Posts Tagged ‘US economy’

A first look at US third quarter 2013 GDP and October Jobs Reports gives the impression that the US economy is mending and might soon begin to recover. But a closer inspection shows that the reports indicate an economy still mired in a ‘stop-go’ trajectory at best and a jobs market able to produce low pay, often contingent service jobs. Moreover, trends within the reports suggest even the already tepid results in the reports will likely wane, once again, in the coming quarter and months. Here’s why.

US 3rd Quarter GDP Report

The official, preliminary GDP numbers for July-September indicate a 2.8% US growth rate. The truth is always in the details, however. And a closer look at the composition and trends within GDP are nowhere near so rosy.

First and most important, no less than 0.71 of that 2.8% is due to what is called inventory accumulation by nonfarm businesses, which rose more than twice as fast as the 0.30 in the second quarter 2013 following a mere 0.06% in the first quarter. In other words, businesses have been accelerating their stocking up of goods in anticipation of a subsequent rise in consumer household spending in the U.S. However, as indicated below, that spending is decelerating rapidly—not rising—and along several fronts.

It would not be the first time in the past few years that businesses falsely anticipated the take off of consumer spending and ramped up prematurely, only to have to contract just as dramatically when spending did not materialize.

In early 2012 a similar scenario occurred. Business inventory accumulation surged, adding significantly to GDP, then collapsed. After gains in inventory spending contributing 0.91 to GDP in the 3rd quarter 2012, last year, the same inventory spending collapsed in the final quarter of 2012, subtracting a full -2.09 from GDP. Fourth quarter 2012 US GDP in turn collapsed to a mere 0.1% growth rate. Thereafter, businesses began once again this past spring in building inventories in anticipation, yet again, a surge in consumer spending to occur this current 4th quarter 2013—once again a ‘surge’ that does not appear will take place.

Another problem with the recent 2.8% GDP 3rd quarter 2013 number is that it reflects a major redefinition of what constitutes GDP that was introduced this past July 2013 by the Bureau of Economic Analysis, the US agency responsible for GDP reporting. In that change and redefinition, the BEA added for the first time business Research & Development costs to the business investment contribution to GDP. In other words, ‘costs’ not ‘output’, as previously has always been the case, now contribute to GDP. This was clearly one way to artificially raise what has been a declining trend in US business investment in the US for the past decade. Applying the redefinition retroactively, this GDP redefinition added no less than $550 billion to 2012 GDP last year. And for the most recent quarter, it added further to US GDP’s 2.8% rate. R&D contribution to US GDP is currently running at more than $280 billion for the year. That ‘redefinition and cost’ compares to an estimate of $292 billion for all software contribution to US GDP this year; and more than the investment contribution for all transport equipment or all industrial equipment to US GDP this year. It is not an insignificant sum, in other words. But it is ‘adding’ artificially to the 2.8% US GDP recent numbers.

Eliminate the excessive .71 contribution of inventories that will almost certainly contract this fourth quarter, and the artificial addition to GDP from R&D ‘costs’, the actual longer term trend in GDP in the 3rd quarter is about 1.8%–not 2.8%. That’s about the longer term average of US GDP growth annually for the past two years. In other words, the economy is growing no faster than it has in the past, a rate that is about half what it should be at this point nearly five years after the end of the recession in 2009.

But the 3rd Quarter GDP numbers are notable as well for other weak trends within the general number. First, it appears that spending on services has nearly come to a halt. After contributing 0.69 and 0.53 to GDP rates in the first and second quarters of 2013, respectively, services spending collapsed to only 0.05% in the 3rd quarter. Other warning signs of questionable consumer spending going forward are also now beginning to appear as well. Consumer confidence has plunged. The largest segment of consumer spending, retail sales, fell 0.1% in September, following one of the worst ‘back to school’ shopping seasons that “ended on a sour note, raising concerns about the holidays”, according to the Wall St. Journal. Imminent cuts of billions of dollars in food stamps recently approved by Congress will take a further toll on consumer spending essentials in the near future, as will the 6-day shorter holiday shopping season for this year. Both wholesale and consumer prices continue to decelerate to 1% or less, also an indicator of soft sales and demand by consumers. In short, it is not likely consumer spending will rebound significantly this fourth quarter, prompting in turn the sharp reduction in business inventory spending noted above.

Added to this will be a continued decline in government spending at the federal level, as the sequestered spending cuts take an even deeper ‘bite’ out of the US economy. Both Defense and Non-defense spending has been reducing GDP every quarter since the beginning of 2013. This will not only continue, but will now accelerate in the 2013-14 fiscal budget year.

Finally, on the manufacturing and construction side of the economy, which represents about 20% of total GDP, recent growth in new residential housing construction will likely decline. The recent US ‘housing recovery’ is now over, with rising interest rates and prices. US homebuilders are beginning to recognize this and are now reducing their output, and thus future contribution to GDP from this sector.

The contribution of manufacturing and exports to US GDP growth longer term is also fading. In the 3rd quarter, net exports added to GDP despite slowing exports because imports declined faster than exports. What was a US brief export sales advantage for a while in 2013 is in decline, as the Eurozone economy takes action to lower its exchange rate and thus boost their exports and as China quickly moves back to an ‘export-driven’ GDP in recent months after having tested the waters, and retreated, from a shift to more internal consumption driven growth. The imminent shift by the US federal reserve bank toward a ‘taper’ monetary policy in coming months will also result in higher US interest rates (further slowing housing and auto sales) and a related rising dollar (further slowing export sales).

The recent 2.8% US GDP for the third quarter is therefore a ‘false positive’ in terms of where the US economy, and economic growth, may be headed this coming 4th quarter and longer term.

US October Jobs Report

Last month’s Jobs report is a reflection of US third quarter GDP. The reported increase of 204,000 jobs in October at first glance appears a positive development. At least that number is needed to start reducing the unemployment rate. However, that rate actually rose last month. The reason is a whopping 700,000 more workers left the labor force. That huge number leaving the labor force is a strong indicator of severe weakness in the US labor markets, not strength. It means hundreds of thousands more in just one month have given up finding work because they can’t.

The composition of the hiring is also disturbing. 44,000 new hires in the retail sector. 53,000 in leisure & hospitality. And 52,000 in business services. The first two are typically overwhelmingly part time employment, as is a good part of the third as well. No doubt concerned with the weak August-September retail sales results, retail has begun hiring part timers even earlier than in previous years. Leisure and hospitality (restaurants, hotels, etc.) have also continued to hire, again typically part time. The hiring of part time, or ‘contingent’, labor is a major trend of this past year—when in the first half of 2013 more than 600,000 of the 900,000 newly hired were in fact ‘contingent’ (part time and temp jobs). That means low paid and service jobs, without benefits as a rule. That also means slow to stagnant income growth from job creation—the most important source of disposable income growth necessary for sustained consumer spending.

While wage increases for the past year are reported as 1.8%, it is important to note that this rate is for full time workers only. It does not reflect the lower pay received by part time workers, which have been the bulk of jobs created over the past year. When adjusted, wages are stagnant at best or falling for production and supervisory workers as a whole, full and part time and temp. It is not surprising, therefore, that median family (aka working class) disposable incomes continue to fall this year, as they have in four preceding consecutive years. That is not a foundation for future consumption increases. To date, consumption spending has risen even tepidly due to the growing use of consumer credit—cards, student loans, and auto and mortgage refinancing loans. Recently, credit card usage has slowed, however. Consumer spending has also been boosted by the wealthiest 10% households, who spend largely on performance of stock and bond markets that have been surging to record levels. Stocks and credit cards are not a basis for true household spending recovery; jobs and real income growth are the key but neither appear will contribute much in coming months.

Finally, contingent job growth—and especially in retail and hospitality both highly dependent on holiday spending—can ‘disappear’ quickly from the economy, and may in fact do so by December should consumer spending come in well below expectations. Meanwhile, the federal government continues to reduce spending and shed jobs, and may even do so at a faster rate early next year should the ‘sequester’ spending cuts not be reversed and Congress take an even deeper bite out of social security and medicare spending in 2014.

To summarize, the 2.8% GDP for the 3rd quarter, and the October 2013 jobs report, are nothing to get excited about. They represent temporary adjustments to an otherwise stagnant at best US economy performance and a jobs creation record barely absorbing new entrants into the labor force and doing so at a sub-standard pay rate.

Jack Rasmus
November 11,2 013

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

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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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The economic ignorance of the Teapublican faction of the Republican party in the US House and Senate is perhaps exceeded only by the similar ignorance of its economic advisers.

Appearing in the public press in recent days is the latest ‘brilliant’ Teapublican view that a default by the US government on paying interest on its debt would not have a negative impact on the US or global economy.

Both the US and global economies are already slowing noticeably, with the Federal Reserve in the US continuing to downgrade and lower its estimates of future US growth, and the IMF doing the same for growth rates in China and the rest of the world. The Teapublicans claim a US debt default would not impact these already negative trends.

While it is true that the US government will not completely run out of money with which to pay its debts on October 17, 2013, as Treasury Secretary, Jack Lew, has publicly stated, it is equally true that it will definitely do so sometime between October 24 and early November. Thereafter, some funds will continue to come into the government, but not nearly enough to pay all its bills. That will force the Obama administration to choose between what it will pay: either bondholders who own US debt or grandma and grandpa on social security. Teapublicans no doubt want to force Obama to make that ‘Hobsons’ Choice’ (i.e. damned if you do and damned if you don’t). Teapublicans will argue he should pay the bondholders first, and forego paying social security. It’s their way to start cutting social security before they even negotiate an official reduction in it with Obama.

To quote one Teapartyer’s statement today, Republican Representative, Joe Barton, of Texas: “We have more than enough cash flow to pay interest on the public debt, so there is no way we’re gong to default on the public debt unless the president of the United States intentionally does so”.

Such statements by lesser known Teapublicans were followed up today in the business press with an article by Teapublican notable, Paul Ryan. Ryan made it clear that the focus of the debt ceiling discussion was to provoke further concessions by Obama on Social Security-Medicare cuts. US House radicals thus are attempting to put Obama in a negotiating box: either he agree to cut Obamacare or to cut Social Security-Medicare.
What the Teapublican faction in all their economic ignorance don’t understand, however, is that the psychological effects of a default—or even a near default—on the US and global economy will prove significant. One does not have to wait for a complete default for that to happen.

What then are some of the possible impacts?

First is the prospect of rising interest rates. Interest rates have already begun to rise, starting on a base that has already risen since the US Federal Reserve’s bungled attempt to signal over the past summer its intent to begin reducing (tapering) its Quantitative Easing (QE) $85 billion a month liquidity injections. That Fed ‘faux pas’ has already driven up long term rates by more than 1%, thereby causing an abrupt halt to a very timid US housing recovery earlier this year. In the past month banks and mortgage servicing companies have already announced thousands of layoffs in their mortgage departments, signaling the virtual end of that housing recovery. Further interest rate hikes, short and long term, on top of the Fed’s recent bungling—which will now certainly occur as the default approaches—will all but ensure the end of any housing recovery in the US.

Short term rate increases will most likely accelerate further throughout the month of October. That includes, in particular, Treasury bill rates which will in turn impact other rates. ‘Other rates’ include the critically important ‘Repo Market’ rates. Destabilizing the repo market is a dangerous game. It is likely the locus for the next financial crash, the analog to the subprime market that was the center of the last financial crash. Teapublicans are thus playing a dangerous game, one that may well in a worst case scenario precipitate another financial instability event on the scale of 2008.

Rising interest rates also mean the end of the latest stock price and junk bond booms. In itself, that doesn’t affect average folks much. But the psychological impact of a rapid decline in asset prices can, and does, spill over to consumer and business spending. That leads to layoffs, in a US job market that is, at best, producing only part time, temp, and low paid jobs as it is.

Rising rates and an even weaker job market in November-December will translate into slowing consumption, which is already showing signs of weakness in August-September. Retail sales in general will weaken still further as a consequence of the debt ceiling default, as will an already ‘long in the tooth’ auto sales cycle.

The negative impact of debt default on consumption is already becoming evident in recent weeks. A Gallup Poll in recent days showed consumer confidence dropping precipitously. While some argue confidence surveys are typically volatile and unreliable as indicators of consumer spending, that is not as true for abrupt and significant movements in confidence indicators. That may now be happening, as the public begins to focus on the dual crises events.

The recent Gallup poll in question fell to -35 from a prior -15. This compares to -56 during the August 2011 worst period of that prior debt ceiling debacle. During the worst period of October 2008 the index was -66. Already falling significantly early in the current crisis, one can estimate where the -35 current poll will be by October 17-24 should the crisis not be resolved by then. We will almost certainly be in the August 2011 territory, when the third quarter US GDP nearly went negative (and did so if the GDP deflator was substituted with the CPI index for that quarter).

Globally, the approaching debt ceiling crisis has already provoked widespread public responses by foreign governments, warning a potential default by the US would have dire consequences for US debt holdings and future purchases. China, Japan, and the IMF have all raised warnings in recent days. If default occurs, then US bond rates will rise even further and faster than at present, raising a real question whether they will continue to purchase US Treasury debt when the price of their holdings are declining significantly in the wake of a default.

There are also important implications of a default (or even near default) for the Eurozone’s own current economic recovery and its still very fragile banking system.

Yet another negative impact globally will be a decline in Euro exports. A default situation would result in the US currency losing value, causing a further rise in the already fast appreciating Euro currency. That trend would challenge German and Euro export growth and therefore that region’s tepid 0.3% last quarter’s recovery.

Another problem potentially to grow worse is the Euro banking system. The Eurozone’s version of QE-the LTRO liquidity injection policy of the past year amounting to more than $1.5 trillion-will soon need another LTRO II injection by the European Central Bank in a matter of months. In addition, more than $1 trillion of the LTRO I will need to be refinanced soon. Nearly all the major banks in Italy, for example, have yet to repay anything of their share of the LTRO $1.5 trillion and will need further liquidity in coming months. Rising interest rates from a debt default in the US will spill over to Europe, thus raising the costs of LTRO II, as well as the financing of much of LTRO I. That will cause further fragility in the Euro banking system and economic recovery there, especially for the highly fragile Italian banks.

For Japan, its recent export gains would also slow, at a time when it has decided to raise taxes while suspending structural economic reforms.
Currency volatility in emerging markets would also intensify from a debt default in the US, likely causing a retreat once again in real growth in those markets, just a few months after their recent ‘stop-go’ provoked by US Fed QE policy uncertainties this past summer.

Throughout the past 18 months, this writer has forewarned that a fragile US economic and global recovery-not nearly as robust as some maintain-is susceptible to a ‘double dip’ recession in 2013-14 should one or more of the following negative ‘tail events’ occur: first, a renewed banking crisis in the Eurozone or elsewhere; second, significant further deficit cutting in the US; and thirdly a continued drift upward in US long term interest rates as a consequence of QE tapering or other events. While it appears the Euro banking crisis has temporarily stabilized—except for Italian banks perhaps—the deficit cutting and interest rate trajectory in the US are very real and serious trends that may yet precipitate a descent into a double dip condition in the US economy.

And if the Teapublican faction in the US House of Representatives managers to prevent a resolution of the debt ceiling issue into the latter part of October, then the economic consequences for both the US and global economies will be severe, and may even prove sufficient to precipitate a double dip recession in the US.

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Transcript of Radio Interview: October 4, 2013

How Will the US Government Shutdown Impact Markets?

As the government shutdown, the stock market largely shrugged. Yesterday the Dow Jones actually rose 62 points suggesting investors don’t see the current shutdown as a long-term problem. Here with more analysis is Jack Rasmus. He’s a Political economist as well as the author of “Obama’s Economy: Recovery for the Few”

Rob Sachs, Host of Russia Radio American Edition:

‘This shutdown occurs and the stock market actually gains a little bit. It doesn’t seem to be congruent with the thoughts of what stock market would do. Why did they gain?’

Dr. Jack Rasmus:

The stock markets are more concerned with what is happening with the Fed taper of its QE and on September 17th the Fed made it very clear it was going to continue pumping 85 billion a month into the economy. That is their first and foremost major concern. Second, the markets are concerned about real data on economies in the US, Chinese, Eurozone economies, jobs, retail, sales; and what is happening with banks in Eurozone, Italy, China, manufacturing exports, emerging markets etc. Third in line of concern at the moment, I would say would be the debt ceiling situation . But that is still several weeks off, plenty of time to deal with that.

In contrast, the government shutdown really doesn’t affect markets that much, which is not surprising. The last time we had a government shutdown in 1995-1996, stocks and bond markets were totally unaffected by it and were hardly impact at all by the crisis. So it is not strange that we see the same development going on here today.

Now the real risk is if the shutdown continues for whatever reasons, which I don’t think it will, for another 2-3 weeks, and then it converges with the debt ceiling deadline. That deadline for the debt ceiling is probably closer to the end of October than the October 17th date, the Obama administration is now saying. Then you have a different scenario in terms of impact on financial markets and the US economy.

Rob Sachs:

‘We came to that before when we had this debt ceiling debate and people were saying this would be Armageddon, it is outrageous – the idea that the US would not pay its debts. But what was the role of Wall Street before in preventing that from happening? What can Wall Street do now to urge congressmen and those on Capitol Hill to come to some type of agreement?’

Dr. Jack Rasmus:

I am sure Wall St. and its lobbyists are putting increasing pressure already on politicians to come to some kind of agreement. Last time we had a debt ceiling confrontation, in August 2011, they waited till the last minute and didn’t leave themselves enough time to really lobby. But now I am sure there is a lot of intense lobbying going on at this particular stage before the October 24th or so ceiling deadline, when the government may not make an interest payment on its debt, which creates a default. That’s when a technical default happens.

I think an indicator of how things may be going as we approach that deadline will be what starts to happen with short-term interest rates. If you see the bank-to-bank federal funds rate, short term Treasury bills, or especially the bank repo market began to rise, then those rising rates will have an impact on stocks and bonds. That’s what investors are concerned about. That’s what will cost them money—not the government shutdown that impacts mostly workers and households. But I don’t see that happening at this stage. Not yet.

Rob Sachs:

‘When you look though at what is at stake, a lot of people say the shutdown is not so much a big deal but what really gets people nervous when we talk about inaction on Capitol Hill? Is it something more than just not getting a legislation passed?’

Dr. Jack Rasmus:

What makes the markets (i.e. banks and investors) nervous is they can’t necessarily count on getting paid their interest at the time it comes due should a default occur. If you don’t get paid for your investments, then you are not going to make investments. When interest rates rise in anticipation of, or a result of, a default by the government, that reduces the demand for government bonds that spills over and so forth and causes problems with rising interest rates in general. It is the translation of all this into rising rates that is important in terms of impact.

That is the key and we already see that the US economy is becoming increasingly sensitive to increases in rates, bond rates and so forth. We saw that over this past summer with the Fed trying to taper its QE buying, and how long-term interest rates immediately shut up over 1% and caused serious problems in the US and global economy. With emerging markets capital flight and so forth and the slowing of the housing market in the US. So, the global system is extremely sensitive right now to interest rate hikes after 5 years of QE. Not just long-term rates but as we will see with the debt ceiling issue, also with short-term rates if it comes to a crisis. It could all have a significant impact and more quickly than people think right now.

Rob Sachs:

‘Your book “Obama’s Economy: Recovery for the Few” talks about a lot of the benefits that we’ve seen have not been spread out and when we think about this economic recovery we’ve had, it has really not been felt in the middle class. Is that something where if we default, it is going to be impact on the middle class the most, or is this something where the stock market, these kinds of things are for investors to worry about and those who are throwing around tens of millions of dollars each day?’

Dr. Jack Rasmus:

It will primarily affect stock and bond markets and the investor class in a very short term that has a little effect on the real economy and real folks. But what could happened over time is that when investors pull back, then you have business investment pulling back, which is not that great in the US right now anyway. That starts to affect jobs, which are not really rising much at the moment, and incomes for the middle class and so forth, which are already falling in the US. For most US household we already have real disposable income declining at 1 and 1.5% per year for the last 4 years. And as recent data shows, the wealthiest 1% have accrued 95% of all the additional income gains since 2009. So, we are already growing increasingly income lopsided and consumers have a hard time spending, as we are now seeing with retail sales struggling in the US. So, this debt ceiling thing can have a important psychological impact. It can have a psychological impact on consumers and consumer spending and on businesses and business spending, and that is how it will mostly transmit into the real economy. The psychological impact is really important.

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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.





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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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A sample of my recent ‘tweets’ on the economy over the past three weeks, August 20 to Sept. 7,are as follows:

• Dr. Jack Rasmus ‏@drjackrasmus 1m

Is Eurozone Econ Recovery underway? Don’t bet on it. Today’s Industrial Production rept. shows -1.5% decline for July vs. forecast of+ 0.1%

• Dr. Jack Rasmus ‏@drjackrasmus 3h

Latest IRS data study shows Top 1% accrued 95% of all income gains, 2009-2012. Remaining 99% declined 0.4%. Median and below, big declines.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Read my piece tomorrow (9-7) on the Znet blog: “Larry Summers-Next Fed Chairman?” And why there’ll be no ‘Summers Effect’ as Fed chair.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Obama should have been a union rep. Then he’d know “never take a strike vote unless you know they’ll vote yes” (Syria=big egg on his face)

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Check out my blog piece, ‘Federal Reserve Policy-Past Failures and Future ‘Tail Risks’, at http://jackrasmus.com .

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Will Fed now back off from QE 9-18? No. A very slow, token reduction in the $85B/mo. money injection-watch for $75B or a reverse repo deal.

• Dr. Jack Rasmus ‏@drjackrasmus 6 Sep

Another stagnant US jobs report + only 100,000 jobs in July. US barely creating (low pay) jobs for new entrants. And as jobs ‘churn’, wages burn

• Dr. Jack Rasmus ‏@drjackrasmus 5 Sep

Frontpage mainstream press (NY Times, Journal, CNN) articles today featuring Larry Summers. Is Summers’ Fed Chair announcement imminent?

• Dr. Jack Rasmus ‏@drjackrasmus 4 Sep

Money flooding out of Asia, Brazil, Turkey,etc. back to US, EU. Export gains US/EU at expense of Emerging Mkts. No net gain for world econ.

• Dr. Jack Rasmus ‏@drjackrasmus 4 Sep

G20 meets in St. Petersburg Thurs. #1 issue? Not Syria. But emerging markets crisis: capital flight, currency freefall, commodity deflation

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

Will the Fed ‘taper’ after 9-17? Will Summers get appointed next Fed chair? Will Obama send missiles into Syria? Do bears live in the woods?

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

US consumer spending last month=0.0%, adjusted for inflation (Consumption=70% US economy). Banks lower 3Q13 GDP estimates to 1.5%. Recovery?

• Dr. Jack Rasmus ‏@drjackrasmus 30 Aug

Why did Obama & Repubs agree Jan. 1 to extend $4 trillion of the $4.6T Bush tax cuts?So corps could give $821 bil. to stockholders this year

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

India economy ’emerging’ as weakest of emerging markets. Watch for 2% GDP or less in 2014. Currency (Rupee) to fall to record lows

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

Emerging mkts quadruple crisis: rising US rates, capital flight to safe havens in west, commodities deflation, and soon to rise oil prices.

• Dr. Jack Rasmus ‏@drjackrasmus 29 Aug

Re. growing assault on democratic rights in the USA, see my blog http://jackrasmus.com article ‘North Carolina’s ‘Moral Mondays’ movement’

• Dr. Jack Rasmus ‏@drjackrasmus 27 Aug

Watch for coming ‘tail events’ causing market declines: Fed taper, debt ceiling fight, & emerging mkts capital flight–converging late Sept

• Dr. Jack Rasmus ‏@drjackrasmus 26 Aug

So bus.spending biggest fall since 2008, consumer-retail sales flattening, and home sales in freefall. OK, so where’s the recovery (again)?

• Dr. Jack Rasmus ‏@drjackrasmus 26 Aug

Data today show bus.investment fell in July almost twice as fast as consensus. Durable goods orders and shipments largest since 2008.

• Dr. Jack Rasmus ‏@drjackrasmus 23 Aug

consumer spending decelerating & flatlining-as predicted in my ‘The Stop-Go US economy’, see my blog, http://jackrasmus.com , article

• Dr. Jack Rasmus ‏@drjackrasmus 23 Aug

New home sales July freefall. My prediction rising rates (due to taper talk) will stop H-recovery sooner rather than later, now coming true

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

The global economy, including USA, is slowly slipping into a stagnant growth scenario. The process is slow, long-term, erratic, but steady.

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

Has the Eurozone/UK ‘recovered’? No, just following the trajectory of Epic Recession: short shallow recoveries followed by repeated relapses

• Dr. Jack Rasmus ‏@drjackrasmus 20 Aug

The locus of global economic instability is now shifting from Europe to Asia, esp. India, as China slows & Japan’s boom proves short-lived.

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

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

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

The US Economy 2012-2013

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

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

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

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

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

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

The 2nd Quarter 2013

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

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

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

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

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

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

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

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

A Scenario for the Remainder of 2013

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

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

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

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

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

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

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

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

Jack Rasmus, August 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jack Rasmus, August 2, 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jack Rasmus,
July 22, 2013

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

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