Posts Tagged ‘US economy’

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

I. Review of January 2012 Predictions

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

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

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

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

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

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

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

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

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

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

Economic Predictions: 2013-2014

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

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

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

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

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

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

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

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

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

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

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

12. Gobal trade will continue to decline.

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

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

Jack Rasmus
June 15, 2013

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

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Nearly daily in recent weeks, indicators of the US economy have fluctuated wildly. One day reports of manufacturing and factory orders show a declining economy, another day housing prices and residential home building appear to rise; the next day purchasing managers show a services (88% of the economy) employment trend of absolutely no gain in job creation, followed by a monthly jobs report from the Bureau of Labor Statistics that 170,000 jobs were created in May 2013. What to make of these conflicting indicators?

Stock and bond markets and investors—especially the average ‘herd’ mentality driven average types—become schizophrenic, buying one day and selling off the next. A true sign that the so-called ‘experts’ have no idea what’s coming next and that the US economy is churning and ‘frothing’, a sign of instability that could flip either way—toward more growth or toward a major relapse of the same.

As this writer has argued on numerous past occasions, the ‘experts’—whether of the business press or professional economist variety—tend to focus and hype the most recent report and indicator as revealing the ‘true’ emerging trend. But a better view is to consider the longer term trends behind the daily numbers and latest report. Furthermore, to factor in to this purely economic data analysis considerations of government (US and global) economic policy shifts, as well as highly potential ‘tail risk’ developments (a bank crash, a ‘Cyprus’ event, intensification of a currency war, etc.).

With that in mind, what follows is this writer’s analysis of the ‘longer term’ apparent trend in the US economy over the past year—as reflected in US Gross Domestic Product (GDP) numbers. However, US GDP is notoriously insufficient to fully reflect the US economic trend, for various reasons that will not be discussed here, except for two points: one is that US GDP does not accurately reflect the rate of inflation and therefore the proper adjustment for inflation to get ‘real GDP’. It underestimates inflation, thereby overestimating real GDP. It also fails to account for population growth and therefore real GDP per capita, which is the real estimate of how well the economy is doing. There are other major issues with GDP calculation that result in its overestimate of real US economic growth, that will remain unaddressed for now.

Despite its limitations, however, GDP is still the best of the worst indicators of the general state of the US economy. What follows, therefore, is an ‘intermediate’ term analysis of US GDP, over the past four quarters since summer of 2012. What it reveals is that the US economy is not accelerating onto a path of more sustained growth; to the contrary, that growth is slowly declining, which means all the hype based on short term, monthly reports and indicators should be considered with a good dose of skepticism.

Over the past year, July 2012 to June 2013, it appears US GDP has been fluctuating between virtually zero growth and 3%. But when special one-time, one off factors are adjusted for, the average growth rate is actually no more than 1.5% on average—or about the same average growth in 2012 and 2011. In other words, the economy has remained stuck in an historical, well below average recovery for the past two and a half years. Moreover, when properly further adjusted for actual inflation and for population growth, the US growth rate is averaging well less than 1% annually—i.e. has been stagnating for some time.

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 has also proved temporary as well, flattening out and declining in 2013. Another one off event then occurred in the 1st quarter 2013: a rise in business inventory expansion, which account for a full 1.5% of the total 2.5% of the 1st quarter 2013 GDP. And that one time exceptional event disappeared too in the 2nd quarter. So when the temporary, one off effects of pre-election government defense spending, business equipment spending at year end, and inventory surge in early 2013 are ‘backed out’ of the longer term trend, that longer trend is a GDP growth of no more than 1.5%–or about half that normally at this stage, five years after the recession.

As noted previously, moreover, even that is an overestimation. What’s important is real GDP, not just price increases for goods and services. So adjustment is typically made for inflation. But the official inflation index used to calculate real GDP is called the ‘GDP Deflator’, the most conservative measure of inflation; that is, the index that minimizes inflation the most. And by minimizing inflation, the result is to maximize real GDP, making GDP appear larger than it actually is. For example, both the Consumer Price Index (CPI) and the Personal Consumption Expenditure Price Index (PCE) record a significantly higher inflation rate than the GDP Deflator, and therefore a significantly lower real GDP than the Deflator index. Using the CPI, the average for GDP since July 2012 through March 2013 would be well below 1.5% and likely closer to 1% average growth. Finally, when population growth is taken into account and ‘per capita GDP’ is considered—i.e. the real effect of growth on real people—than the growth rate is adjustable further by another 0.5%. We’re now talking about US GDP and economic growth at a sub-par less than 1%. That’s economic stagnation and an economy drifting toward, and teetering on the edge, of another recession—a condition of fragility that would take little to push over the edge into another, ‘double dip’ recession.
For the past 18 months this writer has therefore been predicting that a double dip recession in the US is quite possible, and even likely, somewhere in the late 2013 or early 2014 timeframe should the two following conditions occur: first, the continuation of government program spending cuts and, second, a new eruption of a banking crisis in Europe which is today the weakest link in the global economy. This prediction is reiterated, adding now a third possible major disruptive factor: a shift in Federal Reserve Monetary policy (slowing or stopping its current $85 billion per month ‘quantitative easing’ (QE) money injection into the economy) that would result in a sharp upward rise in general interest rates in the US.

Stated alternatively: given the slowing global economy and the deepening recession and financial instability in Europe, should the US continue to implement additional fiscal spending cuts (aka ‘austerity American style’) late in 2013 and, simultaneously, have the Federal Reserve act such that interest rates continue to rise—then the probability is high the US economy will slip into another ‘double dip’ recession.

Perhaps anticipating this possibility, the US government agency responsible for calculating GDP, the Bureau of Economic Analysis, is planning this summer 2013 to significantly revise the way it does so. That revision will increase GDP by as much as $500 billion, according to a report by the global business daily, The Financial Times, this past April 2013. Already a relatively weakly accurate indicator of the performance of the US economy, GDP will likely soon become even more so.
In other words, while an actual double dip recession may occur later in 2013-14, especially when properly adjusted for inflation and population growth, it may nonetheless be conveniently ‘defined away’ by the forthcoming changes in its method of calculation.

Jack Rasmus, June, 2013

Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”; host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network; and ‘shadow’ chairman of the Federal Reserve in the recently formed Green Shadow Cabinet. His website is: http://www.kyklosproductions.com, his blog: jackrasmus.com, and twitter handle: #drjackrasmus.

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Last week, George W. Bush’s presidential library was dedicated. The Media were there in droves. So too were presidents Obama and Bill Clinton. They were all buddy-buddy, smiling, shaking hands and mutually jovial in the realization, no doubt, of the successful implementation of their very similar policies of the past 20 years–policies which, of course, have their ultimate origins in their common policy ancestor, Ronald Reagan.

The policy differences between the three (and Reagan) are far less than the similarities. It’s all just a matter of degree and emphasis. GW Bush, however, represents an extreme in that common spectrum. The damages to the US and global economy by the Bush regime have been almost immeasurable, and continue to this day, as they will for years to come.

Liberal economist, Paul Krugman, briefly recounted some of the more momentous damages in his recent column. But a brief column cannot do justice to the full scope and severity of George W. Bush’s toxic legacies.

This writer wrote a lengthier assessment back in December 2008 of the Bush Ten Toxic Legacies (a short list). Given all the hoopla about Bush and his library dedication (and the accompanying attempt to resurrect his reputation surrounding the event), I thought it was appropriate for readers to review in more depth and detail just what George W. Bush had done to destroy the US economy and US society, written by yours truly in December 2008. That assessment is as follows:


“Bush’s First Economic Legacy: The Mountain of Debt

During Bush’s two terms in office more than $3 trillion have been poured down the black hole of wars in Iraq and the Middle East. More than $5 trillion has been served up in tax cuts for corporations and the wealthiest 10% households in the U.S.

According to U.S. Federal Reserve Bank data, since Bush assumed office in January 2001 Government debt levels have risen by more than $3 trillion. But that’s only the total as of the end of March 2008. It does not yet include the cost of bank bailouts this past September: $300 billion for Fannie Mae/Freddie Mac, $85 billion for the insurance company giant, AIG, and the infamous $700 billion ‘TARP’ (Troubled Asset Relief Program) bailout at the close of the month. The September bailouts thus amount to another minimum $1.085 trillion.

The above $1.085 also doesn’t include pending bailouts by the U.S. government’s FDIC (Federal Deposit Insurance Corp.), the agency that is tasked with closing down failed banks and reimbursing depositors. Banks like IndyMac and others. As of the end of September, The FDIC has only $35 billion in available funds remaining for additional bailouts. It is potentially liable for 8,600 banks in the U.S. with deposits and assets totaling $13.3 trillion. It expects 800-1000 regional and smaller banks to fail in coming months. Its bailout this past summer of Indymac Bank cost $8 billion alone. After the November elections, it will have to ask Congress for hundreds of billions, and perhaps even a trillion or more, in additional funding to cover bank failures yet to come. And that’s only banks! What happens when large hedge funds or a large pension fund goes under? Will the Government bail them out as well? It seems anyone with a corporate balance sheet is now eligible for a Government-Taxpayer income transfer.

For example, non-financial corporations have already begun to queue up at the bailout trough. The three big US auto companies have just been handed $25 billion by Congress, in a separate bill that quietly slipped by the public and press in September, amidst the cacophonous wailings for bailout assistance by banks and financial institutions. Even foreign auto makers doing business in the U.S. are now demanding a piece of that pork as well. Like hogs in a pen, Corporate America’s lobbyists, financial and non-financial alike, noisily rush to the fence as the farmer approaches with his slop-pail of goodies. And it’s only the beginning. Corporate defaults are expected to rise tenfold in the next eighteen months, according to Standard & Poor’s, the corporate rating agency.

But there’s still more trillions in this Bush mountain of debt legacy picture. Between 2002 and 2007 the ‘subprime’ mortgage loan crisis was created by the Bush administration. Total mortgage debt in the U.S. more than doubled, rising from $5 trillion in 2001 to more than $11 trillion in 2007. The poor quality subprime and other risky mortgage loans amounted to approximately $2 trillion of that $6 trillion.

The Bush administration was forewarned time and again from 2003 on, by regulators and elected officials alike, at both federal and state levels, that the subprime situation was a time-bomb. Bush not only did nothing but actively discouraged federal intervention. The Bush administration officials at the Securities & Exchange Commission, SEC, in particular were instructed to look the other way as Banks set up ‘shadow banks’ operated off their regulated books. The shadow banks, called Structured Investment Vehicles, or SIVs, served as the trash receptacles in which various securitized bad subprime mortgage bonds were stuffed. Cooking separate books like this, off ‘balance-sheet’ as it is called, was precisely what CEOs and CFOs at Enron went to jail for a few years earlier. But similar behavior at banks and financial institutions in the case of subprimes was apparently not a problem for the Bush administration. When certain investigators and prosecutors got too close or appeared to have too much success, such as ex-New York attorney-general and governor, Eliot Spitzer…well… the FBI found a way to remove him from the scene.

Bush directly contributed to the subprime bust and financial crisis in yet another way. This required the active assistance of Federal Reserve (FED) Chairman, Alan Greenspan. In 2003 Greenspan was awaiting reconfirmation of his position at the FED by the Bush administration. The economic recovery from the 2001 recession had stalled by 2003. After a weak recovery in 2002, job growth was declining once again, even though jobs had still not recovered to pre-2001 levels. Bush was intent on going to War in Iraq. And 2004 elections were but a year away. The economy needed a special boost.

Bush-Greenspan struck a partnership that led directly to the subprime bust. Here’s how it happened: Greenspan and the FED accommodated Bush by lowering interest rates to 1% and then keeping them there far longer than was economically justified in any sense. The Bush-Greenspan strategy paid off for both partners. Super low interest rates produced a housing and commercial property driven economic boom from 2003 to 2006. Greenspan was awarded with reappointment as FED chairman by Bush in spring 2004 and Bush got his economic over-stimulus in time for the November 2004 elections. Financial speculators, banks and the mortgage industry raked in superprofits. They were able, as a result of Greenspan policies, to borrow virtually free money from the FED, which they then ‘leveraged’ to purchase ten times more volume of subprime mortgage bonds. Some of the more aggressive Investment banks, like Bear Stearns and Lehman Brothers, leveraged themselves 30 times or more. Greenspan’s 1% interest rate policy helped fuel the speculative excesses in the mortgage industry that created the subprime boom of 2003-06. When the FED finally began to raise rates again in 2005-06 it provoked the subprime bust of 2006-07. The end result of it all was a record housing price spike from 2004 to 2006, followed in turn by the consequent subprime mortgage price collapse.

In the process of borrowing for leveraging and housing speculation, banks and financial institutions added roughly $8 trillion in new debt during the first seven years of Bush’s term–$6 trillion of that during the subprime speculative boom period of 2003-07.

But there’s still another $ trillion to account for. That’s the amount of new credit card debt that American middle and working class consumers also took on since 2001. It is a lie and misrepresentation that consumers have been increasing their credit card debt in order to engage in spending on luxury and unnecessary items. Most of credit card debt has been taken up in order to pay for big ticket necessities, like college education for children, payment for medical bills their employer insurance plans no longer cover, for medical services by those no longer able to afford insurance at all, for basic transportation needs, for general cost of living by retirees no longer able to survive on social security, and so on. The credit card has replaced the annual wage increase that many employers used to but no longer give. It has substituted for wage increases that unions, now but a shell of their former selves, used to negotiate but no longer can. Credit cards are now relied upon by the more than 40 million workers who used to have full time permanent jobs but now have to make due with lower paid part time or temporary work; and by the more than 8 million workers whose once decent paying manufacturing jobs have gone offshore and have had to accept lower paid service jobs.

To the $3 trillion in government debt was thus added $6 trillion in household mortgage debt, $8 trillion in banking debt, another $1 trillion in new consumer credit card debt, and $3.5 trillion in additional non-financial business debt. A total of more than $21 trillion in accumulated debt of various kinds over the course of Bush’s term in office. That’s a stack of $500 bills 3,297 miles high; or, roughly the distance from New York City to London.

Second Economic Legacy: Financial System Collapse

The ‘unwinding’ of the $21 trillion in net debt accumulated during the Bush administration is the direct, root cause of the current financial crisis.

The write-downs and write-offs by banks and other financial institutions, the bankruptcies by companies and consumers, the losses of home values, the foreclosures, etc.—all represent the ‘unwinding’ of that record level of $21 trillion new debt accumulated since Bush took office. The September bank bailouts, from Fannie Mae to TARP, represent an effort by the US government on behalf of banks and financial institutions to transfer the cost of the banks’ $8 trillion debt unwinding from their banking friends to the general taxpayer. More specifically, the September bailouts represent a strategy by Finance Capital and America’s corporate elite to shift a major portion of this debt from their corporate balance sheets to the ‘public balance sheet’ and taxpayer.

But the bank bailouts will not stop the debt unwinding. They do not address the fundamental causes of housing and commercial property price collapse underway since the beginning of the year and now accelerating. Housing prices have yet to fall another 20-30%, and new phases or stages of the financial crisis will continue to emerge. Furthermore, housing deflation will continue to spill over to the commercial property market, to the stock markets that have yet to fall another 20% as well, and eventually to producer and consumer prices and wages should the recession prove deep and long. The bailouts only relieve the banks of their share of the pain of that collapse. Bailouts like those enacted in September are designed primarily to transfer the costs of the crisis—from big banks, financial institutions, and other corporations and their investors to the general taxpayer, worker, and consumer. But shifting the ‘bad’ debt from private to public balance sheets does not eliminate it. The only thing settled by the bailouts—TARP, Fannie Mae, AIG, and others—is who will pay for the crisis, not how to end the crisis.

Once a fundamental debt-driven financial crisis gains momentum it is not easy to stop. The US Federal Reserve’s strategy has been to throw ‘liquidity’ at it. Since December 2007 the FED has committed nearly a trillion dollars in special and emergency loans—to no avail. Time and again the FED has upped the ante—and the crisis has deteriorated further. It is amazing that the current chairman of the FED, Ben Bernanke, has not learned that throwing liquidity at the problem, i.e. a money supply solution, is not working after a year of such repeated attempts. The problem is not the balance sheets of banks and financial institutions; the problem is the ‘balance sheets’ and insufficient incomes of workers, consumers and homeowners—i.e. a demand side problem. The financial crisis is not a liquidity crisis. It is a solvency crisis. It is a general systemic crisis and a deepening crisis of confidence in the financial system itself.

The debt-driven financial implosion is thus the second major economic legacy of the Bush administration. What Bush has left the nation is a classic Debt-Deflation crisis that has resulted in a near freeze up of the entire financial system. The last time this occurred was 1929-34, and before that in the 1870s and the 1890s. Moreover, the Bush legacy of financial collapse is not finished. It will continue to reverberate and make itself felt for years to come.

Third Economic Legacy: Epic Recession

The direct consequence of financial crisis and implosion is a general ‘credit crunch’. A ‘credit crunch’ is a system-wide severe and sharp contraction of credit. A credit contraction has been progressively growing in the economy since last January. A credit contraction occurs when banks and financial institutions have, or expect to have, significant losses due to bad loans and investments, and therefore are increasingly reluctant to loan out reserves they may have on hand. They are uncertain they may need the cash on hand and reserves to cover anticipated losses and prevent becoming technically bankrupt if their losses exceed their reserves. Over the past year financial institutions have step by step tightened their lending terms. But even the slow down in lending hit a wall and entered a new, more intense and serious stage with the financial events of September—i.e. a credit crunch. In the wake of the collapsing of Fannie Mae, Lehman Brothers, Merrill, AIG and others, in September credit market after market began to freeze up and virtually shut down

From housing and commercial property markets, to industrial loans, to municipal and corporate bonds, to commercial paper, and even markets in which banks loan to each other, such as Libor—all began to shut down in September. There is no inter-bank lending market at present in the U.S. or even globally for that matter. They have shut down. The FED and other central banks have become, in effect, the only banks willing to lend to other banks. Even money markets are contracting. Money market funds, mutual funds, pension funds, and hedge funds are all in the process of contracting and reducing lending.

The credit crunch is the transmission mechanism by which the current financial crisis translates into a recession. It is the linking event. Financial crisis and recession are therefore but two sides of the same coin, driven by the same set of fundamental causes. The debt-deflation drives the bank, consumer and corporate losses, which results in the credit crunch. Without available funds to borrow, or even borrowing at extremely high rates, businesses in turn begin to cut back, announce mass layoffs, and then shut down or go bankrupt.

The extreme levels of accumulated debt since 2000 has produced a financial crisis correspondingly severe and unlike anything since 1929-34.. The severe and protracted financial collapse has created a credit crunch of equal historic dimensions as well. So there is no reason to assume the recession now emerging will be anything less historic or severe. The current financial crisis and credit contraction is producing a recession of equally deep scope and magnitude—i.e. ‘Epic Recession’—as I have called it last June in an earlier article in this publication. An Epic Recession of particularly long and/or deep duration that shares characteristics of a typical postwar recession but also characteristics of a classic Depression similar to 1929-34, 1873-78, or 1892-97. A recession that is fluid and unstable, and can easily accelerate in the direction of a bona fide Depression.

What Bush has therefore bequeathed the country is an economic crisis of historic proportions—in terms of debt, systemic financial collapse, and Epic recession. In so doing, Bush has turned the clock back on the American economy more than a century.

Fourth Economic Legacy: Record Budget Deficits and Fiscal Crisis of the State

With bailouts, with expected losses in tax revenues in 2009 due to the now deepening recession, and with the certain need for further fiscal stimulus by the federal Government to save State and Local governments from bankruptcy and provide unemployment insurance for the millions more jobless to come—the next U.S. budget deficit will easily double from its current projected level of around $500 billion. (Yes, that’s another $1 trillion!) A mind-boggling $trillion dollar budget deficit that will all but ensure that, whoever wins the November 2008 election, few if any of their campaign promises or programs will see implementation. Instead, a national economic ‘austerity program’ will likely be the agenda come January 2009 regardless who wins. Come January 2009, critical programs like national health care reform, student loans, sustainable environment, jobs creation and protection, foreclosure mortgage relief, retirement systems reform, etc. will all be sidelined more or less permanently, or at best proposed by the new President in only token form with insufficient funding.

The fiscal-budget crisis of the US government that now looms large on the horizon also has potentially enormous consequences for the non-financial economy. The massive budget deficit is the consequence thus far of three primary causes: the $3 trillion Mideast Wars, the $5 trillion tax cuts for corporations and the rich, and now more recently the multi-trillion, still rising bailouts of finance capital at taxpayer expense. A fourth and fifth cause will balloon the budget deficit further. The fourth is the deepening recession itself, which will result in a major shortfall of tax revenues to the federal government. The fifth is need for the federal government to spend significantly more in order to stimulate recovery from the downturn.

Very little to date has been expended by government to help consumers and homeowners and thus stimulate demand to generate any recovery from recession. The depth of the fiscal-budget crisis may thus neutralize to a large extent the ability of the government to engineer a recovery from the recession. Monetary policies of low interest rates have clearly failed to have any effect on recovery, and the FED has little further leeway to lower interest rates in any event. Traditional monetary policy has clearly failed. The full burden of recovery is thus now shifted to Congress, the President, and fiscal policy. But can the government—having wasted so much on Wars, tax cuts for the rich, and bailouts—still afford to stimulate the economy given the pending trillion dollar deficits? That kind of fiscal spending constraint did not exist in 1929-33, whereas it now clearly does.

As the fiscal crisis deepens, it may have no recourse but to pull out of the wars it can no longer afford, find some way to raise taxes on corporations and wealthy investors, and slow the free flow of bailout money to the banks. However, it is highly problematic that Congress and the new President will have the political will to do any of the above.

Trillion dollar budget deficits may also have serious consequences for the U.S. economy in a global sense. It means the US government will have to borrow much of that trillion deficit from foreign sources—central banks, banks, wealth funds, and foreign investors. If it cannot borrow, it will have to print the money. But will foreign sources want to loan that amount to the US? Perhaps not, if they believe the value of their loans might decline overnight. But if they do not, it may mean a collapse of the U.S. dollar as a world currency. And that will in turn hasten the decline of the U.S. dollar still further, in a vicious downward cycle. If the U.S. government cannot borrow enough to cover the trillion deficit, it will have no recourse but to turn to printing money. That will lead to an explosion of inflation, a further decline of the dollar, and even less willingness by foreign sources to loan to the U.S., and so on. In short, the fiscal crisis legacy of Bush carries the very real risk of spawning a consequent U.S. currency crisis of epic dimensions as well.

Fifth Economic Legacy: Chronic Job Loss and Jobless Recessions

More than 3 million US workers have lost jobs to China alone during the two Bush terms, and another million have been lost due to free trade with Mexico, Central America and Canada. Bush’s first recession in 2001 resulted in loss of millions more jobs. It took 48 months, four years, just to return to employment levels that existed in January 2001 on the eve of Bush’s first recession. It was the longest ‘jobless recession’ on record in the post world war II period. We are now in the third Bush jobs recession. The first occurred between 2001-2002. A brief and weak recovery of jobs followed in 2003, followed in turn by another jobs decline in 2003-04. It was not until just before the 2004 elections that job levels fully recovered. By late 2007, after just a brief few years of jobs growth the economy once again began to gush jobs at an alarming rate. After three jobs recessions under Bush, it now appears jobs recessions are becoming endemic to the US economy.

The most recent jobs recession began in 2007 and now has begun to accelerate once again. Officially, more than 750,000 jobs were lost through September in 2008. The actual number is much higher, however, given the conservative way the US government calculates unemployment. For example, in September the government estimated 159,000 jobs were lost. But 337,000 part time workers were hired that month. That means many tends of thousands of US workers were cut back from full time and rehired as part time. Part time work should represent a ‘half’ of job loss, but the government counts part time and fully employed. Since January 2008 at least another 750,000 part time workers were hired. The true job loss since the start of 2008 is thus closer to 1.5 million than the estimated official 800,000 or so.

The Bush jobs legacy has thus been one of shifting more jobs offshore as a result of free trade policies, weak and brief job creation during recoveries from recessions, at least three ‘jobs recessions’ during his watch, and the replacement of millions of higher quality full time jobs with lower paid, lower benefits (or no benefits) part time and temporary jobs. It is an abysmal legacy that explains a good deal why 91 million middle-working class households’ pay and incomes have stagnated or declined.

Sixth Economic Legacy: Middle-Working Class Earnings and Income Stagnation

The real weekly earnings of the 91 million households in the U.S. earning—i.e. 80% of all households earning roughly $80,000 a year or less—are less today than when Bush took office. To maintain standards of living these households—those that constitute the middle and working class—have out of necessity turned to credit cards, refinancing their mortgages when it was possible, and working second and third part time jobs. The chronic loss of jobs due to free trade and repeated jobless recessions, the shift to lower paying service jobs, and companies transferring workers from full time permanent employment to more part time-temporary jobs explains a good deal of the stagnant or declining incomes. But not all. The decline of unions and effectiveness of collective bargaining during Bush’s term has also contributed to the income stagnation, as has the shifting of the cost of rising health insurance, deductibles, and copayments from employers to workers during Bush’s term.

In stark contrast to the Bush legacy of stagnating and declining earnings for the 91 million as a group, the Bush legacy has meant turning a blind eye to multi-million dollar, and even billion dollar, CEO pay packages—including those granted bank executives who received multi-million dollar payoffs even when their companies crash and burn. No wonder the general public were incensed this past September with Treasury Secretary, Paulson’s, proposal for $700 billion TARP bailout! That bailout failed—and continues to fail—to provide any effective constraints on Executive Pay or CEO ‘golden parachutes’. The obscene, uninterrupted, and historically unprecedented explosion of executive pay is thus one of the more visible hallmarks of the Bush economic legacy.

Seventh Economic Legacy: Regulatory Chaos and Endemic Corporate Corruption

Some argue the current financial crisis is the product of financial industry deregulation. But that is only partly correct. Deregulation is only an ‘enabler’ of the crisis, not a fundamental cause of it. Deregulation has allowed the banks to set up ‘shadow’ institutions, as noted above, in which to hide and bury their ‘junk’ securities. It has spurred the process called ‘securitization’, in which bad loans were bundled with other bad or good securities, cut up into 5 to 15 pieces, marked up in price to make a superprofit, and sold and resold around the world to other central banks, banks, funds and private investors. Deregulation allowed banks to work with mortgage lenders to generate record quantities of bad mortgages; allowed banks to spread contagion in the name of spreading risk; permitted excess leveraging by financial and non-financial corporation alike. But deregulation means nothing if debt is not readily available to borrow at excessively low costs. That’s where the FED’s quarter century long loose monetary policy and below normal market interest rates played a complimentary role. Speculation results in excessive leveraging of ‘bad debt’. But leveraging requires easy, low cost borrowing. Deregulation allows leveraging to happen. But super low interest rates by the FED makes it possible in the first place. The two go hand in hand.

The repeal of the Depression-era Glass-Steagall Act in 1999 and its replacement with the Gramm-Bliley Act removed a major impediment, while providing a major impetus, to financial speculation and excess. But Bush took the opportunity several steps further. Bush’s contribution was to encourage and promote excessive financial speculation; turn over what remained of policing of the banking industry, in particular the investment banks, to the banks themselves; and send the remaining regulatory agency, the Security and Exchange Commission (SEC), to the sidelines. This policy thrust went on from the very beginning of his term in 2001 up to the outbreak of the financial crisis in late 2007. It is possible to cite numerous and repeated attempts by state and even federal mid-level officials who warned of the dangers of growing financial speculation, in general and with regard to subprimes in particular, from 2002 on. Regulators at both the state and federal levels repeatedly warned from late 2003 on what was going on in the mortgage markets in particular. So it is simply not true that Bush Administration regulators “did not see what was coming”.

In April 2004 the floodgates were further opened. At that time the SEC decided to allow the ‘big 5’ investment banks—i.e. the Lehman Brothers, Bear Stearns, Merrill, Morgan Stanley, Goldman Sachs—to take on unlimited debt and ‘leverage’ as they began their manipulation of the emerging boom in the subprime market. They were no longer required to keep virtually any reserves on hand for emergency situations. They could borrow without limit from the FED, hedge funds, and other private funds and leverage to the hilt, which they did. Bear Stearns, Lehman and the rest typically took on any and all bad debt and leveraged themselves to more than 30 times their available reserves. Moreover, they would be allowed to self-regulate themselves with no further SEC policing or oversight. Without this strong encouragement by the Administration, the excessive bad debt accumulation associated with the subprime market would not have been possible.

Thus the Securities and Exchange Commission did not simply ‘look the other way’. The agency responsible for regulation actively participated in and enabled the deregulation. It helped dismantle the last vestiges of regulation under Bush. Its chief Commissioner, Christopher Cox, was handpicked by Bush because he, Cox, had a long track record as a representative in the House raising and promoting legislation to protect the investment banking industry from lawsuits, loosening accounting rules for executive stock options, and cutting staffing and inspections at the SEC. Bush awarded him with the position.

It is also often forgotten that Secretary of Treasury, Paulson, the administration’s point man for financial system re-regulation, assumed his current role as Treasury Secretary in mid-2006, barely two years ago, and immediately launched as his first act in office a major effort to deregulate the banking industry still further. As the subprime crisis began to emerge in late 2006, Paulson was proposing and championing legislation for looser oversight by the SEC of banks and mortgage companies responsible for the subprime bust. His ‘mantra’ was to replace defined rules governing banks’ practices and behavior with vague, undefined ‘principles’. He originated a special commission to report proposals to do just that, which it did. As part of the report, while controls were further lifted on banks, more controls and restrictions were implemented, in contrast, on regulators. The target of the report were attorney generals and governors, like Eliot Spitzer, who were beginning to act and intervene because the SEC was content to do nothing and ignore the growing crescendo of warnings about the pending subprime crisis.

The same Paulson, ex-CEO of the investment bank, Goldman Sachs, and champion of deregulation under Bush from 2006 on, is now entrusted with financial re-regulation. It should therefore have been no surprise that his original ‘TARP’ proposal called for no new regulatory controls on the banks or limits on executive pay, as he simultaneously proposed to give Banks a handout of $700 billion.

Deregulation is directly related to corporate fraud. In Bush’s first term, scores of CEOs and senior managers were indicted and convicted for various forms of fraud. These companies were mostly associated with the technology sector, in the wake of the dot.com boom and bust. The current financial crisis has yet to produce its own crop of corrupt captains of industry. But it will. Investigations are already well underway by the FBI, SEC, and Congress. The new corruption cases will make the post-dot.com bust fraud revelations pale in comparison in terms of the dollar value rip-offs. Bush will therefore leave office with one of the worst legacies of corporate corruption on his watch.

It is important to note that Bush’s legacy on deregulation and its huge costs to the economy and US taxpayer was not limited to the finance industry. Space does not permit a chronicling of the devastating consequences of other industries’ deregulation under Bush: transport, communications, cross-industry occupational safety and health, environmental, federal labor and wage standards, food and drug safety, and countless other areas. In all cases, however, the result has been greater profits for corporations at the expense of consumers, workers and taxpayers.

Eighth Economic Legacy: The Destruction of Retirement

Another Bush legacy has been the destruction of the retirement system established in the immediate post-World War II period. That system was based upon the idea of a ‘three legged stool’ structure that included Social Security, employer-provided pensions, and personal savings. All three were actively undermined by Bush and have resulted in a crisis of historic proportions, for the more than 44 million retirees today and the 77 million baby boomers who will start joining their ranks starting next year.

The crisis in Social Security is not as described by the Bush administration a few years ago, as Bush desperately attempted to privatize the system. The crisis is the more than $2.3 trillion dollars that has been siphoned out of the Social Security Trust Fund the last two decades, transferred to the U.S. general budget, and spent in order to pay for wealthy and corporate tax cuts, chronic wars under Bush, and ballooning defense budgets. Social Security payroll tax collections for two decades have actually subsidized the U.S. budget, not undermined it. Every year the Social Security program produces a surplus, at the rate of sometimes hundreds of billions of dollars a year. And that surplus is diverted in full and spent. Defenders of the historic theft say ‘we owe it to ourselves’ and can put it all back in the trust fund whenever we need’. True. But to replace it requires the US Government borrowing back the $2.3 trillion from banks and other private sources, paying interest on that debt, and thus adding at least $200 billion more a year for ten years to the coming $1 trillion a year budget deficit. In accounting terms it is possible; in economic and political terms it is not. Bush has borrowed over his eight years in office more than $1.3 trillion of the $2.3 trillion Social Security Trust Fund surplus.

The second ‘leg of the stool’, private pensions, have fared even worse under Bush. When Bush took office there were more than 35,000 defined benefit pension plans, single and multi-employer, in the U.S. Today there are barely 30,000. More than 5,000 have disappeared. That decline has been with the active encouragement of the Bush administration. Throughout his first term and well into his second, Bush allowed underfunded pension plans to defer payments, required by law, into their pension funds to ensure they were solvent. He called these ‘contribution holidays’. In 2004-05 the practice was particularly abusive, in the run-up to the passage of what he called the ‘Pension Protection Guarantee Act of 2006’. That 2006 Act, however, was not designed to rescue defined benefit plans but to hasten their further demise—as witnessed by the collapse of 5000 more plans during his term. His legacy in this area is yet to worsen, moreover. Key elements of that Act permitted pension funds to invest in risky Hedge Funds. The latter are about to go bust in large numbers, resulting in a further crisis of traditional defined benefit pensions and their funds.

Bush consistently pushed the dismantling of defined pensions and their replacement with 401K plans. In fact, the 2006 Act has allowed companies to force-enroll employees in 401Ks. But 401Ks are virtually unregulated and studies show they yield far less in returns available for retirement than do traditional pensions. In fact, the average balance in 401ks today is barely $18,000. That means tens of millions face the future of retirement in the 21st century with only $18K of retirement sources, apart from social security benefits.

The final ‘leg’ of the retirement system stool has been broken as well under Bush. That was supposed to be the accumulation of one third of necessary retirement resources from personal savings. However, under Bush the personal savings rate has collapsed. Americans now have a negative savings rate, as they’ve struggled to barely keep up with the cost of living. Falling annual earnings do not produce savings. In an ominous recent trend, moreover, it appears many are having to borrow from their already insufficient 401ks just to cover medical cost and other expenses.

Bush’s legacy in the area of retirement is a crisis of historic dimensions in insufficient resources for tens of millions.

Ninth Economic Legacy: Dismantling the Postwar Health Care System

Bush has been even more successful in privatizing, and thus dismantling, the post-war health care financing system. By allowing health care insurance premiums and other costs to double during his term, rising more than 10% every year in his first seven years, he has forced employers and workers alike to give up health care coverage altogether or to reduce that coverage in order to afford rising premiums and other costs. There are now more than 47 million Americans without any kind of health coverage whatsoever, an increase of 9 millions since 2000. Eight out of ten of those uninsured are working Americans. More than 1.3 working Americans lost their health insurance coverage in 2006 alone. Approximately 12% of all kids in the U.S. have no health coverage. Despite this collapsing coverage, the U.S. spends nearly twice as much, about 17%, of its total GDP on health care. That compares with 9%-10% for those countries with single payer health delivery systems in Europe, Canada and elsewhere. It means the U.S. spends more than $1 trillion a year on middle men, i.e. mostly insurance companies, to push paper and forms around while delivering not a single health service.

For those still with health insurance, the rising cost burden has also shifted significantly from employers to their workers—by as much as 30% according to some studies—to cover rising costs of not only monthly premiums but out of pocket deductibles and copayments. Thousands of companies have been allowed to abandon their health plans altogether, most notably in recent years the big auto companies which are in the process of dumping their health care funds, underfunded by $50 billion, onto the auto workers’ unions. Employers that once provided medical benefits for their retirees under their plans, benefits often negotiated with their unions, have simply arbitrarily and unilaterally discontinued those benefits. The administration and the courts have encouraged and endorsed such employer and court decisions.

Bush’s long run plan has always been to fully privatize health care, just as it has been to complete the privatization of defined benefit pensions and has attempted to privatize social security. Bush’s creation of so-called Health Savings Accounts, or HSAs, has been the center of the administration’s health care insurance strategy. HSAs are simply the analog of 401ks. Like the latter, they are designed to eliminate and replace group plans provided by employers or negotiated by unions. Bush and employers have as their goal the elimination of any central role by employers providing either retirement or health care coverage. That is what Bush has called his ‘Consumer Driven Society’. That too is his legacy—a health care delivery and financing system that is now as broken as the retirement system.

Tenth Economic Legacy: Massive Tax and Income Shift to the Wealthy

Every year for the first five years of his terms in office Bush pushed historic tax cuts totaling more than $5 trillion. Estimations from sources like Brookings, Urban Institute, and others are that about 73% of the cuts benefited the wealthiest 20% households. 30%, or $1.5 trillion, of that 73% benefited the wealthiest 1% households, or roughly 1.1 million out of the total 114 million taxpaying households in the U.S. But these figures don’t even include tax cuts for corporations, which have amounted to trillions more under Bush. Nor do they include similar massive tax shifting at the State and Local government levels. Where has all that tax cut money gone, one might ask? A good deal of it into Hedge Funds, Private Equity Funds, and other forms of private, unregulated banking—and thus stoking the fires of speculative investment in recent years in subprimes, derivatives and other unregulated financial securities. Other amounts have no doubt contributed to the explosion of offshore tax shelters. According to the investment bank, Morgan Stanley, in 2005 offshore tax shelters had increased their funds from only $250 billion in 1983 to more than $5 trillion by 2004. More recent estimations by the Tax Justice Network indicate tax shelters now hold more than $11 trillion. A reasonable estimate is that wealthy Americans likely account for at least 40% of that total, or around $4-$4.5 trillion. Exactly how much is not currently knowable, since there are around 27 offshore tax shelters, according to the IRS, in mostly sovereign nations like the Cayman Islands, the Seyschells, Isle of Man, Vanuatu and the like which have closed their tax doors and do not cooperate with IRS attempts to investigate how much wealthy US taxpayers have stuffed away in their electronic vaults.

The massive tax shift has been a prime cause of the Bush legacy of shifting relative income and wealth in the U.S. during his term—from roughly 91 million middle and working class taxpaying households to the wealthiest 1% (1.1 million) of U.S. households. There are of course numerous additional means by which income has been shifted from the bottom 80% to the wealthiest 1% (e.g. executive pay), but the tax system restructuring under Bush has likely been the most contributive sources.

An idea of how much this has all resulted in the explosion of income and wealth gains at the top at the expense of those at the bottom 80% has been estimated in recent academic studies by professors Emmanual Saez and Thomas Picketty. Based on their deep analysis of IRS taxes paid over the history of the Federal Income Tax since 1917, the wealthiest 1% of households in the U.S. received about 8.3% of total income in the U.S. in 1978. By 2006, however, that wealthiest 1% were receiving 20.3% of total income generated in the U.S. And that still does not include tax sheltered income. Nor does it include corporations’ retained income or profits diverted offshore to avoid taxes. But the 20.3% does represent a return to almost exactly what the top 1% received in 1928—i.e. 21.09%–on the eve of the last Great Depression!

For the Bush years, that 20.3% translates into incomes of the top 1% growing in real terms at a rate of 11% per year between 2002-2006. In contrast, the remaining 99% of taxpaying households in the U.S. grew in real terms at an annual rate of only 0.9%. It also means that top1% captured about 75% of all the incremental net income gains during the years 2002-06 under Bush. (1)

Two Final Comments

Bush’s ‘Toxic Economic Legacies’ have their roots in policies that are not uniquely his own. The above ten points represent policies that commenced in earnest in the 1980s under Reagan, and in some instances even before that during the last two years of the Jimmy Carter administration. The policies were continued in various form through the administrations of George Bush senior and Bill Clinton with different emphases. What characterizes the administration of George W. Bush is that the toxic legacies were carried to the extreme, accelerated in terms of their effects, as well as their inevitable negative consequences. Whether income shift, financial deregulation and crisis, tax shift, budget deficits and fiscal crisis, the destruction of the retirement and health care systems, etc., Bush represents the continuation of the policies and legacies on an accelerated rate, on a magnified scale—i.e. ‘a toxicity writ large’.

A second, final comment is that these toxic economic legacies are interdependent, one feeding upon and exacerbating the other. It is not possible, for one example, to understand the current financial crisis and emerging global epic recession apart from the massive shift and concentration of income in the hands of the wealthiest household-speculators and corporate-speculators. That is not the sole explanation of the present systemic financial collapse or growing threat of global depression increasing now almost daily. But the financial and economic crisis underway at present cannot be fully comprehended apart from the former either. Reversing the legacies, removing the toxic effects on the future of American economy and society cannot take place without correcting the fundamental causes. And that includes reversing once again, as in the 1930s and 1940s, the perverse and distorted income and wealth distribution afflicting society itself.

Dr. Jack Rasmus

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The following 2nd contribution to the debate summarizes in brief my perspective—neither Mainstream nor contemporary Marxist—on the causes and consequences of the crisis in general, and specifically how financial cycles and real cycles interact to create a crisis that is not a normal recession and not yet a bona fide depression—or what I have called an ‘Epic Recession’. The latter cannot be resolved, I argue, by traditional fiscal-monetary policies, and so long as it remains unresolved the potential increases for it transforming into a bona fide global depression. My perspective is presented in the form of 20 propositions, which I apologize for beforehand as, due to the requirements of debate, are necessarily too brief and general.

Proposition 1:

Deep capitalist cycle contractions (depressions and epic recessions) are driven by endogenous forces, both real and financial, that mutually determine each other, with different relative magnitudes and directions of causality that vary with the phase of the long run boom-bust cycle.

Proposition 2:

The key endogenous Independent variable is not profits but Investment—the latter comprised of two fundamental components: real asset investment (Ig) and financial asset investment (If).

Proposition 3:

Over the boom phase of the cycle, the composition and relative weight of total investment shifts from Ig to If. In the early boom phase, financial assets are created as a one-to-one representation of the market value of real assets. A mortgage is equivalent to the original market value of a new structure, for example. But as the boom phase of the cycle progresses, If expansion becomes increasingly independent of Ig—driven by excess money liquidity, proliferating forms of credit decoupled from money, increasingly leveraged debt financing, and the increasing demand driven character of financial asset price inflation over the boom phase of the cycle.

Proposition 4:

Money may serve as credit; but credit is not limited to the money form. Credit is simultaneously money and more than money. Money may function as ‘outside credit’, but credit is also created ‘inside’ and autonomous of money. Money and autonomous credit are key to understanding the relative shift from Ig to If over the boom phase of the cycle.

Proposition 5:

The relative and absolute shift from Ig to If over the boom phase of the cycle creates destabilizing asset price bubbles and financial crashes that in turn produce deeper and more durable contractions of the real economy than typically occurs in the case of ‘normal’ recessions that are not precipitated by, or associated with, financial instability events. Depressions and epic recessions are not normal recessions ‘writ large’, but reflect the outcome of unique qualitative forces associated with financial cycle volatility.

Proposition 6:

An explosion of both money credit and autonomous credit has been occurring since 1945—the process accelerating with the collapse of the Bretton Woods International Monetary System after 1973; with the global ending of international capital flow controls in the 1980s; with the digitization of financial transfers in the 1990s; and with the global expansion of shadow banking institutions, very high net worth professional investors, highly liquid secondary financial markets, and the proliferation of multiple new forms of financial asset instruments.

Proposition 7:

Decades of excessive liquidity and autonomous credit creation has resulted in a shift to greater debt and growing debt-leveraged financing, which accelerates If forms of investment more than Ig, and short term speculative financial forms of If in particular. Rising debt leveraged financing results in more frequent, larger, and more globalized asset price bubbles and corresponding financial instability.

Proposition 8:

There is no such thing as ‘the’ capitalist price system. There are several price systems. They do not behave alike. The system of financial asset prices is more volatile, in terms of both inflation and deflation, than product or factor (e.g. wage) input prices. Unlike the latter, financial asset prices are driven increasingly by speculative demand over the course of the boom phase of the cycle, and late boom phase in particular. Financial asset prices are subject to little or no supply force constraints during the boom phase, unlike product or factor prices. As financial asset inflation occurs, demand drives prices higher, invoking still more demand, until further price increases are unsustainable and the asset price bubble collapses. Asset price deflation following the financial bust in turn drives product and factor (wage) deflation. All three price systems mutually determine each other in a negatively reinforcing way during the initial stage of the bust phase of the cycle. Asset and product price deflation together dampen Ig, leading to employment declines, wage deflation, and falling household income and consumption. Business and household defaults follow, in turning provoking more asset, product, and factor price deflation that result in rising real debt levels. A generalized downward spiral of debt-deflation-default sets in, resulting in a deeper and more durable contraction of the real economy. The capitalist price mechanism thus plays a central role in destabilizing the system—both in the boom and bust phase—contrary to prevailing mainstream economic ideology that the price system works to restore equilibrium and stability.

Proposition 9:

The forces driving financial asset investment, If, slow real asset investment, Ig, during the late boom phase by diverting financing from Ig to If, and thereafter subsequently accelerating the already declining Ig during the initial bust phase. The growing frequency, magnitude, scope, and duration of financial investment, bubbles, and crashes over the long run thus have a combined negative impact on Ig—i. e. more slowly during the boom phase (a structural effect) and more rapidly during the bust phase (a cyclical effect). This long run decline of Ig relative to If due to both structural and cyclical causes convinces successful real asset investment companies to shift more toward If forms of investment. Thus, a company like General Electric, for example, perhaps the largest manufacturer in the world, increasingly shifts to and relies upon portfolio (e.g. financial asset) investing over the longer term.

Proposition 10:

This overall ‘Financial Shift Effect’ further results in non-financial capitalist enterprises seeking to reduce labor and other factor input costs over the longer term by various measures—i.e. reducing labor costs by moving to offshore markets, demanding further tax concessions and subsidies from the state, reducing inter-capitalist competition costs (free trade), shifting operating cost burden to workers and consumers (industry deregulation), and restructuring labor costs in the home market (de-unionization, more part time-temp labor, cutting social security-medicare and private pension ‘deferred’ wages, shifting medical costs to its workforce, reducing paid time off, delaying minimum wage adjustments, etc.), to name but the most obvious.

Proposition 11:

Income for the ‘bottom 80%’ primarily wage earning households progressively stagnates and declines over the boom phase of the cycle, as operating income for both financial and non-financial corporations in contrast rises. To offset declining real income for the 80%, consumer household credit and debt grow—especially mortgage, student loan, credit card, and installment loan forms. Terms and conditions of debt repayment are typically ‘lenient’ during the boom phase, thus serving to accelerate credit and debt accumulation. Financial institutions are more than willing to extend credit and debt to such households, charging interest that in effect represents a claim on future, not yet paid wages.

Proposition 12

Systemic Fragility grows over the boom phase, accelerating in its later stages, composed initially of both business Financial Fragility and household Consumption Fragility. Fragility is a ratio and a function of three elements: rising indebtedness, declining liquid income, and the terms and conditions for which payment on incurred debt is made. Mainstream economics bifurcates this ratio: the Hybrid Keynesian wing considers income but largely disregards finance, credit and debt as equivalently important variables; the Retro Classicalist wing considers credit and debt but de-emphasizes the role of income. Both minimize the importance of ‘terms and conditions’ of repayment by focusing only on a subset—the interest rate—of this third element determining fragility.

Proposition 13:

Over the boom phase, rising household indebtedness amidst stagnating and declining household income represents rising ‘Consumption Fragility’ (CF) within the system. Similarly over the boom phase, rising financial institution (banks, shadow banks, and portfolio operations of large corporations) indebtedness that occurs with the increasing shift to debt-leveraging financing of If, represents ‘Financial Fragility’ (FF). Financial fragility during the boom phase is obscured by rising financial asset inflation. Consumption fragility is obscured by the continuing growth of consumption driven by debt. Both obscured effects disappear with the onset of the boom phase, revealing the true condition of fragility deterioration during the boom.

Proposition 14:

During the boom phase, a third form of fragility—Government Balance Sheet Fragility (GBSF)—also grows, as successive financial instability events of growing intensity require repeated government bailouts of financial institutions and as fiscal stimulus policies are introduced in successive (normal) recessions to assist recovery of non-financial corporations. In addition to these cyclical contributions to GBSF, structural causes also contribute to GBSF, as legislated tax cuts and subsidies for corporations adds further to government debt and thus GBSF. Thirdly, in the particular case of the United States, the policy choice since the 1980s to run annual and growing trade deficits adds still further to total deficits and debt levels. Dollars accumulate abroad due to the trade deficits and US trading partners agree to recycle the dollars back to the US by purchasing US Treasury bonds. Knowing the bond purchases will continue, the US federal government cuts taxes and increases spending further still, thus raising the deficit and total government debt. Federal debt consequently grows from less than $1 trillion to more than $15 trillion in the process. GBSF rises due to rising debt and falling (tax revenue) income.

Proposition 15:

During the initial bust phase following a financial crash, financial asset prices collapse and financial fragility accelerates, with its consequent effects on real Ig, employment declines, and the debt-deflation-default processes previously noted. Simultaneously, Consumption Fragility—already rising during the boom phase—deteriorates even more rapidly, driven by income declines due to mass layoffs, wage-benefit reductions, shorter hours of work and weekly earnings, and negative wealth effects as savings levels and rates of growth collapse. The financial crash thus precipitates a further ‘fracturing’ of both financial and consumption fragility. By means of the price system and the debt-deflation-default process, Financial and Consumption Fragility thus exacerbate each other in the course of the downturn. Just as the financial side of the economy causes a deterioration of real side conditions, the latter in turn cause a further deterioration of the financial side. The internal transmission mechanism of this mutual feedback is the debt-deflation-default process, which also contains its own inter-causal feedback effects.

Proposition 16:

Rising real debt, deflation across the three price systems, declining cash flow and disposable income, and the corresponding collapse of available credit transmits to the real economy in the form of a rapid decline in business and consumer spending, which in turn feedback upon each other. A faster, deeper and more protracted recession results, not a ‘normal’ recession precipitated by external demand or supply shocks, but an ‘epic’ recession precipitated by a financial crash and accelerated by an endogenous condition of extreme ‘systemic fragility’.

Proposition 17:

As the bust phase of the cycle continues and recession deepens, Government Balance Sheet Fragility—already growing per forces noted in proposition #14 above—rises further as well, as government fiscal-monetary stimulus policies attempt to halt the downturn. However, GBSF is not without limits. Under particularly severe conditions of Financial and Consumption Fragility, attempts to halt the momentum of decline by means of tax cuts and spending may prove insufficient while nonetheless adding to GBSF. The result is an extended period of ‘stop-go’ recovery, with short and brief real economic growth punctuated by repeated relapses, and even double dip recessions. This ‘stop-go’ recovery trajectory may continue for years, and even decades, should Systemic Fragility rise or remain high.

Proposition 18:

Systemic fragility in its three basic forms, and their mutual amplifying feedback effects, transmit to the real economy by means of reductions in fiscal and monetary multiplier effects. In the attempted recovery phase, the State engages in fiscal stimuli to bail out banks, corporations and investors. However, Systemic Fragility means business tax cut multipliers have sharply declined, to less than 1.0. State fiscal stimulus consequently results in business, and especially Multinational Corporations, cash hoarding. Cash hoarded is then diverted to corporate stock buybacks and dividend payouts, diversion of real asset investment to offshore emerging markets, and into new financial asset speculative investing in an effort to resort collapsed asset values and corporate balance sheets. Real investment and thus job creation subsequently lags and a stagnant stop-go recovery results.

Proposition 19:

Systemic fragility and its amplifying effects also serves to reduce money multipliers. Massive money supply injections by central banks are initially hoarded, then redirected to lending offshore, to financial speculation, and to ‘safer’ large corporations. Banks reduce lending to ‘less safe’ smaller businesses and households, further reducing investment, jobs and consumption demand. Money demand and money velocity thus offset money supply injection by central banks. Central bank QE and zero interest policies provoke instead new financial bubbles in stocks, junk bonds, real estate, foreign exchange and derivatives trading. Currency wars erupt as money injection policies depress currency exchange rates. Banks and financial markets become increasingly addicted (dependent upon) central banks money injections. Globally, financial speculation raises the specter of further financial instability on a real economy base further weakened by the preceding cycle of economic contraction. The risk of bona fide global depression rises in time.

Proposition 20:

In the context of conditions noted above—of systemic fragility and growing feedback amplitude effects—traditional fiscal-monetary policy tools attempting to expand the economy are rendered increasingly ‘inelastic’ (i.e. less sensitive or effective) in generating a sustained economic recovery. Conversely, when such tools are employed to contract the economy, via austerity fiscal policies and/or central bank raising of interest rates, the effects are more ‘elastic’ (i.e. more sensitive and effective) in contracting the real economy. Fiscal-monetary policies are therefore not simply increasingly non-productive but, over time, become counter-productive in generating recovery. Solutions to recovery consequently lie in the necessity of a major restructuring of the economy along multiple key sectors including, but not limited to, the tax system, banking system, retirement and healthcare systems, labor markets and public investment—with the purpose of redistributing income while simultaneously reducing debt. That is, reducing systemic fragility in aggregate as well as its mutual amplifying effects.

Jack Rasmus, copyright April 2013

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