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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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RADIO SHOW RECORDING

Alternative Visions – The US Fiscal-Monetary Crisis Intensifies – 10/02/13

Oct 2nd, 2013 by progressiveradionetwork

Dr. Jack Rasmus provides his analysis on the current government shutdown and the repeat of the debt ceiling crisis coming by mid-October and their possible negative impacts on the economy. Rasmus then considers the ‘other policy crisis’–i.e. the US Federal Reserve’s QE and zero interest rate monetary policies. He explains why US monetary policy has also entered a crisis stage in recent months–i.e. proving increasingly ineffective at stimulating the real economy while simultaneously generating financial bubbles. QE and austerity policies elsewhere in the world are discussed, with similar counterproductive effects on the real economy. Rasmus concludes the US and global economy is now entering a period of growing ineffectiveness of traditional fiscal-monetary policies generating a sustained economic recovery, at a time during which the US and global economies continue to slow or stagnate long term.

LISTEN TO THE FULL 56MIN. SHOW ON THE ‘ALTERNATIVE VISIONS’ WEBSITE AT:

http://prn.fm/category/archives/alternative-visions/

OR ALSO AT:

http://alternativevisions.podbean.com/

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This past week the US central bank, the Federal Reserve (Fed), opted not to change its current 3rd Quantitative Easing (QE) policy providing $85 billion a month in bond purchases from bankers and investors. The Fed’s QE3 policy has been in effect for about a year, injecting in excess of $1 trillion in subsidized money into the US and global economy. Since QEs began in 2009, the total injection will have exceeded $4 trillion by the end of this year.

Consensus was strong in recent weeks that the Fed would at least slightly reduce that $85 billion, by a token $5-$10 billion a month. That would have provided a mild, second signal it would begin reducing its $85 billion a month money injection.

Last May-June 2013, the Fed’s chairman, Ben Bernanke, initially signaled to the markets the Fed might soon start ‘reducing QE. That set off what has been called the ‘taper tantrum’ by investors. Almost immediately in response to the Fed’s suggestion, rates on bonds in the US began to escalate, including mortgage rates, corporate bond rates and US Treasury bonds—all of which surged by more than a full 1% in a matter of weeks.

The outcome of the rapid rate rise was the tepid US housing market recovery almost stalled, stock and bond prices began to tank, and investment into ‘emerging markets’—where much of the total $4 trillion in QEs since 2009 has gone—began to reverse and flow back from abroad to the US and Europe. Emerging markets’ currencies in turn began to decline, the global currency war ratcheted up another notch, and capital flight from those economies to the west accelerated.

Faced with the ‘taper tantrum’ by global high net worth investors and their institutions—aka ‘the markets’—the Fed and Bernanke quickly changed their tune by early July, reassuring investors and speculators that s significant retraction of QE3’s $85 billion wasn’t really their intention. The ‘markets’ quickly sighed with relief and stock, bond, property, and other financial asset prices rose again.

As part of its so-called ‘forward guidance’ policy—notifying markets of its future intentions—the Fed in August took another shot, this time more cautiously, at trying to extricate itself once again from its massive, five year, $4 trillion QE program.

The extrication has become increasingly necessary, since QEs—together with the Fed’s accompanying policy of ‘zero bound’ interest rates—have been force-feeding financial asset bubbles globally—threatening to destabilize the global money system. Simultaneously, it has become no less clear that these dual Fed policies have become increasingly ‘inefficient’—that is, while feeding financial speculation and asset bubbles they have not resulted in much real investment in goods and services.

As more and more reports and articles have begun to show, as QE continues to grow and financial asset market prices rise, the growth of real investment in goods and services continue to slow. According to one report, only 15% of financial flows since 2009 are now going into real investment in goods and services, according to a recent article in the global news daily, the Financial Times, this past September 20.

However, the Fed’s second ‘forward guidance’ second suggestion to taper in August led to still more capital flight and currency declines in emerging markets. At the same time, by late summer in the US, a number of economic indicators began to show that the US economic recovery is not as strong as the press hype has been suggesting. Even the Fed itself has been lowering its own forecast for the US economy, from 2.5% earlier in 2013 down, most recently, to 2% GDP growth. (That downward revised forecast was not the first. In fact, the Fed has consistently reduced its US economic forecasts for the past three years, from an originally predicted 4.3% annual GDP growth).
Given the obvious concern with Fed monetary policies’ growing ‘inefficiency’ stimulating the real economy and the growing effects of QE and zero rates feeding financial speculation and bubbles, the Fed last week on September 16, shook markets and investors by deciding not to ‘taper’ at all for the moment, suspending its August implied ‘token taper’ of $5 or $10 billion a month.

To recap these Fed events over the summer: in a matter of just a few months the Fed has shifted from responding to the ‘Taper Tantrum’ to the ‘Token Taper’ retreat. This has left its policy of ‘forward guidance’—i.e. signaling its intentions to the markets—in a shambles. In recent days, several Fed board governors have returned to suggesting a third time that a reduction of the $85 billion will occur before year end, and perhaps even start in October—i.e. what might be called a ‘Taper Tomorrow’.

What all this policy shifting signifies is, in the last several months, Fed monetary policy is perhaps beginning to unwind in more ways than one.
On the other hand, the Fed’s retreat from the ‘Tantrum’ and the ‘Token’ has left speculators, investors and banksters quite happy. The stock and bond markets surged in September once again, emerging market currencies recovered a little, and other financial markets moved once more to the upside—illustrating the tight positive correlation that has evident for four years now between financial asset inflation and Fed QE policies (and the equal lack of any correlation between QEs and the real economy).

To employ a metaphor, as a consequence of its ‘on-off’ QE policy the Fed is beginning to appear like the drunk driver stopped by police after appearing to ‘weave back and forth’ on the highway. It is being asked to hold its finger to its nose and walk a straight line, to give evidence if it is indeed drunk or not. And it’s not succeeding. Instead, its stumbling to either side of the line.

What the Fed’s ‘stop-go’, on and off, QE policy signifies in a broader sense is threefold:

First, that investors and banksters have become addicted to the QE, low interest and free money policies of the Fed that have been in effect the past five years. (see this writer’s March 7, 2012 article and prediction, ‘Are Capitalists Becoming Addicted to Free Money’, on his blog at jackrasmus.com). The mere suggestion of a QE retraction, even when token, results in financial asset price declines and rising interest rates. Banksters-investors simply want the free subsidies to continue and they expect that to happen. A ‘cold-turkey’ withdrawal of liquidity sends them into ‘financial fits’.

Moreover, each time the Fed retreats on its signal to taper, it makes the next attempt even more difficult as investors anticipate and become even more predisposed to quickly respond to counter any Fed suggested move. As the Fed repeatedly retreats, the financial bubbles continue, emerging markets’ problems of currency volatility and capital flight grow, China’s real estate market becomes more fragile as hot money inflows return from the west to Chinese ‘shadow’ banks, and US monetary policy becomes even less ‘efficient’ stimulating the real US economy.

Secondly, Fed recent stop-go policies suggest the real economy has become super-sensitive to interest rate hikes—just as it has become ‘super-Insensitive’ to interest rate reductions over the past five years. (In economists’ parlance, this is expressed as the economy having become ‘increasingly inelastic’ to interest rate declines—i.e. falling rates generating little real growth—while conversely becoming ‘increasingly elastic’—rising rates quickly slowing real growth—to interest rate hikes).

QE is showing the real economy is responding less and less positively to money supply injections and interest rate declines, while more and more negatively to money supply reductions and interest rate hikes. Furthermore, the Fed’s key policy of ‘forward guidance’—i.e. telling the markets what it plans to do in order to avoid severe volatility response by investors—is now unraveling as well. No one really knows what the Fed is going to do now, how it plans to do it, and when and at what rate it plans to begin doing it. In short, the Fed is losing control of the monetary tools by which it has been stabilizing the banking and financial system the past five years.

Thirdly, it all means it will be even more difficult for the Fed to ‘taper tomorrow’, which is apparently its latest message being delivered by select Fed governors. Emerging markets may react even more volatilely to the next taper iteration by the Fed, producing even more currency volatility, capital flight, and economic slowdown. More hot money will flow into China’s increasingly fragile local property markets via its growing ‘shadow’ bank network there. Financial asset bubbles, having returned in the interim, will pose an even greater risk of too rapid asset price contraction at some later date.

Apart from problems of feeding financial speculation, asset prices, and continuing financial bubbles, the US and global real economy will now become even more ‘super-sensitive’ to QE withdrawal and resulting interest rate hikes.

Dr. Jack Rasmus
September 20, 2013

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Over the past five years the US central bank, the Federal Reserve (Fed), has printed nearly $4 trillion in liquidity (money) which it has provided to banks and professional investors. This is called ‘Quantitative Easing’ (QE). QE means the Fed essentially prints money and buys bonds—mostly toxic subprime mortgages to date—from institutional investors (i.e. banks, shadow banks, foreign banks, other investors). In addition to printing nearly $4 trillion with which to buy bonds from banks and investors, since 2008 the Fed has also conducted various ‘special auctions’, by which it has loaned additional trillions of dollars at little or no interest to banks. Still more trillions were loaned were loaned by the Fed by means of policies that resulted in near zero interest rates (between 0.1%-0.25%) at which banks could borrow money.

The Fed’s QE purchases represent a massive direct subsidization of banks and investors, since the Fed’s bond purchases were almost certainly bought in most cases at prices well above the collapsed value of the bonds—most of which were mortgage bonds including toxic subprime mortgages. But we’ll never know the exact price the Fed paid bankers and investors for the bonds, since the Fed doesn’t provide specific reports on individual deals and purchases; not even to Congress. Only the aggregate data is reported.

The total of QE, special auctions, and near zero interest rates made available to bankers and investors since 2008 comes to at least $10 to $15 trillion. Some estimates range as high as $20 trillion. The number rises still higher when similar QE and free money measures by foreign central banks is taken into account; specifically, by other major central banks like the Bank of England, Bank of Japan, and the European Central Bank (ECB).

Justifying QE1: Economic Recovery

The Fed originally argued in 2009 that this massive, free money injection and bank subsidization was necessary to stimulate the US economy and generate a sustained full recovery as quickly as possible. But even if the Fed and its policies were responsible for all the economic growth since 2009, an impossible assumption that ignores all other contributions to growth, that contribution would still amount to only 8.2% GDP growth over the past five years—which is about only half the GDP growth after five years that occurred in prior recession recoveries since the 1970s.

The Fed’s QE policies these past five years have come in four doses. There was the initial QE1 in 2009, amounting to $1.75 trillion in bond purchases. The US economy then stalled out in the summer of 2010. Then came the $600 billion QE2 in the fall of 2010. The economy stalled a second time in 2011, leading to what was called ‘Operation Twist’ (QE 2.5?) that provided another $400 billion in mortgage bond purchases. When that petered out, it was followed by QE3 last September 2012. Unlike its predecessors, QE3 has had no limit. It calls for Fed purchases of $85 billion a month for ‘as long as necessary’. So QE3 has now amounted to about another $1 trillion, and continues to rise by $85 billion every month.

While there is talk that the Fed may start to ‘taper’ (reduce) its $85 billion a month, don’t expect much of a change. Maybe $10 billion a month or so reduction. QE will therefore continue for some time. That’s because, as this writer has argued elsewhere, bankers and big investors are now ‘addicted to the free money’ regime that characterizes 21st century finance capital globally today.

Just the mention of a possible ending of QE by the Fed this past June sent bankers-investors globally into financial fits and paroxysms last June. Stocks, bonds and other financial assets fell into a major tailspin in a matter of weeks. The Fed quickly denied it had any such intention of ending QE. The markets quickly recovered and went on their merry financial bubble way once again. That event of possibly reducing QE, and financial markets’ extreme reaction, this past summer has been called the ‘taper tantrum’. What’s coming in the next few weeks, however, is at most a ‘taper tweak’.

Justifying QE2: Restoring Price Stability

The Fed initially launched QE1 in early 2009, claiming it would stimulate the economy and generate a recovery. But no such thing happened. In the summer of 2010 the economy weakened again. The Fed thereafter switched its excuse. It next argued in 2010 a second QE was necessary, this time to head off the growing trend in the economy toward deflation (price declines) at the time.

Deflation is a very dangerous thing. As long as prices continue to fall, businesses will hold off investing and consumer households from buying. For businesses, deflation creates uncertainty whether they can sell their goods at a price high enough in the future to cover their production costs in the present. For households, deflation results in consumers ‘waiting for prices to bottom out’ before actually purchasing again. The recent housing market in the US is a good example. Home prices continued to fall for four years, about 40% on average. During the period of home price declines the housing market did not recover, despite the 30%-40% price drops. It wasn’t until late 2012, as home prices began to rise, that home buying recovered a little and home prices began rising a little, by about 12-15%. Thus deflation means both business investment and household consumption ‘freeze up’. That means no recovery. The Fed therefore argued another round of QE was needed to halt deflation and get prices rising again, so that investment, consumption, and recovery could follow.

But the Fed’s claim that QE 2 was needed to prevent deflation and raise prices (to a Fed target of 2.5%), as a way to encourage investment and consumer spending, didn’t materialize either. Between 2010-2011, the period during which QE2 was in effect, consumer and wholesale prices for goods and services continued to slowly drift lower, flirting dangerously with deflation. While QE policies may—and often do—result in price bubbles for financial assets (stocks, bonds, etc.), they have little effect in terms of inflating prices for normal goods and services.

So the Fed’s QE1 did not generate a sustained recovery for the US economy (which has been bouncing along the bottom now for four years since the ‘end’ of the recession in June 2009). And its QE2 did not result in getting prices to rise to the Fed’s minimal target of 2.5%. The primary goals of QE in its first and second iteration therefore failed.

Justifying QE3: Reducing Unemployment & Creating Jobs

Enter QE3, and the Fed’s third justification for introducing yet another third round of QE3 in the fall of 2012. The new excuse was that another QE was necessary in order to reduce unemployment rates and get a job recovery underway. In September 2012 the Fed announced it would launch another QE, printing and injecting $85 billion a month into the economy, until such time as the ‘U-3’ unemployment rate fell—from the 8.1% level in September 2012 to a 6.5% target level. The U-3 rate has come down over the past year to 7.3%. Meanwhile, the more accurate U-6 unemployment rate still remains around 14% and more than 20 million continue unemployed.

But the Fed’s QE3 has not really been responsible for reducing even the unemployment rate from 8.1% to 7.3%. That reduction has been the result of millions of unemployed leaving the labor force altogether over the past year, and from jobs ‘churning’ from declined in full time jobs to increases in part time and temporary jobs.

Over the past year, 2012-2013, it is true that the US economy has created 2.3 million jobs. But this has been largely part time and temp jobs, with low pay and essentially no benefits.

‘Jobs Churn’: The US Jobs Market Today

The main characteristic of the US job market today is perhaps best described as a ‘job churn’. While the US is not losing jobs, it is not creating them very well—at least not decent paying jobs.

The US is ‘churning out’ full time jobs and replacing them with ‘contingent jobs’. Since January 2013 through July 2013, just under a million jobs were created; but no fewer than 650,000 of these were part time and temp jobs. Meanwhile, 250,000 full time jobs disappeared over the same period. This ‘job churn’ has other dimensions as well.

In addition to replace full time with part time-temp jobs, it is providing jobs for millions of new entrants (at mostly part time-temp status) as millions more leave the labor force altogether.

It is substituting high paid jobs for low paid. As a recent study showed, 60% of the jobs lost since 2008 have been ‘high paid’ (more than $18/hr. on average), while 58% of the jobs created since 2008 have been ‘low paid’ (less than $12 an hour).

Not only substituting new entrants to the labor force for those leaving the labor force; not only full time for part-time/temp jobs; not only high paid for low paid. The economy is churning out union jobs and replacing them with non-union jobs as well.

It is a sad but remarkable fact that while the economy added a couple million jobs since 2012, US unions experienced an unprecedented decline of 500,000 jobs in 2012 alone. That loss amidst job creation has never before occurred for organized labor. At that rate, its meager 6% or so unionization rate in the private sector today will fall to 3% or less by the end of the current decade—i.e. the lowest ever, signifying the virtual disappearance of organized labor in the private sector in America for all practical purposes.

QE as 21st Century ‘Trickle Down’

Notwithstanding the foregoing facts, if one still insists on maintaining that the Fed’s QE3 has reduced unemployment, it is clear that QE to date is an incredibly inefficient, costly, and wasteful way to create jobs.

For example, let’s assume QE3 and Fed monetary policy is responsible for half of all the 2.3 million jobs created over the past year—a generous assumption. But let’s assume it nonetheless. That’s 1,150,000 of the roughly 2.3 million jobs created over the past 12 months. Let’s further assume that about 400,000 of that 1,150,000 represents part time-temp jobs. Next, if two part time jobs roughly equals one full time job, that’s 200,000 full time equivalent jobs created by QE and the Fed the past 12 months. Add that 200,000 to the remaining 715,000 full time jobs assumed created by QE3 over the past year, adds up to a total of 915,000 full time jobs created by QE/Fed over the past year. Let’s round it all up, to an even 1 million jobs created by QE3.

Now let’s take the $1 trillion cost of QE3 over the past year. Divide the $1 trillion by 1 million jobs and the result is a cost of $1 million per job created. That’s an absurdly inefficient and wasteful job creation program!

So who has really benefited from the Fed’s $1 trillion QE job creation program?

Taking the calculations one further step, the average wage of the 1 million jobs is reasonably no more than $15/hr—given the composition of 400,000 part time-temp, low paid jobs in the total. That $15/hr. is about $30,000 a year. The ‘benefits cost’ load is no more than 10% of the base pay, since many of the jobs are part time-temp with essentially no benefits. That’s another $3,000. That’s $33,000. That leaves $967,000 of QE3’s Fed printed money going into the pockets of someone else other than the worker who got the QE created job!

The ‘someone else’ in this case include the bankers and investors to whom the $1 trillion was provided in the first place. The bankers and investors then mostly loaned out the QE mostly to other speculators, who in turn likely invested it in the stock, bond and derivatives markets—thereby driving up the financial asset prices for these securities which, when sold, realize super-capital income gains. Given the absurdly low capital gains tax rates that exist, the bankers-investors get to keep 85% or more of their profits (realized income). Alternatively, they might not loan out the $967,000 billion from the Fed QE windfall to other financial market speculators, but loan it to offshore emerging markets, like China. In either case, the $967,000O doesn’t create any jobs in the US since it doesn’t result in investment in the US. Or, thirdly, they might just hoard the cash; or send it to their offshore tax havens in order even to avoid paying the nominal capital gains tax; or, if they’re a public corporation, as most banks are, use it to buy back their bank stock, payout more dividends to shareholders, or use it to purchase their competitors (mergers & acquisitions). None of that creates jobs either.

The net outcome of QE is the escalating incomes of bankers, investors, wealthy shareholders and high net worth individual households. That means even more income inequality in the US.

It is not coincidental that during the period of QE1-QE3 in the US, income inequality has accelerated at an even faster pace than in the past. As the most recent data on income inequality trends, released by Professor Emmanual Saez of the University of California earlier this month as part of his on-going study of income inequality trends, shows: the wealthiest 1% households accrued 95% of all the income gains in the US economy between 2009-2012.
QEs mean bankers and investors get $967,000 and the worker gets $33,000. That’s the essence of the Fed’s current QE3 job creation/unemployment rate reduction claims!

If one were to assume this ratio represents ‘trickle down’ economics in practice today, it would mean that for every one dollar in income for the worker, the capitalist-investor-banker is now getting 29.3. Of course, that 29.3 invested in financial securities generates even more income over time. The ‘trickle down’ ratio rises further and is virtually unlimited to the upside for the wealthy investors who benefit enormously from the free money QE policies of the Fed—while workers struggle to make ends meet working increasingly part time and temp jobs with low pay and no benefits.

A ‘QE for Jobs’ Program Alternative

It doesn’t take much imagination to envision a better, more efficient, less wasteful way to create jobs. If the Obama administration had a 21st century Works Progress Administration direct job creation program, it could have the Fed print the $1 trillion QE3 and create 20 million jobs at a fully loaded full time $50,000 a year. That would instantly wipe out every U-6 jobless person in the US. That’s 20 million jobs at $50k vs. the Fed’s current ‘unemployment reduction program’ of 1 million jobs at $33k.

Why should the Fed print money and subsidize the incomes of super-wealthy investors and their banks? Why shouldn’t the Fed use its printing press to instantly finance the creation of 20 million jobs directly by the US government? That’s a jobs program that would add nothing to the US deficit and debt, just as the Fed’s QE programs have added nothing to the US deficit and debt.

Those who argue to do so would result in a major inflation are simply ignoring the facts. Nearly $4 trillion in QEs to date have had no effect on inflation in goods and services. They have only inflated financial securities prices. Inflation in real goods and services continues to drift lower, flirting with bona fide deflation. If the Fed wants the get goods and services inflation to rise to 2.5%, a QE for Jobs program noted above would likely do it.

Others might argue that a $1 trillion ‘QE for Jobs’ program would mean the Fed would have to print $1 trillion every year to keep paying for the jobs in subsequent years. But that’s nonsense. It doesn’t take much imagination to understand that $1 trillion in jobs-related income in the hands of 20 million workers would result in a major boost to consumption. That in turn would result in businesses finally investing in the US and creating jobs to match the consumption demand. As real investment rose, the Fed ‘QE for Jobs’ might actually be scaled back in magnitude.

A ‘QE for Jobs’ program would also represent the greatest reduction in income inequality overnight in US history. It would also mean an annual first year boost to consumption of at least $500 billion. Considering possible ‘multiplier effects’, that would mean a boost to US GDP of more than $1 trillion. That would in turn easily push the US economic recovery to an annual GDP growth rate of more than 7% to 8%–and result in the fastest (not currently slowest) economic recovery on record for the US.

Jack Rasmus
September 15, 2013

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

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

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

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

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

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

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

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

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

Jack Rasmus, copyright, September 2013

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AS THE ‘SHADOW’ US FEDERAL RESERVE CHAIRMAN OF THE NEWLY FORMED US ‘GREEN SHADOW CABINET’, THE FOLLOWING IS MY INITIAL OPED STATEMENT ON FISCAL-MONETARY POLICY IN THE US, ITS FAILURE, AND WHAT NEEDS TO CHANGE CONCERNING THE US FEDERAL RESERVE AND MONETARY POLICY. (Dr. Jack Rasmus)

“OpEd Contribution
‘The Failure of Fiscal-Monetary Policy, 2008-2013’
By Dr. Jack Rasmus
‘Shadow’ U.S. Federal Reserve Chairman’
GREEN SHADOW CABINET

“Fiscal and Monetary policies since the financial crisis and the protracted recession that began in 2008 have failed to generate a sustained recovery of the US economy—except for big banks, big corporations, investors and speculators, and the wealthiest 10% households. All have benefited significantly from record profits growth and record returns on stock, corporate bonds, derivatives and other financial securities’ investments since 2009, while median family earnings have continued to decline every year and Main St. America has been left behind.

Fiscal Policy Failures

Obama’s fiscal stimulus spending programs of 2009-2012 have been grossly insufficient—not just in terms of levels of spending, but in the composition and timing of that spending as well. On the tax side, Obama programs have been grossly over-weighted toward business tax cuts and personal income and inheritance tax reductions for wealthy investors and households.
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Instead of leading to investment and jobs in the US, the business tax cut bias has resulted in record cash hoarding by big business and multinational corporations in excess of $3 trillion. Instead investment and jobs in the US, that corporate cash hoard has been, and continues to be, diverted to record stock buybacks and dividends payouts, to investment and job creation in offshore emerging markets, and to investment in speculative financial securities.

The failure of Obama fiscal stimulus programs to create jobs has contributed significantly to the weakest job recovery from recession of the 11 prior recessions since 1945. In addition to hoarded business tax cuts, hundreds of billions of dollars distributed in subsidies to the States since 2009 were promised first ‘to create jobs’ and then at least ‘to save jobs’. Neither happened. State and Local governments instead laid off 700,000, engaging in massive job destruction instead of job creation which continues to date. $100 billion in stimulus spending targeted for infrastructure investment—promised for ‘shovel ready’ projects—were instead redirected to long term, capital intensive projects and little job creation.

In 2013 more than 21 million still officially remain jobless; in actual fact, more than 25 million. While the administration touts the creation of 5 million new jobs, it remains silent on the 5 million who have left the labor force unable to find any form of work. Full time permanent jobs have disappeared while more than 6 million involuntary part time jobs were created and millions more temporary jobs. Of the jobs lost since 2009, 60% were top tier jobs paying more than $18/hr. while 58% of the jobs created since 2009 were the lowest paying jobs at less than $12/hr. Not surprising, as a consequence of continuing massive unemployment and falling real wages, median wage earner families’ real income has fallen consistently since 2008.

Administration housing policies have been no less a disaster. Token spending programs promised to save US homeowners in 2009 were in fact mostly incentives to banks and mortgage companies to move owners out of their homes to resell to new buyers. Foreclosures escalated to more than 14 million to date, about 1 out of every 4 homeowners with a mortgage, while more than ten million homeowners still languish in negative equity. State attorney generals’ legal suits against banks and lenders in response to the ‘robo-signing scandal’ in 2010 were subsequently brokered by the Obama administration in 2011-12 in favor of the banks, allowing the latter protection from all future liability in exchange for a pittance settlement providing illegally foreclosed homeowners damages averaging a mere $1500. Further administration subsidies to banks and mortgage lenders in the form of the 2012 ‘HARP 2.0’ program have fattened bank profits while providing a minimal number of homeowners in negative equity any relief. The recent much-hyped housing recovery is largely the result of purchases of banks’ foreclosed housing stock by wealthy speculators (US and foreign), private equity and hedge funds, who area loaned money by the banks who in turn borrow the funds at zero interest from the Federal Reserve—or, alternatively, the building of apartments at a feverish pace to house the 13 million plus foreclosed former homeowners.

Monetary Policy Failures

Monetary policy, driven by the US Federal Reserve, the central bank of the US, has amounted to more than five years and $3 trillion of ‘Quantitative Easing (QE)’ printing of money by the Fed, which has been then directly used to buy collapsed mortgage bonds and other instruments owned by banks, shadow banks, and wealthy individual investors—most probably at prices above their true depressed market values. In addition, the Fed has provided tens of trillions of dollars more to banks and shadow banks in essentially free money, zero interest loans. The Fed has even allowed banks to redeposit the free money with it, for which it pays the banks interest. In short, the Fed policy has been to subsidize purchases of investors with QE while additionally paying banks to borrow money from it for free.

QE and Zero rate policies have had virtually no effect on the real economy and recovery, while creating bubbles in the stock market, corporate junk bond market, farmland real estate prices, derivatives trading and foreign currency exchange speculation. QE and free money flows directly from the Fed into financial speculation and investment in the various liquid, short term, price driven financial markets globally. While fattening the wallets of professional speculators, banks, and ‘portfolio’ operations of multinational companies, monetary policies have created numerous negative effects and have hindered, not stimulated, the recovery of the real non-financial economy.

Five years of near zero rates have mean zero returns and income growth for seniors and households dependent on fixed incomes; have accelerated the collapse of pension funds and even 401k matching contributions by employers; have resulted in real income decline for tens of millions of households; have diverted much needed potential lending to small businesses into stocks and other speculative markets; and has set off a global ‘currency war’ as economies worldwide in recession attempt to use QE to lower their currency values to gain export advantages vis-à-vis competitors. Monetary policy is thus slowing much needed investment, serving as a drag on consumption, and destabilizing once again the global financial system.

The Alternatives To Traditional Fiscal-Monetary Policy

Traditional Fiscal-Monetary policies implemented by the Obama administration result in lopsided recovery on behalf of the wealthy and corporations, and stagnation at best for the rest. The consequence is a ‘stop-go’ recovery, of short and shallow periods of growth followed by relapses and stalling in the rate of growth and even double (and triple) dip recessions. This scenario will continue so long as the policies of the past five years continue.

The failure of traditional policies is the consequence of their inability to adequately address the mountain of debt burdening the majority of households (bottom 80%), on the one hand, and the steady decline of real disposable income by those same households as well. Major structural reforms of the economy must replace reliance on failed Fiscal-Monetary policies above. These structural reforms must target the reduction of excess household debt while reversing the declining share of income by the 80% in favor of the top 10%, and especially top 1%, and their corporations, which serve as the conduit through which the wealthiest have been consistently accruing more and more share of national income.

Restructuring can only be achieved by means of a series of major overhauls of the US tax system, the banking system, the retirement and health care systems, by reversing the immense damage wrought on US jobs and incomes by Free Trade policies and offshoring, and by restoring a balance in union-management power destroyed over the past three decades by various legislative, court and technological measures and developments.

An initial ‘short list’ of overhaul-restructuring policies along the several ‘economic fronts’ noted above include: restoring the tax structure back to 1978 levels at minimum and introducing a Financial Transactions Tax of 1% on stock, bond, derivative and forex trades; introducing a public banking system for all forms of consumer credit to provide loans at ‘no profit’ cost of money for mortgages, autos, education, consumer installment, and small businesses. Nationalizing all 401k and private pension plans into a new expanded national social security system that provides a minimum of two-thirds of wage income; a medicare for all health system funded by a payroll tax of 15% on all forms of incomes, wages and capital; an immediate suspension and renegotiation of all Free Trade agreements; national legislation creating a ‘card check’ system for union recognition and bargaining; and selective expunging of bank financed student loans and predatory mortgage and credit card loans.

To Conclude:

Excess household debt and declining real disposable income has resulted in a collapse of spending and tax multipliers that have rendered traditional fiscal policy ineffective. Similarly, Federal Reserve monetary policies of QE and zero rates have result in a resurgence of speculative finance that is collapsing money multipliers for real asset investment by diverting credit from real investment and job creation. Only policies and measures that restructure the US economy fundamentally across critical sectors, and thereby reduce debt loads for the bottom 80% households while raising real disposable income for the same, will prove successful long term in overcoming the current general stagnation of the US and global economy and ensure a return to a trajectory of sustained economic growth.

Liberal mainstream economists’ claim that all that is needed is simply more spending will mean more of the same stagnation. Conservative mainstream economists’ claim that more business tax cuts, more deregulation, and more deficit spending cuts will mean a transition from current stagnation to another deeper economic contraction and perhaps financial crisis and even depression. Both are incorrect. Both seek simply to readjust the relative mix of the same policies. More of the same Fiscal-Monetary policies of the past decade will prove as ineffective in the future as they have been in the past. A fundamental restructuring of key sectors of the economy is necessary for long term recovery.

Dr. Jack Rasmus, April 18, 2013
Green Shadow Cabinet
Federal Reserve Chairman

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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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