and additionally injected $4 trillion in Federal Reserve bond buying into the economy. What happened to US GDP real growth? Annual growth rates averaged 1.43% from 2008 through 2016. One cannot argue therefore than lowering rates stimulated the real economy. They didn’t. But they subsidized a lot of investors with low cost money and made them richer.

The same applies vice-versa: the historical record in the US since 2016 shows raising rates do little to dampen inflation. What that record does show, however, is that when Federal Reserve long term bond rates hit 5.5%-6% they provoke a financial crash. That happened in 2000 just before the dotcom bust, in 2007 before the subprime mortgage-derivatives crash, in 2019 when the Repo market threaten to implode, and in 2023 when the regional banks in the US began to go belly up. Those long term US bond rates are now about 5.4% and rising!  

Rising rates make the rich richer and destabilize the financial system, while doing little to nothing to dampen global supply side inflation driven by US policies.

Fed Rates vs. Trump’s War, Trade & Sanctions

Today in 2026 another global development is rendering Fed interest rate policy ineffective: Trump’s Middle East wars, sanctions and trade policies, and the consequent decline of the US dollar, are all responsible for driving up global energy and commodity prices. It has nothing to do with domestic Demand.

While the US domestic economy is essentially self sufficient in oil and energy, the global economy is not. That’s especially true for Europe and northeast Asia (Japan, South Korea).

Trump’s war in Iran, now spreading throughout the Middle East region, has resulted in a serious shortage of energy (oil and natural gas) In Europe in particular. The US initially exported large quantities of US (and Venezuela) oil and gas to Europe when the Iran war began. Much of the US release of its Strategic Petroleum Reserve (SPR) was exported to Europe. However, now the SPR reserve release is running low and Europe oil supply from US exports is in trouble. Global oil and gas prices have therefore begun accelerating again, and US prices in turn as US oil companies price their sales on global prices not domestic supply.

US sanctions policy—in particular on Russia and Iran—is also driving up global energy prices. So is Trump’s tariff wars raising import prices. And the devaluation of the US dollar which is doing the same.

But if the Federal Reserve’s raising rates has no effect on US and global energy supply and thus no effect on US domestic inflation, why is the Fed raising rates nonetheless?

US Inflation & US Treasury Market Crisis

The US Treasury and its agent selling Treasury bonds, the Federal Reserve, need to raise interest rates. Why? To offer higher returns to buyers of US Treasuries and thereby provide an incentive to buy more US Treasuries.

So why does the Fed and US Treasury have to sell more bonds and securities?

Because the sale of Treasuries to buyers domestic (2/3s) and foreign (1/3) are the primary means by which the US covers its annual budget deficit. This year the 2026 deficit will exceed $2 trillion. It has done so since 2020. Total US defense and war spending is the largest cost element in the annual US budget deficit. Pentagon spending is already over $1 trillion and Trump has requested $1.5 trillion in 2027 to cover the continuing cost of wars, replenishing exhausted US weapons supplies, and to fund new weapons systems like drones, hypersonic missiles, autonomous weapons, etc. Interest rates on past Treasury sales now costs the US more than $1.2 trillion a year and rising as the US national debt escalates past $40 trillion.

 In short, the US must now sell even more Treasuries in order to cover the rising budget deficit driven by ever higher defense and war spending. (Either that or Congress must raise taxes on the rich which it won’t do).

But in order to sell more Treasuries, the Fed needs to raise interest rates it pays borrowers (buyers) of the Treasury securities.

One may argue that the Federal Reserve knows it must raise rates not so much to dampen inflation (which higher rates won’t do), but to sell more Treasuries to pay for US war driven escalating budget deficits and accelerating interest payments on the national debt.

There’s yet another twist to the Federal Reserve’s rate dilemma: Not only must it sell more Treasuries to cover the rising budget deficit and debt, but it faces a growing challenge to even maintain current levels of Treasury sales.

Forces are developing which indicate that key groups of foreign buyers of Treasuries (1/3 of all buyers) are retreating from purchasing US Treasuries.

The Fed must raise rates not only to cover a rising budget deficit. It must raise rates to attract more domestic US buyers of Treasuries as foreign buyers of Treasuries retreat.

The retreat from holding Treasuries has been underway for some time by China. Once having held $1.2 trillion in US securities just a decade ago, latest data show China holds only $.63 trillion. It continues to steadily divest itself of Treasuries, not buying new and allowing old to mature and roll off. Other economies of the global south are beginning to do the same. Blame US sanctions and trade war policies for much of this development. They are replacing Treasuries with gold, and soon digital currencies as well.

For example, recent events in Japan indicate Japan, once a stalwart purchaser of US Treasuries, may be about to join China and reduce its Treasury holdings. A constant holder of more than $1 trillion, the largest foreign buyer, of Treasuries, Japan began to slow its purchasing in 2026. The reason? Japan’s own government bond rates are rising for the first time in more than a decade. Japan’s currency value was formerly zero. Its investors, and global investors, used to buy Japan Yen cheap and use it to buy US dollars and in turn US Treasuries. That was called the carrying trade. That is ending. Japan’s bonds are rising above 3%. Its Yen is also rising. With the government bond rate differential between Japan and US Treasuries narrowing, global investors are now buying Japan bonds instead of US Treasuries. That is why US Treasury Secretary Bessent last month entered the Yen market to buy Yen (with Euros by the way, saving US dollars for other purchases). He did that to prop up the Yen, keep Japan bonds from rising further, and ensure foreign investors continue buying US Treasuries.

However, events in September thus far show Bessent has failed. Japan may therefore buy fewer Treasuries—i.e. at a time that China is buying less and the US needs to sell even more Treasuries to cover its accelerating annual budget deficit!

There’s a third reason why foreign Treasury sales may be entering a crisis. In recent years, as China reduced its buying and Japan didn’t increase its, Europe stepped in to fill the gap, accelerate its buying of US Treasuries, and to help the US cover its US budget deficits as US war spending accelerated after 2021.

European countries in many cases more than doubled their purchases of US Treasuries from 2021 through 2026: Britain increased its holdings of Treasuries from $412 billion in 2020 to $865 billion in 2025; Belgium from $135 billion to $466 billion. Luxembourg from $197 to $431 billion; France from $49 billion to $376 billion and so forth.

One may argue Europe did so in exchange for continuing US military support for NATO in Europe and for Europe-NATO’s war in Ukraine. But with Trump’s decline of support for NATO funding and Ukraine war spending, Europe now has to fund the Ukraine war itself. To that end it has thus far raised or committed $176 billion in Euro bonds. Will it—indeed can it—continue to buy US Treasuries at the same rate as before? Not likely for several reasons.

First, it’s less likely given that Trump and Europe are feuding over Greenland; Trump is attacking Europe with tariffs; And Trump is angry with Europe’s lack of support for his war in Iran. Europe has a number of incentives therefore to reduce its prior level of purchases of US Treasuries.

Evidence is beginning to appear Europe plans not to continue purchasing US Treasuries at past rates. France, Belgium, Britain and other European countries in recent weeks have begun moving their physical gold stocks from the US back to Europe. That likely means it plans to substitute gold in lieu of buying US Treasuries. More outright shifts are also occurring. The huge Norwegian Sovereign Wealth Fund has reportedly begun selling its Treasuries.

A countervailing force, however, is that Europe has nowhere to go for oil and natural gas other than the US. Oil and energy from the Middle East to Europe continues to decline. The US has backfilled much of Europe’s oil needs in the first half of 2026 with SPR exports. With SPR now running low, that export may slow. In turn, Europe energy prices have begun to escalate still further.

In parallel to Europe, Canada has begun orienting toward Europe as result of a deep trade dispute with Trump. It has become an associate member of the EU. Like Europe, Canada previously increased is buying of US Treasuries from $69 billion in 2020 to $475 billion in 2025. And like Europe, it is unlikely it will continue to do so as the trade dispute between Canada and Trump further deteriorates.

The point of this preceding analysis is that a crisis in the US Treasury market is brewing. Foreign purchases of Treasuries are likely to slow across the board—at a time when the US needs to sell even more to foreign buyers to cover its further escalating war cost driven budget deficits.

That means the US Treasury needs to sell even more to US domestic buyers of Treasuries. For that it needs to raise the rates it pays buyers of US bonds and other securities, to entice them to buy even more and not just at prior rates.

The Treasury Market and Accelerating Decline of Empire

This is where financial instability in the massive Treasury market comes in. The US has to sell more Treasuries to domestic buyers in particular. But who are those buyers? In recent years they have been the increasingly unstable US financial institutions like hedge funds and other so-called and unregulated ‘shadow banks’.

Should the US real economy slow—or worse the AI investment bubble go bust—hedge funds and their ilk may begin to retreat from the Treasury market. The result could be the eruption of a major crisis in the Treasury market, which would reverberate across all financial markets rapidly. One may argue that’s perhaps why Bessent also recently began to provide an extra $8 billion a week to Treasury investors.

A crisis in the Treasury markets would drive Fed rates even higher—perhaps beyond that 6% long bond rate that history shows since 2000 is a tipping point for precipitating a general financial crash. Should that occur, a deep contraction of the US real economy would be certain. That contraction would then exacerbates even further the ability of the US empire to fund its projected war spending.

The Empire would have to accelerate its geopolitical retreat, already underway, as its funding collapses. Empires and their military cannot sustain themselves without sufficient funding. Slowing US Treasury sales and a contracting real economy and deep recession ensure the US Empire would have to retreat and consolidate—to the western hemisphere and central Pacific at minimum.

About the Author

Dr. Jack Rasmus is the author of several books on the United States and the global economy, including The Twilight of American Imperialism, Clarity Press, 2026; The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, Clarity Press 2020, and Systemic Fragility in the Global Economy, Clarity Press, (2016). He is a host for the radio show Alternative Visions on the Progressive Radio Network, a journalist, a playwright, and a former professor of economics at St. Mary’s College (retired).

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Predicting the US and Global Economy, 2013-14′ by Dr. Jack Rasmus

Posted in Uncategorized, tagged , , , , , on June 16, 2013| Leave a Comment »

Annually for the past three years this writer has made leading edge predictions about the trajectory of the US and global economies for the 12-18 months to come. The last previous set of predictions appeared in the January 2012 issue of ‘Z’ magazine. Eighteen months later, it appears most have materialized. The following briefly summarizes those prior predictions, and makes further predictions for the next 18 months, through December 2014:

I. Review of January 2012 Predictions

1. The forecast that the US would enter a double dip recession around late 2013 or 2014 is yet to be determined. However, the US and global economies both appear to be slowing significantly (see my blog piece ‘US GDP Longer Term Trend Analysis’), while China, the BRICS, and in particular Europe all are slowing even faster. Japan has engaged in a desperate and risky monetary stimulus that will fail in the longer term. Simultaneously, financial instability worldwide grows as asset bubbles peak and begin to deflate.

2. It was also predicted in the January 2012 issue that the US Federal Reserve would introduce a third version of its QE program. That prediction was realized, with the Fed introducing an open ended $85 billion a month liquidity injection.

3. A third previous prediction in January 2018 was that deficit cutting would begin again in ‘great earnest’ immediately following the November 2012 elections. That of course also happened, with fiscal cliff, sequestration, and all the rest.

4. In 2012 it was predicted Social security and Medicare spending would be cut a minimum $700 billion, based on what Obama had proposed in the summer of 2011, but backloaded into later years of the coming decade. That is yet to be determined, but appears likely as Obama’s 2012 budget again called for $700 billion in such cuts.

5. Two predictions in January 2012 did not prove accurate: that home prices would continue to fall and foreclosures rise. Single family home prices began to rise slowly in late 2012, albeit only one fourth of the original decline. More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013

6. In the January 2012 predictions, it was forecast that US manufacturing and exports would slow in late 2012, which did, and the minimal job growth in manufacturing would level off and decline, which also has occurred.

7. Prior predictions forecast that jobs recovery would undergo a series of ‘false starts’ determined by seasonal and other statistical factors. The result would be little net reduction in total unemployment. This proved partially true: some jobs were created, but more workers than expected left the labor force entirely. The previous prediction of 24 million jobless compares to today’s official 21 million jobless. But the numbers are largely the same if one considers the 4-5 million ‘jobless’ who left the labor force altogether. As a related new prediction: There will be still be no sustained recovery of jobs over the coming year. Jobs will continue to ‘churn’, with high wage replaced with low wage, full time with part time/temp, current workers with jobs leaving the labor force and new entrants and lower pay taking their jobs, etc.

8. Past predictions were more accurate with regard to the global economy. It was predicted the Eurozone sovereign debt crisis would stabilize, then worsen again. The temporary stabilization occurred in the late summer of 2012. The worsening once again is pending. It was also predicted two or more Euro banks would fail. More than that failed in the periphery of the Eurozone alone, with others in Belgium, Netherlands and elsewhere.

9. It was predicted both France and Germany would enter recession in 2012 and the UK experience a double dip—all of which occurred.

10. It was predicted that global trade would slow and begin to contract in 2012—a prediction that also proved correct.
The following constitute this writer’s predictions for the US and global economies in the coming 18 months. (For a more detailed explanation of why these predictions, see the July issue of ‘Z’ magazine, and this writers article “Predicting the US and Global Economy”. This article will be posted on the writer’s website, http://www.kyklosproductions.com/articles, in late July. See also the writer’s weekly radio show on the Progressive Radio Network, ‘Alternative Visions’, archived on Wednesday, June 12, 2013, for an audio explanation of the bases for the predictions).

Economic Predictions: 2013-2014

1. The U.S. will enter a double dip recession around late 2013 or 2014, providing both of the following occur: that either U.S. policymakers continue deficit cutting and a more severe banking crisis erupts in Europe. Either event may be sufficient to precipitate recession. Both most certainly will.

2. The Fed will begin reducing its $85 billion a month liquidity injection significantly within the next 12 months. Monetary retraction will severely disrupt both stock and bond markets. A major stock market correction will ensue and may have already begun at this writing. The additional financial markets at greatest risk are corporate junk bonds, real estate investment trusts, and money market funds.

3. There will be yet another round of deficit cutting later in 2013 and it will be associated with a major revision of the U.S. tax code. That tax code change will include a big reduction in corporate tax rates, from the current 35 percent to somewhere around 28 percent, perhaps phased in over time. Multinational corporations will also get a sweet deal on their $1.9 trillion offshore cash hoard, paying less in the end than their legally required 35 percent rate. R&D tax credits and other depreciation acceleration tax cuts will also occur as part of the deal.

4. In the next round of deficit cutting, Social security and Medicare spending will be cut a minimum of $700 billion—already proposed in Obama’s 2014 budget—and perhaps much more.

5. The much-touted current housing recovery will stall and single home price increases will slow and perhaps even level off. (More than 1.1 million new foreclosures were added to the roughly 14 million total to date in 2013.) Housing will bounce along the bottom much like other sectors of the economy. Institutional speculators will continue to drive the market and once again convert it into a speculators dream, different in form from the subprime fiasco but similar in content.

6. Manufacturing and U.S. exports will slow still further, drifting in and out of negative growth as the global economy and world trade continues to contract further.

7. There will be still be no sustained recovery of jobs over the coming year (today’s official jobless is 21 million). High wage jobs will be replaced with low wage, full-time with part-time/temp, current workers with jobs leaving the labor force, and new lower paid entrants taking their jobs.

8. The current negotiations between the Obama administration and Pacific Rim countries to create a Trans Pacific Partnership (TPP)—NAFTA on steroids—will be concluded, but will not pass Senate approval until after 2014, or take effect until 2017.

9. With regard to the global economy, the Eurozone sovereign debt crisis will again worsen and the banking system grow more unstable. Austerity policy will focus more on direct attack on wages and benefits.

10. More economies in the Eurozone will slip into recession, including Denmark and perhaps Sweden. France’s recession will deepen. Germany will block the formation of a bona fide central bank in the Eurozone and the UK will vote to leave the European Union.

11. China growth rate will continue to drift lower and it will be forced to devalue its currency, the Yuan, as Japan and other currencies are driven lower at its expense by QE policies. A global currency war, now underway, will intensify.

12. Gobal trade will continue to decline.

13. Japan’s risky experiment with massive QE and modest fiscal stimulus will prove disastrous to the global economy, resulting in still more speculative excess and financial instability. Japan’s stock and asset markets will benefit in the short run, but not the rest of the economy in the longer run.

14. Capitalist economies worldwide will converge around QE monetary policies, more modest deficit spending cuts, and a more focused attack directly on workers wages and especially social benefits like pensions, healthcare services and the like—i.e. the U.S. formula. The consequence will be more income inequality worldwide and no noticeable positive impact on economic growth. The next financial crisis event may not come in the form of a crash of a particular market, but in the form of a grinding slow stagnation of markets in general. With general stagnation of the real economy, a slow drift into no growth scenarios is a distinct possibility.

Jack Rasmus
June 15, 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. His website is http://www.kyklosproductions.com; his blog: jackrasmus.com; and twitter handle #drjackrasmus.

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US GDP–On the Road to Double Dip?

Posted in Uncategorized, tagged , , , , , , , on January 30, 2013| 3 Comments »

US GDP data released on January 30, 2013 for the fourth quarter 2012 showed a decline in GDP of -0.1% for the last three months of 2012, thus raising the specter of the US economy, facing still further deficit spending cuts in 2013 amidst declining consumer confidence, may be on track for a possible double dip recession in 2013 or 2014 along with other economies in Europe, the UK, and Japan.

In the fourth quarter GDP numbers, government and business inventory spending led the decline. To the extent consumer spending played a positive role at all in the 4th quarter, it was largely driven by auto sales—stimulated by auto dealers offering buyers deep price discounts, virtually free credit with near 0% auto loan interest rates, as well new auto purchases in the northeast as a result of Hurricane Sandy’s destruction of existing auto stock. 2012 Holiday season retail sales data, in contrast, were otherwise not particularly notable and would have been much worse without the auto sales exception. How much longer auto companies can continue the deep price discounts and free credit remains a question going forward. Net export sales continued to sag in the last quarter, as the slowdown in world manufacturing and trade continued. And, as others have noted, an important source of past consumer spending and GDP growth—i.e. health care services—began to slow ominously at the end of 2012 as well, promising to continue that trend into 2013.

This weak scenario in the fourth quarter 2012, and the virtual absolute stop to US economic growth, was predicted on this writer’s and other public blogs in a piece entitled “US 3rd Quarter GDP: Short Term Myopia vs. Long Term Realities” last October 2012 (see jackrasmus.com, as well as in this writer’s April 2012 book, ‘Obama’s Economy: Recovery for the Few’).

Last October 2012, it was noted that the 3% growth rate in the preceding 3rd quarter, July-September 2012, period was artificially produced by record levels of one-quarter federal defense spending accounting for more than one third of total GDP growth in the quarter. That government spending surge was preceded by more than two years of federal government spending reductions, and thus the third quarter defense-government spending acceleration represented previously held back government spending, to be released right before the November 2012 elections. It was predicted in the above blog commentary on GDP 3rd quarter results that government spending therefore would decline sharply in the following fourth quarter—which it did. It was further noted business inventory spending was on a track to decline as well in the fourth quarter, and that US net exports, having turned negative in the third quarter, would continue to decline in the fourth quarter—all of which also occurred in the latest GDP report. The true US GDP growth trend for July-September was therefore not the 3% reported, but only around 1-1.5% for the third quarter when the appropriate adjustments are made. And that 1.5% or so been the average GDP rate for more than two years. Then the bottomed dropped out in the fourth quarter, as GDP collapsed to -0.1%.

So what’s going on? Is the fourth quarter GDP an aberration? A temporary one time event? Or a harbinger of a still further slowing US economy, moving more in line with global economic trends indicating a slow but steady further slowdown?

In the first quarter 2013, a number of negative developments in the fourth quarter will likely continue, along with new negative developments, together suggesting the first quarter 2013 GDP will at best look much like the fourth quarter—and could even prove worse.

First, more than $100 billion has been taken out of the economy with the end of the payroll tax cut last January 1. Second, consumer sentiment and spending is showing a definite sharp decline in the early months of 2013. Deficit cutting will intensify with a deal on the ‘sequestered’ $1.2 trillion agreement that will occur in March in Congress. Defense spending cuts projected will be reduced, but non-defense spending will occur and perhaps even rise. Consumer spending on autos, which has been a plus in 2012, cannot continue at the prior pace. Health care spending will likely continue to slow, as health insurance premiums of 10-20% continue to be imposed in the new year by price gouging health insurance companies looking to maximize their returns in 2013 in anticipation of Obamacare taking effect in 2014. Business spending that occurred in the fourth quarter to take advantage of tax laws will almost certainly slow in the first quarter. Industrial production and manufacturing will add little, if anything, to the economy and housing will contribute to growth through apartment construction. In short, the scenario is one of continued very slow growth.
It is not the deficit that faces a ‘cliff’; it is the US economy. As this writer has repeatedly written since last November, the ‘fiscal cliff’ was mostly an economic farce. Real forces were further slowing the real US economy. Those real forces are once again reasserting themselves. However, should Congress proceed with continued deep spending cuts in 2013, should the Euro economies, UK, and Japan continue to weaken, and should China-India-Brazil not succeed in reversing their economic slowdowns significantly—then the odds of a double dip in the US will rise still further in 2013-14, as this writer has repeatedly predicted.

The strategic question is ‘Why is the US economy so fragile and weak? Why has it been unable to generate a sustained economic recovery from ‘Epic’ recession since 2009? Why now, after five years since the onset of recession in late 2007, has the US economy stagnating and collapsed to virtually zero growth, once again? ‘
The answers to this are not all that difficult to understand. First, despite $13 trillion in free, no interest money given to banks, investors, and speculators by the US federal reserve for five years now, the banks still continue to dribble out lending to small-medium US businesses. No loans mean no investment mean no hiring mean no income growth for consumption, which is 70% of the economy. Similarly, large non-bank corporations continue to sit on more than $2 trillion in cash. Like the banks, they too refuse largely to invest in the US to create jobs, preferring hold the cash, or use it to buyback stock and pay shareholders more dividends, to invest it offshore, or to invest it in speculating with financial instruments like derivatives, foreign exchange, commodities futures, and the like.

At the same time, the bottom 80% of households, more than 110 million, are confronted with 5 years now of continuing real disposable income stagnation or decline. This income stagnation and decline translates into insufficient income to stimulate consumption spending, which makes up 71% of the US economy. What spending exists is fundamentally credit driven, not income driven. Thus car loans, student loans, credit cards, and installment loans rise and with it household ‘debt’.

The problem with the US economy therefore is fundamentally twofold: not only insufficient income but growing household debt. Together they result in consumption becoming increasingly ‘fragile’ (an income to debt ratio term), and therefore unable to play its historic role of generating a sustained economic recovery. Together, fiscal-monetary policies are rendered increasingly ‘inelastic’ in generating recovery as ‘multipliers’ collapse—to use economic jargon. The outcome of all this is ‘stop go’ recoveries, bumping along the bottom, or what this writer has called an ‘epic’ recession.

by Dr. Jack Rasmus, copyright 2013

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