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 retirees 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 and the unemployment 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 rises 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.
It is no secret that the Federal Reserve controls the price of bonds
by openly buying and selling US Treasuries. Since 1987 the Federal
Reserve can also support the price of US equities. 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. In
recent years, when corrections begin they are quickly interrupted and
the fall is arrested.
As a member of the Plunge Protection Team known officially as the
Working Group on Financial Markets, the Federal Reserve has an open
mandate to prevent another 1987 “Black Monday.” In my opinion, the
Federal Reserve would interpret this mandate as authority to directly
intervene. However, just as the Fed can use the big banks as agents for
its control over the price of gold, it can use the Wall Street banks
dark pools to manipulate the equity markets. In this way the
manipulation can be disguised as banks making trades for clients. The
Plunge Protection Team consists of the Federal Reserve, the Treasury,
the SEC, and the Commodity Futures Trading Corporation. As Washington’s
international power comes from the US dollar as world reserve currency,
protecting the value of the dollar is essential to American power.
Foreign inflows into US equities are part of the dollar’s strength.
Thus, the Plunge Protection Team seeks to prevent a market crash that
would cause flight from US dollar assets.
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.
This article was originally published on Paul Craig Roberts Institute for Political Economy.
https://www.paulcraigroberts.org/2018/06/26/long-can-federal-reserve-stave-off-inevitable-paul-craig-roberts/
