How
Long Can The Federal Reserve Stave Off the Inevitable? — Paul Craig Roberts
How Long Can The Federal
Reserve Stave Off the Inevitable?
Paul Craig Roberts
When are America’s global
corporations and Wall Street going to sit down with President Trump and explain
to him that his trade war is not with China but with them. The biggest chunk of
America’s trade deficit with China is the offshored production of America’s
global corporations. When the corporations bring the products that they produce
in China to the US consumer market, the products are classified as imports from
China.
Six years ago when I was
writing The Failure of Laissez Faire Capitalism, I concluded on the
evidence that half of US imports from China consist of the offshored production
of US corporations. Offshoring is a substantial benefit to US corporations
because of much lower labor and compliance costs. Profits, executive bonuses,
and shareholders’ capital gains receive a large boost from offshoring. The
costs of these benefits for a few fall on the many—the former American
employees who formerly had a middle class income and expectations for their
children.
In my book, I cited evidence
that during the first decade of the 21st century “the US lost 54,621 factories,
and manufacturing employment fell by 5 million employees. Over the decade, the
number of larger factories (those employing 1,000 or more employees) declined
by 40 percent. US factories employing 500-1,000 workers declined by 44 percent;
those employing between 250-500 workers declined by 37 percent, and those
employing between 100-250 workers shrunk by 30 percent. These losses are net of
new start-ups. Not all the losses are due to offshoring. Some are the result of
business failures” (p. 100).
In other words, to put it in
the most simple and clear terms, millions of Americans lost their middle class
jobs not because China played unfairly, but because American corporations
betrayed the American people and exported their jobs. “Making America
great again” means dealing with these corporations, not with China. When
Trump learns this, assuming anyone will tell him, will he back off China and
take on the American global corporations?
The loss of middle class
jobs has had a dire effect on the hopes and expectations of Americans, on the
American economy, on the finances of cities and states and, thereby, on their
ability to meet pension obligations and provide public services, and on the tax
base for Social Security and Medicare, thus threatening these important
elements of the American consensus. In short, the greedy corporate elite have
benefitted themselves at enormous cost to the American people and to the
economic and social stability of the United States.
The job loss from offshoring
also has had a huge and dire impact on Federal Reserve policy. With the decline
in income growth, the US economy stalled. The Federal Reserve under Alan
Greenspan substituted an expansion in consumer credit for the missing growth in
consumer income in order to maintain aggregate consumer demand. Instead of wage
increases, Greenspan relied on an increase in consumer debt to fuel the
economy.
The credit expansion and
consequent rise in real estate prices, together with the deregulation of the
banking system, especially the repeal of the Glass-Steagall Act, produced the
real estate bubble and the fraud and mortgage-backed derivatives that gave us
the 2007-08 financial crash.
The Federal Reserve
responded to the crash not by bailing out consumer debt but by bailing out the
debt of its only constituency—the big banks. The Federal Reserve let little
banks fail and be bought up by the big ones, thus further increasing financial
concentration. The multi-trillion dollar increase in the Federal Reserve’s
balance sheet was entirely for the benefit of a handful of large banks. Never
before in history had an agency of the US government acted so decisively in
behalf only of the ownership class.
The way the Federal Reserve
saved the irresponsible large banks, which should have failed and have been
broken up, was to raise the prices of troubled assets on the banks’ books by
lowering interest rates. To be clear, interest rates and bond prices move in
opposite directions. When interest rates are lowered by the Federal Reserve,
which it achieves by purchasing debt instruments, the prices of bonds rise. As
the various debt risks move together, lower interest rates raise the prices of
all debt instruments, even troubled ones. Raising the prices of debt
instruments produced solvent balance sheets for the big banks.
To achieve its aim, the
Federal Reserve had to lower the interest rates to zero, which even the low
reported inflation reduced to negative interest rates. These low rates had
disastrous consequences. On the one hand low interest rates caused all sorts of
speculations. On the other low interest rates deprived retires of interest
income on their retirement savings, forcing them to draw down capital, thus
reducing accumulated wealth among the 90 percent. The under-reported inflation
rate also denied retirees Social Security cost-of-living adjustments, forcing
them to spend retirement capital.
The low interest rates also
encouraged corporate boards to borrow money in order to buy back the
corporation’s stock, thus raising its price and, thereby, the bonuses and stock
options of executives and board members and the capital gains of shareholders.
In other words, corporations indebted themselves for the short-term benefit of
executives and owners. Companies that refused to participate in this scam were
threatened by Wall Street with takeovers.
Consequently today the
combination of offshoring and Federal Reserve policy has left us a situation in
which every aspect of the economy is indebted—consumers, government at all
levels, and businesses. A recent Federal Reserve study concluded that Americans
are so indebted and so poor that 41 percent of the American population cannot
raise $400 without borrowing from family and friends or selling personal
possessions.
A country whose population
is this indebted has no consumer market. Without a consumer market there is no
economic growth, other than the false orchestrated figures produced by the US
government by under counting the inflation rate.
Without economic growth,
consumers, businesses, state, local, and federal governments cannot service
their debts and meet their obligations.
The Federal Reserve has
learned that it can keep afloat the Ponzi scheme that is the US economy by
printing money with which to support financial asset prices. The alleged rise
in interest rates by the Federal Reserve are not real interest rates rises.
Even the under-reported inflation rate is higher than the interest rate
increases, with the result that the real interest rate falls. If the stock
market tries to sell off, before much damage can be done the Federal Reserve
steps in and purchases S&P futures, thus driving up stock prices.
Normally so much money
creation by the Federal Reserve, especially in conjunction with such a high
debt level of the US government and also state and local governments,
consumers, and businesses, would cause a falling US dollar exchange rate. Why
hasn’t this happened?
For three reasons. One is
that the central banks of the other three reserve currencies—the Japanese
central bank, the European central bank, and the Bank of England—also print
money. Their Quantitative Easing, which still continues, offsets the dollars
created by the Federal Reserve and keeps the US dollar from depreciating.
A second reason is that when
suspicion of the dollar’s worth sends up the gold price, the Federal Reserve or
its bullion banks short gold futures with naked contracts. This drives down the
gold price. There are numerous columns on my website by myself and Dave
Kranzler proving this to be the case. There is no doubt about it.
The third reason is that
money managers, individuals, pension funds, everyone and all the rest had
rather make money than not. Therefore, they go along with the Ponzi scheme. The
people who did not benefit from the Ponzi scheme of the past decade are those
who understood it was a Ponzi scheme but did not realize the corruption that
has beset the Federal Reserve and the central bank’s ability and willingness to
continue to feed the Ponzi scheme.
As I have explained
previously, the Ponzi scheme falls apart when it becomes impossible to continue
to support the dollar as burdened as the dollar is by debt levels and abundance
of dollars that could be dumped on the exchange markets.
This is why Washington is
determined to retain its hegemony. It is Washington’s hegemony over Japan,
Europe, and the UK that protects the American Ponzi scheme. The moment one of
these central banks ceases to support the dollar, the others would follow, and
the Ponzi scheme would unravel. If the prices of US debt and stocks were reduced
to their real values, the United States would no longer have a place in the
ranks of world powers.
The implication is that war,
and not economic reform, is America’s most likely future.
In a subsequent column I
hope to explain why neither US political party has the awareness and capability
to deal with real problems.
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