How
Long Can The Federal Reserve Stave Off the
Inevitable?
By Paul
Craig Roberts
June
26, 2018 "Information
Clearing House"
- 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.
Dr. Paul Craig Roberts was Assistant Secretary of
the Treasury for Economic Policy and associate
editor of the Wall Street Journal. He was
columnist for Business Week, Scripps Howard News
Service, and Creators Syndicate. He has had many
university appointments. His internet columns
have attracted a worldwide following. Roberts'
latest books are
The Failure of Laissez Faire
Capitalism and Economic Dissolution of the West,
How America Was Lost,
and
The Neoconservative Threat to
World Order.
The
views expressed in this article are solely those
of the author and do not necessarily reflect the
opinions of Information Clearing House.
See also -
Why Half of Americans Can't Come Up With $400 in
an Emergency
