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.
https://www.paulcraigroberts.org/2018/06/26/long-can-federal-reserve-stave-off-inevitable-paul-craig-roberts/
"Never before in history had an agency of the US government acted so decisively in behalf only of the ownership class."
ReplyDeleteThat is the only place I disagree with PCR. Contrary to MMT teaching the Fed is a private corporation masquerading as a government institution. Other than that PCR seems to understand the economy better than Bill Michell.
“The multi-trillion dollar increase in the Federal Reserve’s balance sheet was entirely for the benefit of a handful of large banks. ”
ReplyDeleteThis is a false assertion which he will never explain... it was harmful to banks and removed authority of banks to finance risk assets..
“On the other low interest rates deprived retirees of interest income on their retirement savings, ”
I thought this was “welfare for the rich!” Uh-oh!
“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.“
ReplyDeleteBS... Fed has reduced its factors by $150b while the others continue to expand theirs by 10s of billions per month and the USD is DOWN from its highs against those other currencies...
“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. ”
ReplyDeleteThe Fed’s factors are down by $150b YoY and they have stated they want to be down by $400b by end of year, then down another $400b+ next year...
“ If the prices of US debt and stocks were reduced to their real values, “
ReplyDeleteYeah the “real values” are what is in PCRs mind and not the prices being observed daily in the global markets!
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. PCR
ReplyDeleteSad that PCR should even concern himself with the price of gold. Is he a closet Gold Standard advocate? Does he think the answer to a current form of injustice is a previous form of injustice?
I agree with you about his concern with gold, it sounds a bit libertarian to me.
Delete“On the other low interest rates deprived retirees of interest income on their retirement savings, ” PCR via Franko
ReplyDeleteThe proper way to lower interest rates in fiat is equal fiat distributions* to all citizens - not asset purchases by the CB from the private sector. That way, retirees are compensated for what they might lose in interest income.
Besides that, a generous safety net for citizens should exist so that retirement is not unpleasant regardless of investment failure.
*Financed with negative yields on the inherently risk-free debt of the monetary sovereign including negative interest on large demand account balances at the Central Bank.
Good points, Andrew!
ReplyDeleteThere's nothing libertarian about a Gold Standard since inexpensive fiat is the ONLY ethical money form for government use. Otherwise the taxation authority and power of government is misused to benefit private interests such as gold owners/miners.
ReplyDelete“’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?” ~ Paul Craig Roberts
ReplyDeleteRoberts says that Trump’s trade war with China is actually against U.S. workers. However Tom Hickey says (and I agree with Tom) that Trump’s foolishness regarding China is one manifestation of a dying U.S. Empire’s attempts to flex its muscle and show that it is still the boss.
This typically happens with dying empires. As they enter their final twilight, they increasingly boast, swagger, and shoot themselves in the foot until they can no longer stand. Down they go. The U.S. Empire’s fall is being accelerated by the bankers’ campaign to enslave everyone via debt payments and rent payments.
“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. ~ Paul Craig Roberts
Government at all levels except the federal level. Amazing, isn’t it? The federal government can never run out of money, since the federal government can create infinite money out of thin air. And yet, the federal government screams loudest that it “has no money.”
No federal department has ever “run out of money” unless politicians wanted it to as a prelude to privatization. Not even during the worst part of the 1930s depression.
“The implication is that war, and not economic reform, is America’s most likely future.”~ Paul Craig Roberts
Yes, and the U.S. Empire will lose, since the Empire has already lost spiritually.
It may seem that the corporate news outlets can easily use lies to whip the public into howling for war. However, when average Americans are one paycheck away from homelessness, they don’t care about the Chinese “threat.” Average Americans don’t care about anything except day-to-day survival.
It is one thing for free citizens to band together and go to war. However your slaves will not go to war for you. You can conscript them, but this will no longer work. Not today.
The U.S. Empire will lose. You know it. I know it. Everyone knows it. Even the rich know it. They are just grabbing all they can while they can.
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ReplyDeleteSad that PCR should even concern himself with the price of gold.
ReplyDeleteNot so surprising. Even though the gold standard may be a "barbarous relic"*, gold price serves as a benchmark for addressing the money illusion using gold as a numeraire connecting the nominal and real. People in economics, finance, and business use this, so it still has influence as a factor to be taken into consideration.
*John Maynard Keynes, Monetary Reform (1924), p. 172.
@KAIVEY: Paul Craig Roberts is notorious for almost “getting it” regarding money, and then falling back once again into delusions. He does this all the time. One day he recognizes that the U.S. government (like the U.K. government) creates its spending money out of thin air. The next day he says the U.S. government borrows its spending money, and has a “debt crisis.”
ReplyDeleteOne day he seems to understand how fiat money works. The next day he says that fiat money is worthless unless it is “backed by” gold.
This is why, in commenting on a different post, I brought up the topic of “residual false memories.” Our assumptions and beliefs exist in our conscious and sub-conscious minds. Today we dump a false belief in our conscious mind. But tomorrow the false belief in our sub-conscious mind make us err again.
Paul Craig Roberts long believed that the U.S. government was revenue-constrained like an ordinary person is. Roberts no longer believes this consciously, but he still believes it subconsciously. Therefore today he says the U.S. government has no “debt crisis.” But tomorrow he says it does.
We humans cannot change our subconscious beliefs and assumptions by snapping our fingers. Instead, changing our subconscious minds requires patient, consistent, and daily effort.
At least he's human like the rest of us. His heart is in the right place.
ReplyDeleteA little while back both he and Michael Hudson wrote an open letter to Putin saying as Russia has its own central bank which can create Russia's currency it did not need to rely on foreign loans. PCR said how the Russia CB was manned by neoliberals and warned that the West could destroy Russia through financial warfare as it had done to many other countries if it took their money.
West could destroy Russia through financial warfare as it had done to many other countries if it took their money.
ReplyDeleteBoth Russia and China see it as in their interest to integrate with the global economy and financial system, which the American Empire controls at this point. So this is a balancing act for them. They have to take perception into account while also maintaining sovereignty and freedom of action. So there are tradeoffs.
Got you! It makes sense.
DeleteYes, it is always a dicey game when interacting with a predator. But sometimes it's necessary.
ReplyDeletegold price serves as a benchmark for addressing the money illusion using gold as a numeraire connecting the nominal and real. Tom Hickey
ReplyDeleteHow does one separate the "real" value of gold from the expectation of the value gold would derive from a return to the Gold Standard?
So the price of gold is a very poor connector of the nominal and the real and is instead a measure of dissatisfaction with the current money system? And therefore of the hope of an eventual return to the Gold Standard?
And what money illusion? Fiat is backed by the taxation authority and power of government and by the interest required for private debt since private lending does not create the interest needed except as even more private debt.
How does one separate the "real" value of gold from the expectation of the value gold would derive from a return to the Gold Standard?
ReplyDeleteSo the price of gold is a very poor connector of the nominal and the real and is instead a measure of dissatisfaction with the current money system
The way that people who use this to chart the history of standard items priced in gold bullion, e.g., the rate of housing wrt gold is called the gold to housing ratio.
The Gold To Housing Ratio As A Valuation Indicator by Daniel R. Amerman, CFA
I don't buy it since gold has been hopelessly contaminated by its use as fiat for it to be of any use wrt measuring price inflation.
ReplyDeletePick something else but not gold or silver.
To paraphrase Keynes, it's not a matter of who one thinks is the most beautiful in a beauty contest, but rather who the judges think is most beautiful.
ReplyDeleteWhile one may not be interested gold, the ROW is.
The only reason gold-bugs are not afraid to show their faces is that the current fiat and credit system, which is basically welfare for the rich, so often disgraces itself that stupidity seems like a better choice.
ReplyDelete@ KAIVEY:
ReplyDeletePart 1 of 2
“A little while back both PCR and Michael Hudson wrote an open letter to Putin saying as Russia has its own central bank which can create Russia's currency it did not need to rely on foreign loans.”
PCR does not understand MMT. Let’s clarify things for him…
The U.S. government has no need for foreign loans, since the U.S. government creates infinite dollars out of thin air, and those dollars are accepted worldwide. However Russian rubles are not accepted worldwide. Therefore, in order to buy imports, Russia needs money in foreign currency. For example, Norwegians who sell to Russia want to be paid in Norwegian krones, not in Russian rubles.
Russian rubles are not accepted outside Russian borders. Therefore Russia gets foreign currency by selling goods and services to foreigners, and by taking loans when necessary. Loans are a quick and easy way to get foreign currency, but they carry an interest charge.
At present, Russia has a trade surplus, meaning that Russia has foreign currency coming in. However Russia’s trade surplus, when averaged out, has been declining over the past 15 years. If the current trend continues, then within six to eight years, Russia’s trade surplus will enter the red zone. That is, Russia will have a trade deficit. Unless Russia can develop self-sufficiency, such that Russia has less of a need for imports, Russia will have to start taking loans in foreign currency. This will cause great economic hardship for Russia. The government will start imposing austerity on the masses.
The Russian government knows all this, and it has been buying gold to act as collateral should Russia need to start taking loans in foreign currency.
Continued below…
Part 2 of 2 of 2
ReplyDelete“PCR said how the Russia CB was manned by neoliberals and warned that the West could destroy Russia through financial warfare as it had done to many other countries if it took their money.”
In Russia there are power struggles between nationalists and neoliberals (just like in Iran). Moscow has a financial district with tall shiny skyscrapers clustered together like the London financial district (the City of London). The Moscow financial district looks like Frankfurt Germany.
Neoliberals are anti-nationalists. They don’t care which nation they destroy (even their own) as long as they make a financial profit, and as long as they can widen the gap between the rich and the rest. For this reason, when a popular leader threatens neoliberal power (e.g. Marine Le Pen of France) neoliberals use the corporate media outlets to portray the nationalist as a racist Nazi. This propaganda works on a large percentage of the peasants.
Putin is a nationalist, and for the moment he has Russian neoliberals at bay. However neoliberalism is a disease of opportunity, always waiting and ready to become a plague if a government drops it guard. If the plague infects Russia, it will destroy Russia, with or without Western sanctions, just as it has already destroyed the USA. We cannot yet fully see the outward form of this destruction, but we can partially see it in the vast and ever-expanding sea of homeless Americans that the bankers have thrown into the streets.
The biggest banks in Russia are Russian banks. At present, the Russian government keeps them under control. Foreign banks are prohibited from opening branches in Russia, but foreigners can own shares in Russian banks. Examples include UniCredit S.p.A. (from Italy), Raiffeisenbank (Austria), Citibank (USA), Deutsche Bank (Germany), DeltaCredit (USA), Nordea Bank AB (Sweden), OTP Bank (Hungary), Banca Intesa S.p.A. (Italy), HSBC (U.K.) and a few others.
The point is that there may come a time when Russia needs foreign loans whether Russia wants them or not. This will not destroy a nation unless the government racks up a massive foreign debt load. The Russian government will not let that happen.
The real question is whether the Russian government will surrender its control to Russian banks. If it does, then Russian will go the way of the UK and USA.
@ KAIVEY:
ReplyDelete[ADDENDUM]
Q. How do banks destroy nations?
A. By reducing the masses to debt slaves.
Q. How do banks do that?
A. By bidding up the market value of things. The market value of a car or a house or college tuition is set by whatever banks are willing to lend for them. The bigger the loan amount, the more profit the bank collects in the form of interest.
(Banks create the actual loan, or principal, out of thin air when they make a loan. The loan money is zeroed out or destroyed as a loan is paid off. Bankers pocket the interest as profit.)
When there is a consumer demand for cars, housing, tuition, and so on, banks offer to extend bigger and bigger loans for them, causing the prices of cars, housing, and tuition to skyrocket. Some people can afford to make the loan payments. Most people cannot, and so they move to a different place, or else they live in a tent on the street.
As the process continues, more and more of a nation’s GDP is sucked up by the banks in the form of loan payments. And because the bankers cause house price inflation, they cause the price of rents, tuition, cars, and everything else to go up. As a result, the gap between rich owners and average tenants widens exponentially. Eventually the nation is destroyed by private debt from bankers.
This is what happens when banker theft is decriminalized.
It sounds to me, Konrad, like money creation should be nationalised, but Richard Werner says that small private banks should be allowed to create money as well as these will have a better understanding of the local communities they serve. Many of them would be non profit.
DeleteI have never read a better description of how bankers work.
ReplyDeleteIt sounds to me, Konrad, like money creation should be nationalised, Kaivey
ReplyDeleteCertainly fiat should be created by or for the monetary sovereign ONLY and then spent on the general welfare and/or distributed equally to all citizens.
but Richard Werner says that small private banks should be allowed to create money as well ... ibid
Even 100% private banks with 100% voluntary depositors can safely create SOME credit.
Many of them would be non profit. ibid
Irrelevant since government privileges for private credit creation enable the richer, the more so-called creditworthy, to loot the poorer, the less so-called creditworthy of what is then, in essence, the public's credit but for private gain.
can safely create SOME credit. aa
ReplyDeleteWell, maybe not safely but with 100% voluntary depositors, knowing the risks and being compensated for them via higher interest rates, why should anyone else care?
This is what happens when banker theft is decriminalized. Konrad
ReplyDeleteRather it is what happens when government privileges, including implicitly*, private credit creation.
*Why, for example, is fiat USE largely limited to depository institutions especially since, with the abandonment of the Gold Standard, fiat is so inexpensive that ALL citizens can directly use it without, for example, making gold so expensive that people could not use it for wedding rings?