posted October 14, 2019
US-China Mini Trade Deal: Trump Takes the Money and Runs

After months of escalating tit-for-tat tariff increases, and bringing the global economy to the precipice of a global currency war, the US and China agreed to a partial deal on their trade dispute this past week.

Trump heralds the deal as Phase 1 of an historic agreement, subsequent phases to follow. But is this the end of the US-China trade conflict? Will phase 2, to begin after the signing of Phase 1 five weeks from now, wrap up the remaining issues? Or will Phase 1 just announced be all that the parties will agree to over restructuring their trade relations (and money capital flows)? Other questions of import include: who got the better end of the Phase 1 deal—China or Trump? Why did Trump settle for the partial deal that China was calling for, and not the ‘big deal’ that Trump was declaring publicly he wanted or else there’d be no deal? Why did Trump concede to a lesser partial deal now instead of pressing for his ‘big deal’? Not least, what is the likelihood the remaining, unresolved issues will be concluded before the US 2020 elections?

A Brief Historical Recap

The US-China trade dispute erupted publicly in March 2018. Its origins, however, go back to August 2017, when the Office of US Trade Representative (USTR) issued a preliminary report charging that China’s ‘2025 Plan’ projected passing the US in next generation technology development (5G wireless, Artificial Intelligence, Cybersecurity). China’s plan represented a fundamental challenge to US global economic—and military—hegemony next decade, according to the USTR. That initial USTR report was followed by a second report released in March 2018 that concluded and confirmed what the first had raised: i.e. China represented a threat in nextgen technology development that the US could not ignore. The trade war with China only then commenced, with Trump imposing an initial $50 billion in tariffs on China imports.

An initial tentative agreement was reached between the main negotiators, the US team led at the time by US Treasury Secretary, Steve Mnuchin, in May 2018. That tentative deal was quickly scuttled, however, as US neocons, China hardliners, Pentagon, and the US Military Industrial Complex and friends in Congressional defense appropriations committees organized their forces and got Trump to nix the deal. The scuttled deal included China agreeing to buy $1 trillion more in US farm goods over five years and agreeing to allow US banks and financial institutions to have 51% ownership control of their operations in China. China reiterated the concessions over the summer of 2018, to no avail. The main issue was not the US trade deficit. Nor IP guarantees. Nor tech sharing of US companies in China. Nor even majority ownership of US operations in China. The main issue was the development of nextgen technologies—AI, 5G, and cyber. US Neocons aligned with the Pentagon-Military Industrial Complex, now led by Robert Lighthizer, the head of the USTR, Peter Navarro, special trade adviser to Trump, and subsequently later in 2019, John Bolton, demanded China slow, and even share its nextgen technology development with the US, or else no deal!

Negotiations stalled thereafter as Trump turned his focus to the NAFTA 2.0 negotiations and the 2020 midterm elections approached. Negotiations were restarted in January 2019 after the midterm elections, and another five months of negotiations between the parties took place until another tentative deal was reached in May 2019. That tentative deal once again was blown up at the last minute by the Lighthizer-Navarro neocon faction now in control of negotiations, with Mnuchin in tow as a co-chair. As the China delegation prepared to come to the US to sign off in May 2019, the US raised new demands: China had to share its nextgen technology development with the US, cease subsidizing its state owned enterprises, and provide assurances it would not devalue its currency to offset US tariffs (which now totaled $200 billion). Furthermore, US tariffs would remain in effect even if an agreement were reached, according to the US. All these demands were publicly communicated in the week prior to the May 2019 meeting in Washington D.C. when the deal was scheduled to be signed off. Understandably, the China delegation came and returned home in a day. The Neocons had scuttled a deal once again. Nextgen technology was the crux. Either China capitulated on nextgen tech or there was no deal, according to the Neocon-Pentagon position.

Trump thereafter met China president, Xi, in Osaka Japan at the G20 meeting and both agreed once again to restart negotiations. Both also agreed to keep a hold on the level of existing tariffs and not raise them further in the meantime. But Trump broke the pledge in late July 2019 when, on advice of his neocon trade negotiators, he raised tariffs on the remaining $250 billion of China imports. The understanding with Xi not to raise more tariffs was thus shattered. China raised tariffs of its own on US goods in response.

Trump threatened to raise existing tariffs by another 5%, to 25% and 30%, and levy more on all remaining China imports in December 2019. The trade war was intensifying. China stopped intervening briefly in global money markets to prevent its currency, the Yuan, from devaluing and allowed it to fall 5%-7%–a move that essentially negated Trump’s additional 5% tariff hike. Stock and bond markets swooned on the prospect of a trade war now morphing into a currency war. The trade war, based mostly on tariff hikes, was about to expand the economic conflict beyond mere tariff measures. Tariffs were already slowing the global economy; a currency war would quickly spread beyond US and China and inject even more instability into the slowing global economy. Both China and Trump peered over the cliff of a pending broader economic war between the two economies—and then backed off.

Trump’s September 2019 Retreat

Fast forward, the outcome by September 2019 was yet another resumption of negotiations between the two parties, followed by the announcement last week of a ‘Phase 1’ deal on trade.

So why did Trump ‘stand down’ and agree to a deal now, after escalating his threats and actions over the summer? The reasons clearly have to do with the US economy softening in the 3rd quarter combined with a growing discontent in the farm sector over Trump’s handling of a trade dispute that was beginning to bite hard on US farm sector sales that were heavily dependent on exports to China.

As the trade dispute between the countries had intensified over 2018-19, Trump had placated farm interests by providing an extra $28 billion in direct farm subsidies. But it wasn’t enough. According to some sources, no fewer than 12,000 farms went bankrupt in 2018 alone. The $28 billion was going mostly to agribusiness and not getting down to independent farmers who needed it most. Farm sector trade associations were demanding Trump settle the trade dispute and their voices grew louder after the August escalation between the US and China.

So too were other notable business groups, like the US Chamber of Commerce and Business Roundtable, raising their complaints about the now rapid deterioration of the negotiations. The trade war was beginning to clearly impact general business investment and manufacturing in the Midwest US, and not only in the US but worldwide. US business investment on new plant and equipment turned negative in the 2nd quarter and promised to continue to slump, while business inventory investment was also being pared. The trade war was beginning to impact beyond the farm sector. By August the US manufacturing sector began to contract, joining what had now become a global manufacturing recession. Moreover, at the end of August it was also beginning to appear that the manufacturing contraction in the US was potentially spilling over to the larger services sector. While manufacturing PMIs were contracting in the US, the even larger Services sector PMI had begun to decelerate sharply in terms of growth rate. Of equal concern, the new round of Trump tariffs on consumer goods now threatened to slow US consumer spending—the only sector of the economy still holding up in terms of growth. Chase bank research was estimating that, with the new Trump tariffs on China consumer good imports set for September and December, consumer spending would be reduced on average by no less than $1,000 per household.

It was this growing economic slowdown in the US—combined with the growing political discontent in the farm sector and from other major non-farm business organizations—that pushed Trump to concede into last week’s Phase 1 deal. Trump’s 2020 election interests had become more paramount than the concerns of the neocons and militarists who were demanding China capitulate on the nextgen tech issue or no deal. A rapid about face by Trump occurred by late August-early September and China was once again invited to resume talks in Washington in early October.

The content of the Phase 1 deal reached October 11, 2019 last week reveals that Trump abandoned his ‘big deal or no deal’ position and retreated from the neocon ‘non negotiable’ demand, that was holding up a deal since May 2018, that China capitulate on the nextgen tech issue or no deal.

Placating his farm sector political base to get China to resume purchases, and taking China’s 51% ownership concession desperately wanted by US big banks (i.e. the primary demand of the Mnuchin faction on the US negotiating team), became Trump’s new priority demand in Phase 1. The nextgen technology issue so critical to the neocons was clearly demoted and removed from the bargaining table by the US. In Phase 1 China got its ‘partial’ deal—and absent any concessions on the nextgen tech issue. That was left for a Phase 2 or even Phase 3, as Trump put it in his press conference the same day. Trump got what the China delegation had already offered way back in 2018: i.e. 51% ownership and resumption of big purchases of US farm products.

In short, Trump caved in and in effect “took the money and ran”. His 2020 re-election interests took precedence over the neocon-military concerns over China’s nextgen tech development.

What’s In the Phase 1 Deal?

Important to note, the Phase 1 deal itself is not yet a signed agreement. It’s a verbal understanding between Trump and China’s vice-premier and chief negotiator, Liu He. In his press conference announcing the deal on October 11, Trump admitted the parties were yet to sign off even on Phase 1 but hoped that it could be done within 5 weeks; that is by the time Trump and Xi meet again at the APEC conference in Chile in November.

Trump boasted repeatedly the Phase 1 deal included up to $40-$50 billion in new US farm purchases by China. Over what period was not clear, however. Trump vacillated from saying current levels of China farm purchases were $8 billion, or maybe $16 billion, or was $17 billion at prior peaks. He really didn’t know. Or maybe it was $20 billion, as one side comment was made in the press conference. It sounded like $40 billion was the target agreed to in principle and over the course of the next two years. But that was the ceiling apparently. Trump declared there’s “never been a deal of this magnitude for the American farmer”. Of course that wasn’t true. But the Trump hyperbole and spin was in.

Another major agreement area in Phase 1, according to Trump, was China’s confirmation it would allow US companies to own 51% of their operations in China. As Trump put it, “banks will be very very happy”. More US multinational corporations could now shift even more production to China.

What was agreed to in ‘IP, or intellectual property’ protections was left vague in Phase 1. Trump admitted only some IP issues were included in Phase 1 but didn’t say what. IP was mostly left to Phase 2, per Trump.

Equally vague was the understanding in Phase 1 on how China might agree not to devalue the Yuan, its currency. That was key to the US since devaluation would offset Trump tariffs. Trade representative, Lighthizer, provided some vague commentary during the Trump press conference about how China and the US would meet to work out some rules in that regard. But the devaluation issue itself was irrelevant. China had consistently over the preceding 15 months of trade war intervened in money markets to keep its currency from devaluing, and did so even as the rising US dollar was the primary cause of the pressure on the Yuan to devalue, as it other currencies worldwide as well. If anything was driving the devaluation it was the rising US dollar, not a policy action by China to enact a devaluation.

On the important tariff front, in Phase 1 Trump agreed only to suspend his threatened 5% tariff hike (raising rates from 25% to 30%) due the following week of October.

What’s NOT In Phase 1

What’s not in Phase 1 reveals clearly that Trump clearly capitulated on the nextgen tech issue in exchange for resumption of farm purchases and the 51% US bank ownership in China offer.

Tech issues were in general put off. As Trump declared, would be “largely done in Phase 2”, or maybe even a Phase 3. And Phase 2 would not begin until and if Phase 1 verbal understandings were ‘signed off’ in writing five weeks from now by Trump and Xi in Chile.

Further revealing no agreement on the strategic nextgen tech issue, Trump indicated the US would continue its policy attacking China’s 5G tech company, Huawei, as well as selectively ‘blacklist’ other Chinese AI companies in the US. That was, he added, “a separate process”. So the nextgen tech issue is now a separate track, in effect decoupled from the trade negotiations. It is very unlikely it will be reintroduced in Phase 2, should that subsequent round even occur, which is not likely in any substantive way before the 2020 US elections.

Also left out of Phase 1 was any US reduction of existing tariffs on China imports. That continuation of tariff levels included the $160 billion of China consumer goods exports to the US scheduled for December 15, 2019.

The US also apparently failed to attain its demand that China reduce its subsidies to its state owned enterprises—a strange proposal given that the US just subsidized its business sector with trillions of dollars with Trump’s 2018 tax cuts.

Some Predictions

For more than a year now this writer has been predicting that there would be no deal with China so long as the US negotiating team was dominated by the neocons and they continued to insist China capitulate on nextgen tech, or else no deal.

The related prediction, however, was that Trump would abandon the neocon-military interests’ prioritization of tech issues, and Trump would settle for concessions China already offered concerning US 51% majority ownership and farm purchases. The shift would occur, it was predicted, when the US economy significantly weakened—i.e. threatening Trump’s support in the farm sector and among US big business, and therefore his election in 2020.

The Phase 1 deal reflects just those predictions: Trump has decided to forego resolution of the tech issue and decided to take the money (farm purchases) and run. He has the full support of US big banks and manufacturing in so doing for their priority demand has always been the 51% ownership concession by China.

It is highly unlike there will be a ‘Phase 2’ in anything but a token discussion level. And if there is, it is extremely unlikely it will include any meaningful concessions by China on next gen tech—i.e. AI, 5G, cybersecurity. China has now clearly prevailed in blunting Trump and the neocon offensive in that regard. For their part, Trump and US military-industrial-Pentagon interests will continue to pursue blocking China on the tech issue in ways decoupled from trade negotiations. Various other measures will now be the focus, such as attacking and blacklisting China tech companies in the US and even elsewhere among US allies. Perhaps even delisting them from US stock exchanges, as a recent Washington ‘trial balloon’ proposed. Trump did not go there on the eve of the recent negotiations. It would certainly have ‘blown up’ the trade deal once again if he had. But that—blacklisting and delisting—remain as likely US tactics in the months to come. For the technology war—i.e. the real war behind the tariffs and trade war—has only just begun between the two countries. And a broader economic war involving non-tariff measures is almost certain to erupt after the 2020 elections.

A ‘Phase 2’ follow up negotiations is tentatively set for after the Phase 1 sign off in November in Chile. Not much will come of it, however, so long as Trump insists on maintaining the current level of 25% tariffs on China imports to the US. Trump likes the current level of tariffs and the revenue it brings in, which allows him a somewhat independent source of financing for his domestic programs independent of the US Congress passing legislation and authorization bills which he now won’t get. On the other hand, Trump may temporarily suspend the planned tariff hikes on $160 billion of consumer goods due December 15, 2019 should the US economy continue to weaken in the 4th quarter, which is more likely than not. But it will be a temporary suspension, not a dropping of the tariffs.

The 15 month long US-China so-called trade war is over. There will be further discussions but no significant changes before the US 2020 election. What Trump got in Phase 1 is all he’s going to get. He’s probably promised the neocons, who have lost out on this Phase 1 deal, even more aggressive action against China companies doing business in the US. That’s there ‘concession prize’. Worst case, Phase 1 might not even be finalized, should the neocon-Pentagon-Military Industrial Complex faction regroup and try to scuttle the deal, once again for a third time. There’s always that possibility. Especially should Trump’s legitimacy fade further due to impeachment proceedings. It’s not impossible the Phase 1 verbal deal might also collapse but not likely at this point.

A Failed Trump Trade Policy

Trump’s trade war with China is clearly a net failure. Trump could have gotten the same deal back in 2018, more than a year ago. Instead, the dispute was allowed to escalate, with the effect of causing business uncertainty and slowing investment in the US and worldwide due to the 15 month trade war. The trade war has clearly played a part in the global manufacturing recession now underway, which threatens now to spread to services and consumption and precipitate a general recession in the US economy and possibly even worldwide.

Trump has pushed the global economy to the brink of a worldwide currency war in the process as well. He has drained $28 billion thus far from business and consumer spending in order to collect tariff revenues that he’s diverted in turn to the farm sector in subsidies that otherwise might not have been necessary. Small business, household consumers, and failing small farmers have paid the price and will continue to do so in higher prices from continuing tariffs.

Despite 15 months of trade war with China—and a series of ‘softball’ trade deals with South Korea, Japan, and Mexico-Canada—the US trade deficit as of August 2019 has reached record deficit levels of $55 billion that month and an annual rate of nearly $700 billion a year. The trade wars have been totally ineffective in reducing the US trade deficit—if that was ever the goal.

Who Benefits?

In net terms, the Trump trade wars have produced little for US capitalist business interests compared to what they already had going into the conflict in March 2018. Conversely, China has clearly prevailed in protecting its nextgen technology plans—i.e. the main target behind the US trade war identified back in August 2017 and launched March 2018 by the USTR and Trump. US agribusiness got their farm purchases renewed—and $28 billion in subsidies to boot. US big banks and multinational companies got their 51%. Trump got an independent executive branch source of revenue flow in the form of tariffs. The US consumer and small goods manufacturers and businesses get to pay for much of it all in the form of rising prices. And more US multinational companies will likely move more productions—and jobs—to China now that they have 51% ownership control.

In a broader picture of ensuring US global economic hegemony in the years ahead, if the Trump trade wars were to be about restructuring global capitalist trade relations favoring the US for another decade, then the outcome is also clearly a dismal failure. The Trump trade war with China has produced few net results in that sense. China prevailed this round in the technology war and will now seriously challenge the US in the 2020s in nextgen technology and the new industries it would create—as well as the new military technologies it portends. Meanwhile, Trump’s ‘other trade wars’ with US allies has similarly produced few net strategic results. They have been thus far ‘token softball’ deals that have merely tweaked existing trade relationships.

Trump’s trade wars have proven to be a lot of bombast, hyperbole, and smoke with no fire. Trump set up straw men opponents, to knock down and allow him to declare he has out-negotiated his president predecessors by rearranging global trade and money flow relations. But this is in fact not so, as history and the next decade will undoubtedly show.

Dr. Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, October 2019. He blogs at jackrasmus.com, his website is http://kyklosproductions.com, and he tweets at @drjackrasmus. Listen to his weekly radio show at http://alternativevisions.podbean.com.

posted October 9, 2019
Europe Today & Tomorrow: Weak Link in Global Economy, Part 1

Interviewer:

So, I think the most important question now is the question about Europe. What will happen in Europe, in terms for example: Look what’s happening right now in France.

Rasmus:

Well, Europe is indeed troubled and it’s going to get deeper. It’s the sick man of the global capitalist economy, right now. As you probably know, it’s already slowed down. It’s almost stagnant and it’s only growing at two tenths of one percent, last quarter and it’s heading towards a recession that I have been predicting.

I have been predicting a recession in the U.S late 2019 or early 2020 as well. But Europe is the even weaker link and of course with Brexit, with the UK is going to have a negative effect and it looks increasingly like it may be a hard Brexit.
And what’s happening in Italy is important. In Italy the new parties are trying to stimulate the economy with fiscal policy, but the Euro Zone rules and regulations prevent a fiscal stimulus above a certain deficit amount. Italy may break that mold, and if it does then the Euro Zone could unravel into a smaller Euro Zone. We have problems with not only Italian banks but other European banks; Greek banks, Portugal Banks, even Deutsche Bank, Commerce bank in Germany.

What you are seeing in France with yellow vest protests is the consequence of the kind of weak recover policy that’s been in place since 2010 and then the double dip recession in 2011-2013 that followed. To what extent there’s been a recovery, that’s been engineered by the European central bank and purely monetary policy, and that hasn’t worked. It’s bailed out the banks, but European banks are still in trouble. There are Trillions of dollars of non-performing bank loans still overhanging the economy. Whenever the European Central Bank, ECB, stimulates the economy by buying bonds and injecting liquidity into it a lot of that liquidity largely flows out of Europe to emerging markets or the United States, so it hasn’t had much of a stimulus effect. And because of that there hasn’t been a real recovery in Europe. It’s the same for the United States, but even more for Europe, since 2008. And the employment growth in both economies has been mostly contingent labor. In other words, a low paid, part time, second class citizens, whatever.

In addition to failed central bank monetary policy the solution has been by policy makers in Europe and politicians to engage in what’s called internal devaluations, in other words because you have a common currency you cannot otherwise devalue your currency to stimulate your economy. All you can really do is lower your wage costs and other costs. In other words, internal devaluation. That policy of internal devaluation, i.e. reducing wages and labor costs, across Europe has been implemented under the cover of labor market reforms. Which are really a way of “Let’s reduce our wages and costs to make our products more competitive” in the world economy. Europe depends much more on exports than the United States, and Germany depends on half its GDP on exports to other European economies and globally. What was set up with the Euro was very preferential to Germany and Northern European economies which have really exploited the periphery economies and benefited from it. I wrote about this in my book - Looting Greece: A New financial Imperialism Emerges. It’s Internal Imperialism, you might say, but through the Euro exploiting the rest of the periphery of the Euro Zone in particular.

Those policies in other words, i.e. internal devaluation, labor market reforms, monetary policy of the ECB, have bailed out the banks and made a small percent of the population, that is the wealthier part, wealthier. But those policies have left behind most of the rest of the economy and people. That’s why you see this uprising going on and this nationalism going on. You know the “Brexit, let’s leave Europe” that was really driven by working class Midlands, England folks who are discontent with the recovery. And then you have immigration laid on top of the poor recovery, so it looks like the immigrants are the cause of it and you get this anti-immigration and growth of right-wing parties as a result. But it’s the economic policies of the elites in Europe that are responsible for this. Europe is now experiencing the consequences in nationalist Catalonia, “Let’s leave Spain”, in Scotland, in Italy. All the nationalist solutions to the crisis which are not solutions at all.

Of course, I see the eruption of working classes and middle classes in France as a harbinger of things to come elsewhere as the next recession hits, which could be even more serious than the last one. So, Europe is in a very precarious state, you see, and the symptoms of its problems are this nationalist trend which reflects itself in various ways, you know separatism and anti-immigration and Brexits, and maybe an Italian exit from the Euro, if the situation gets much worse there over the next couple of years and the economic growth is just not there. That’s why Europe is in a very precarious state, it’s the weak link in the global capitalistic economy and you know future is very unstable, economically and politically, for Europe, as I see it going forward.

posted September 22, 2019
3 Articles on US Wages, Jobs, and GDP Stats

Article 1. Surveys Show US Wages Are NOT Rising and Job Growth 500,000 Fewer

What’s the condition of the US working class on this Labor Day 2019? Wages and Jobs are of course the best indicators of that condition. So let’s look at wages and jobs today in America.

What we see is that—contrary to Trump, US government, and mainstream media hype and reporting—a growing number of independent surveys show that wages have not been rising as they claim. And 500,000 fewer jobs were actually created last year than initially reported.

The media’s oft-quoted figure for rising wages is about 3.1% over the past year. But there are at least five reasons why 3.1% is not accurate and in fact grossly over-estimated. First, the 3.1% is not adjusted for inflation. Second, it represents an average only, which reflects higher wages for the top 10% of the workforce and higher salaries for professionals, managers, and supervisors. Third, it applies to full time workers only and therefore leaves out the 60 million or so part time, temp, and gig workers. Fourth, it does not factor into the 3.1% average the fact that the millions of unemployed are getting no wages whatsoever. Fifth, it defines wage narrowly, excluding the lack of any increase in deferred wages (pension payments) and social wages (social security pay for retirees).

    Why Wages Are Not Rising 3.1 Per Cent

Considering the first point, the 3% figure is what’s called a ‘nominal’ wage. If adjusted for the 1.6% inflation rate, then the real wage gain is only 1.5% a year. (It’s even less real wage gain for workers at the median household income level ($50K/yr.) and below—where inflation is even higher than 1.6% due to housing and rent cost, local utility fees and taxes, medical insurance premiums and drugs costs escalation, education and other costs escalation).

The second problem overestimating the wage gains for the vast majority of workers in the ‘bottom 80%’ of the workforce is that the 3.1% represents an ‘average’. Averaging means the highest paid wage earners (which include most salaried workers) are getting more than the 1.5% and therefore, in turn, those at the median or below are getting much less than 1.5%. And in most cases they’re not even getting that 1.5%.

A survey by the finance site Bankrate.com found that “more than 60% of Americans said they didn’t get a pay raise or get a better-paying job in the last 12 months”. So if 60% didn’t get any wage increase at all, how could wages be rising 3.1% or even 1.5%? Unless of course workers in the best paid 10% of the labor force are getting 10% or more in wage increases last year. These are occupations like software engineers, data scientists, physicians assistants, professionals with advanced degrees, and of course middle and upper managers paid mostly by salary. Perhaps they were getting 10%+ last year, but that’s highly doubtful.

Here’s another mainstream respected survey that challenges the 3.1% wage increase myth peddled by the government and media: Focusing on the median wage—not the average wage—“according to figures from the PayScale Index…the median wage increases, when adjusted for inflation, were only 1.1% since last year and 1% over the past year”.

The Payscale survey is corroborated further by a recent study by McKinsey Global Institute which shows that median wages have not risen at all since 2007. By 2017 they were the same level as in 2007, rising less than 1.1%.

Comparing McKinsey with Payscale, there’s been no wage change under Trump. In fact, the Payscale survey concluded that real wages from June 2018 to June 2019 have shrunk by -0.8% and by 9% since 2006.

But that’s still not the whole picture.

There’s another adjustment necessary, even to the 1.1% real wage. Whether 1.5% or 1.1%, that figure applies only to the full time employed workers. It therefore does not take into account the lower wages, and more typical lack of any wage increases, for the 60 million plus ‘contingent’ (part time, temp, gig) workforce that exists now in the US. That’s 37% of the total workforce of more than 160 million who are not factored into the 3.1% estimate at all!

And the numbers for the part time/temp/gig part of the total work force may be much larger than the government is estimating. US Labor Dept. statistics count part time, temp and gig workers for whom their work is a primary job. It doesn’t accurately account those who have a primary part time job (or a primary full time job) AND who have also taken on second and even third part time, temp, or gig jobs to make ends meet. The aforementioned Bankrate survey showed, for example, that while the government data estimates less than a fifth of all workers are part time, the Bankrate survey found 45% of all US workers had second or third jobs. That included 48% of Millennials, 39% of GenXers, and even 28% of Boomers.

The real picture that appears, therefore, is NOT one of traditional full time workers getting annual 3.1% wage increases in their base pay every year. That’s the US labor force of the 1950s and 1960s, not the 21st century.

The real picture is little or no wage increases for the vast majority those workers, especially those below the 80th percentile of the US labor force, and especially those at the median and below, who are being increasingly forced to take on second and third jobs to make ends meet. Meanwhile, a small percentage of the total workforce, likely well less than 10%, comprised of professionals, managers, tech, and advanced degreed special occupations are realizing wage gains well above the average. In fact, those at the very ‘top’, earning more than $150,000 a year may be getting exceptionally large wage increases. That’s because the US Dept. of Labor employs a methodology in which it ‘top codes’ weekly earnings. Top coding means any raises for those earning above $150,000 a year are not being recorded at all.

What all the foregoing analysis strongly suggests is that wages under Trump have not been rising anywhere near close to 3.1%, or even near the inflation adjusted 1.5%. They are not rising at all for the vast majority of the US workforce since 2016.

To repeat the Payscale survey: real wages have actually fallen by -0.8% between 2018-2019.

The disjoint between the 3.1% and the -0.8% is due to the averaging in wages and salaries for the very top occupations and salaries of managers and professionals; due to accounting for only full time employed; and by ignoring most of the part-time/temp workers—the numbers for whom are also much larger than the official government data now indicate.

Add to these reasons for the gap between 3.1% and -0.8% the fact that monthly pension benefits and social security retirement payments—i.e. deferred wages—are never included in the 3.1% figure by the government. They are really wages as well. They are ‘deferred’ wage payments which are foregone by workers while they were actively in the labor force, to be paid out upon retirement. These wage payments are fixed and are therefore constantly declining in real terms. Nor of course have official wage statistics ever considered calculating wages the millions of unemployed workers who, without jobs, get no wages and therefore no wage increases whatsoever. If deferred wages and unemployed with no wages were included in calculating total wage change for the working class, the Bankrate, Payscale, McKinsey and other independent surveys would show annual wage gains—for all but the very highest paid—have been contracting ever faster than -0.8% under Trump.

    Business-Investor Tax Cuts Haven’t Created Jobs

A hallmark claim of Neoliberalism in general is that business tax cuts create jobs. This is part of the economic ideology notion called supply side economics. Cutting business taxes raises business disposable income, which it is assumed business then spends largely and instantaneously on new investment that boosts production and therefore hiring. But this is a deceptive misrepresentation (i.e. ideology) of reality. Businesses don’t necessarily spend the tax windfall on investment. They may divert the tax savings into investing in financial markets that don’t produce any jobs. They may distribute it to shareholders in the form of stock buybacks and dividend payouts. They may use it for buying up competitors via mergers and acquisitions. They may simply hoard the savings to boost their balance sheets. Or they may invest it on expanding production—but in their offshore subsidiaries. All this is what in fact actually happens, not that business tax cuts create jobs.

In January 2018, once again, Trump and Congress ‘sold’ the economic lie that business-investor tax cuts create jobs. But there is no empirical evidence that such tax cuts causally result in job creation. In fact, even a correlation between Neoliberal tax cuts and job creation does not exist. Witness Trump’s massive $4.5 trillion tax cuts of 2017. (Yes, $4.5 trillion, not his reported $1.5 trillion). What has actually happened to investment in expanding plant and equipment and therefore employment? After a very brief boost in early 2018, business investment in the US fell to only 2.7% (10% rate is historically average). In 2019 it fell further into negative territory by mid-year, as ‘Business investment contracted in the second quarter for the first time since the first quarter of 2016”. That means if investment—i.e. the mechanism for job creation per the supply side theory—has not risen, then the claim cannot be substantiated in turn that business tax cuts, by creating investment, in turn create jobs.

But hasn’t there been actual job creation since Trump took office? Yes, there has. 1.1 million according to government official stats. However, its causation cannot be attributed to the tax cuts. So where have the 1.1 million jobs come from?

    Are ‘Contingent’ (Part-Time/Temp/Gig) Job Greater Than Reported?

US Labor stats do not really report the number of workers finding employment when the Dept. reports job gains each month. It reports jobs—not people—growth. So jobs can be increasing (as second and third jobs added) but employment by real people may not be actually growing by the same number of jobs that were created. Jobs may be increasing by 1.1 million but those newly employed may be far less. Why? Because most of the 1.1 million jobs may represent already employed taking on second and third part time jobs. Recall the prior Bankrate survey which reported that 45% of all American workers indicate they are working second and third jobs to make ends meet! Or the Marketwatch survey that 33% need a gig side job in order to meet living expenses! But the Labor Dept. shows numbers not rising as high for part time and temp work. That may be due, however, to its reporting of part time/temp as the primary job of part time/temp workers. They may be working second and third additional part time jobs and the government is not picking that up—its only accounting for part time/temp jobs that are primary for the person.

    Labor Dept. Revises Jobs Down 500,000 for Last Year

The confusion in the Labor Dept.’s job stats is perhaps further suggested by recent revisions in its job creation numbers. Annually the Labor Dept. adjusts its past year job numbers after more data is made available from States’ unemployment insurance records. In its just latest report, prior to the Labor Dept. downward revisions, the Dept. indicated it had over-stated 2018 jobs by no less than 500,000. That brings 2018 monthly job creation numbers well under 200,000, which is about the 180,000 monthly creation in 2017. In other words, no actual increase due to Trump’s tax cuts introduced in January 2018.

The Labor Dept. stats indicate employment rose from July 2018 through July 2019 by 1.1 million jobs. Does that mean the Labor Dept. had erred by nearly 50% in its job growth numbers? If so, it’s such a gross margin of error it makes Labor Dept. job reporting under Trump highly suspect or else something is fundamentally wrong with US job creation stats. What’s wrong is that the stats are failing to accurately reflect contingent job creation as second and third jobs.

    Conclusions: A Much Different Wage & Job Picture Than Reported

A deeper look at the official wage and job numbers shows wages rising no where near the official 3.1%. In fact, most of the wage gains are highly skewed to the very top. At the median they’re barely rising, if at all. And certainly contracting below the median (except perhaps for the few millions in blue states where minimum wages have been adjusting some). When defined more broadly and therefore accurately, wages have been contracting under Trump—as they have been since 2006. Various independent surveys that are not based on the Labor Dept.’s questionable assumptions or definitions, or even errors, in its estimation bear this out that wages are not rising.

Reliability of official jobs data is also a growing concern. Changes in the US labor market structure in recent decades means the growing number of contingent and gig jobs that are second and third jobs are not being reflected in the official job numbers. The Labor Dept.’s recent adjustment reducing last year’s job gains by a whopping 500,000 raises further concerns about the methods by which it reports out monthly job gains. And actual job gains, after its adjustment, suggest that most of these may actually represent part time/temp/gig jobs that are second and third jobs taken on by workers who just can’t make ends meet any more with the first contingent job, or even current full time job. Yet Trump and friends keep peddling the myth that more business-tax cuts are needed to create jobs.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, October 1, 2019, of which the preceding material is an excerpt. His website is https://kyklosproductions.com and twitter handle, @drjackrasmus. He hosts the Alternative Visions radio show on the Progressive Radio network weekly, podcasts available are available at http://alternativevisions.podbean.com.

Article 2. What Is the True Unemployment Rate in the USA?
By Dr. Jack Rasmus

“The real unemployment rate is probably somewhere between 10%-12%. Here’s why: the 3.7% is the U-3 rate, per the labor dept. But that’s the rate only for full time employed. What the labor dept. calls the U-6 includes what it calls discouraged workers (those who haven’t looked for work in the past 4 weeks). Then there’s what’s called the ‘missing labor force’–ie. those who haven’t looked in the past year. They’re not calculated in the 3.7% U-3 unemployment rate number either. Why? Because you have to be ‘out of work and actively looking for work’ to be counted as unemployed and therefore part of the 3.7% rate.

The U-6 also includes what the labor dept. calls involuntary part time employed. It should include the voluntary part time as well, but doesn’t (See, they’re not actively looking for work even if unemployed).

But even the involuntary part time is under-estimated, as is the labor Dept’s estimate of the ‘discouraged’ and ‘missing labor force’.

The labor dept. also misses the 1-2 million workers who went on social security disability (SSDI) after 2008 because it provides better pay, for longer, than does unemployment insurance. That number rose dramatically after 2008 and hasn’t come down much (although the government and courts are going after them).

The way the government calculates unemployment is by means of 60,000 monthly household surveys but that phone survey method misses a lot of workers who are undocumented and others working in the underground economy in the inner cities (about 10-12% of the economy according to most economists and therefore potentially 10-12% of the reported labor force in size as well). The labor dept. just makes assumptions about that number (conservatively, I may add) and plugs in a number to be added to the unemployment totals. But it has no real idea of how many undocumented or underground economy workers are actually employed or unemployed since these workers do not participate in the labor dept. phone surveys, and who can blame them.

The SSDI, undocumented, underground, underestimation of part timers, etc. are what I call the ‘hidden unemployed’. And that brings the unemployed well above the 3.7%.

Finally, there’s the corroborating evidence about what’s called the labor force participation rate. It has declined by roughly 5% since 2007. That’s 6 to 9 million workers who should have entered the labor force but haven’t. The labor force should be that much larger, but it isn’t. Where have they gone? Did they just not enter the labor force? If not, they’re likely a majority unemployed, or in the underground economy, or belong to the labor dept’s ‘missing labor force’ which should be much greater than reported. The government has no adequate explanation why the participation rate has declined so dramatically. Or where have the workers gone. If they had entered the labor force they would have been counted. And their 6 to 9 million would result in an increase in the total labor force number and therefore raise the unemployment rate.

All these reasons–-i.e. only counting full timers in the official 3.7%; under-estimating the size of the part time workforce; under-estimating the size of the discouraged and so-called ‘missing labor force’; using methodologies that don’t capture the undocumented and underground unemployed accurately; not counting part of the SSI increase as unemployed; and reducing the total labor force because of the declining labor force participation-–together means the true unemployment rate is definitely over 10% and likely closer to 12%. And even that’s a conservative estimate perhaps.”

Addendum Note: The Labor Dept. monthly survey counts ‘jobs’ not workers employed. If in its survey it is counting 2nd and 3rd part time jobs for a single worker, then it is over-estimating employment levels and thus under-estimating the unemployment rate still further since the unemployment rate is a ratio of total employed to unemployed).

Article 3. Why Wages Are Lower, Inflation Higher, and GDP Over-Stated
By Dr. Jack Rasmus

In a post last week I took issue with the Trump administration’s claim–repeated ad nauseam in the media–that wages were rising at a 3.1% pace this past year, according to the Labor Dept. In my post I explained the 3 major reasons why wage gains are much lower, or even negative.

First, the 3.1% refers to nominal wages unadjusted for inflation. If adjusted even for official inflation estimates of 1.6%, the ‘real wage’, or what it can actually buy, falls to only 1.5%.

Second, the 1.5% is an average for all the 162 million in the US work force. The lion’s share of the wage gain has been concentrated at the top end, accruing to the 10% or so for the highly skilled tech, professionals, those with advanced degrees, and middle managers. That means the vast majority in the middle or below had to have gotten much less than 1.5% in order for there to be the average of 1.5%. More than 100 million at least did not get even the 1.5%. In fact, independent surveys showed that 60 million got no wage increase at all last year.

Third, the 1.5% refers to wages for only full time employed workers, leaving out the 60 million or so who are part time, temp, gig or others, whose wages almost certainly rose less than that, if at all. Other surveys noted in my prior post found wage gains last year only between -0.8% of 1.1%, depending on the study, and not the 3.1%.

But here’s a Fourth reason why even real wages are likely even well below 1.5%.

As I suggested only in passing only in my prior post, the 1.6% official US government inflation rate is itself underestimated. Not well known–and almost never mentioned by the media–is the fact that Labor Dept. stats do not include rising home prices at all in its estimation of inflation! Incredible, when home prices are among the fastest rising prices typically and always well above the official 1.6% or whatever. And the ‘weight’ of home prices in the budgets of most workers is approximately 30% or more of their total spending. So that weight means the effect on households is magnified even more. If appropriately included in inflation estimates, housing prices would boost the reported inflation rate well above the official 1.6%. How much more? Some researchers estimate it would raise the official inflation rate of 1.6% to as high as 4%. (see the discussion n the August 30, 2019 Wall St. Journal, p. 14).

If the inflation rate is higher, then the nominal 3.1% adjusts to a real wage even less than 1.5%.

If the inflation rate were 4%, not 1.5%, then real wages adjusted for inflation would be -0.9%. And when the ‘averaging’ and ‘full time employed’ effects are considered, real wages for the majority of US workers last year almost certainly fell by as much as -2.0% to 3.0%.

Since we’re talking about housing, here’s another official government stat related to housing that should be reconsidered since it makes US GDP totals higher than they actually are:

US GDP is over-estimated because gross national income (i.e. the income side to which GDP must roughly equal) is greatly over-stated. How is national income and therefore GDP over stated? The US Commerce Dept., which is responsible for estimating GDP, assumes that the approximately 50 million US homeowners with mortgages pay themselves a rent. The value of the phony rent payments boosts national income totals and thus GDP as well. But no homeowners actually pay a mortgage and then also pay themselves an ‘imputed Rent’, as it is called. It’s just a made up number. Of course there’s a method and a logic to the calculation of ‘imputed rent’, but something can be logical and still be nonsense.

Government stats–whether GDP, national income, or wages or prices, or jobs–are full of such questionable assumptions like ‘imputed rents’. The bureaucrats then report out numbers that the media faithfully repeat, as if they were actual data and fact. But statistics are not actual data per se. Stats are operations on the raw or real data–and the operations are full of various assumptions, many questionable, that are explained only in the fine print explaining government methodology behind the numbers. And sometimes not even there.

Here’s another reason why US and other economies’ GDP stats should be accepted only ‘with a grain of salt’, as the saying goes: In recent years, as the global economy has slowed in terms of growth (GDP), many countries have simply redefined GDP in order to get a higher GDP number. Various oil producers, like Nigeria, have redefined GDP to offset the collapse of their oil production and revenue on their GDP. In recent years, India notoriously doubled its GDP numbers overnight by various means. Some of ‘India Statistics’ researchers resigned in protest. Experts agree India’s current 5% GDP number is no more than half that, or less.

In Europe, where GDP growth has lagged badly since 2009, some Euro countries have gone so far as to redefine GDP by adding consumer spending on brothels and sex services. Or they’ve added the category to GDP of street drug sales. But any estimate for drug spending or brothel services requires an estimate of its price. So how do government bureaucrats actually estimate prices for these products and services? Do they send a researcher down to the brothel to stand outside and ask exiting customers what they paid for this or that ’service’ as they leave? Do they go up to the drug pushers after observing a transaction and ask how much they just sold their ‘baggie’ for? Of course not. The bureaucrats just make assumptions and then make up a number and plug in to estimate the price, and therefore the service’s contribution to GDP. Boosting GDP by adding such dubious products or services is questionable. But it occurs.

The US Commerce Dept. that estimates US GDP has not gone as far as some European countries by adding sex and illicit drug expenditures. But in 2013 the US did redefine GDP significantly, boosting the value of business investment to GDP by about $500 billion a year. For example, what for decades were considered business expenses, and thus not eligible to define as investment, were now added to GDP estimation. Or the government asked businesses to tell it what the company considered to be the value of its company logo. Whatever the company declared was the value was then added to business investment to boost that category’s contribution to GDP. A number of other ‘intangibles’ and arbitrary re-definitions of what constituted ‘investment’ occurred as part of the re-definitions.

Together the 2013 changes added $500 billion or so a year to official US GDP estimates. The adjustments were then made retroactive to prior year GDP estimates as well. Had the 2013 re-definitions and adjustments not been made, it is probable that the US economy would have experienced three consecutive quarters of negative GDP in 2011. That would therefore have meant the US experienced a second ‘technical recession’ at that time, i.e. a second ‘double dip’ recession following the 2007-09 great recession.

The point of all these examples is that one should not blindly accept official government stats–whether on wages, inflation, GDP, or other categories. The truth is deeper, in the details, and often covered up by questionable data collection methods, debatable statistical assumptions, arbitrary re-definitions, and a mindset by most of the media, many academics, and apologists for government bureaucrats that government stats are never wrong.

Dr. Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: Economic Policy from Reagan to Trump’, Clarity Press, October 2019. He blogs at jackrasmus.com and tweets @drjackrasmus. His website is http://kyklosproductions.com and podcasts from his Alternative Visions radio show are available at http://alternativevisions.podbean.com.

posted August 27, 2019
Trump’s Other Wall

Trump brags about the ‘wall of money’ now flowing into the US from abroad–from Europe, Asia, emerging market economies–as the global economy slides into recession there faster than in the US. He thinks that is great news for the US economy. But it’s quite the opposite.

Trump’s trade war, his provoking of a global currency war, his monetary policy of forcing the Fed to lower rates all exacerbate the Wall of Money inflow to the US which hastens the decline of the global economy.

Behind the Wall of Money inflow is $17 trillion in negative interest rates in Europe and Japan that is driving money out of those economies and into US Treasuries as a ‘safe haven’, causing a rise in the dollar relative to other currencies and causing currencies worldwide outside the US to fall in turn. As other currencies fall, capital flight from their economies (Europe, Latin America, Asia) sends still more dollars to the US–driving the dollar higher still. A vicious cycle ensues: declining currencies leads to more capital flight, to more demand for US$, to rising dollar value, to further decline in other currencies, etc. Investment collapses and recessions deepen further outside the US.

US Multinational corporations doing business in other countries see their profits rapidly eroding in those economies, as the currencies in the countries in which they’re doing business collapse. They then rush to convert their Pesos, Euros, Rupees, etc. into dollars as quickly as possible and repatriate their offshore profits back to the US. The result: the US$ rises still more.

Trump’s trade war has a similar negative compounding effect as negative rates offshore, capital flight, and multinational corporation repatriation: Today’s slowing global economy (already in a manufacturing recession everywhere including the US) is largely driven by business investment contracting in the face of uncertainty due to Trump’s trade war. That uncertainty and declining investment leads to central banks worldwide reducing their interest rates in a desperate effort to stimulate their economies, which is now happening. But lower interest rates in Europe, Emerging markets, etc. has the negative effect of depressing the value of their currencies still further–leading to even more capital flight to the US, buying up more US Treasuries, and driving up the US $ even more. In other words, Trump’s trade war is also driving the Wall of Money to grow further.

But the Wall of Money is a symptom and represents the global economy outside the US sliding deeper into recessions–a global economic decline that is now spilling over to the US economy.

What’s Trump’s solution? Trump browbeats the Federal Reserve to get Powell, its chair, to lower rates, in the hope lower rates will discourage capital inflow to the US (i.e. the Wall) and thus slow the rise of the dollar. But global recession and the ‘wall of money’ now more than offset any Fed rate cuts effect on the US$. Meanwhile, Trump’s monetary policy (lower interest rates) accelerates the wall of money inflow further by forcing the central banks of other economies to lower their rates still further.

Trump policies have also set off a global currency war, which is about to intensify as he targets China’s Yuan-Reminbi. China is already responding by allowing the Yuan to slowly devalue to offset Trump’s tariffs on China exports. Devaluation of the Yuan forces other economies to devalue their currencies further, as their central banks lower their interest rates further, in Europe and Japan that means even deeper negative rates and more capital flight to US Treasuries and an even higher US$.

In short, Trump’s trade war, his provoking of a global currency war, his monetary policy of forcing the Fed to lower rates all exacerbate the Wall of Money inflow to the US and hasten the decline of the global economy.

Trump has not only clearly now lost control of trade negotiations with China. He has lost control of US monetary policy with the Fed that now refuses to be stampeded, he has lost control of any stabilization of the US dollar, and he has accelerated forces that are driving the global economy into recession.

And it’s only a matter of time–a short time–before it’s also clear he’s lost control of the US economy as well.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, October 1, 2019. His website is http;//kyklosproductions.com and twitter handle @drjackrasmus.

posted August 13, 2019
Argentina & the Next Global Financial Crisis

On August 12, 2019, financial markets in Argentina crashed. The stock market contracted 38% in just one day. The currency, the Peso, fell 20% after falling as low as 30% and recovered to 20% only when Argentina’s central bank raised its interest rate to 75%. Watch next for bond prices, both government and corporate, and especially dollarized bonds which Argentina has loaded up on in recent years, to freefall as well.

What’s going on in Argentina? What’s likely to happen next? And what do the events in Argentina have to do with falling financial asset prices—i.e. stocks, currencies, derivatives, commodity futures, real estate prices, etc.—now underway globally as well?

The precipitating cause of yesterday’s crash in Argentina stocks, peso, bond rates, etc. was the primary presidential election results over the weekend. The election was a preview for the general election that will happen this October. Macri, the current president, a businessman whose election in 2015 was assisted by US interests, lost heavily to his challenger, Alberto Fernandez. Fernandez got 48% of the vote; Macri only 32%. A gap that is likely insurmountable for Macri. It’s almost certain now that Macri will now lose in October. That prospect has global bankers and investors quite worried. For Fernandez is associated with the Kirchner government that held office prior to Macri from 2002 to 2015, and that government refused to pay US hedge funds and other investors the exorbitant rates on Argentina bonds they demanded ever since the last crisis in 2001-02.

The US media and business press today expressed deep confusion over the weekend’s political results. They just can’t understand how Macri could have done so poorly in the primary. As the talking heads put it, ‘Macri’s been putting the economy in order’, why did he lose so badly to Fernandez?

But all the perplexed ‘talking heads’ in the US media needed to do was to look at the facts: Inflation has been running at 56% per year, one of the highest in the world. The pundits say Macri has done well, bringing inflation down from 70% in 2018. But annual inflation rates, whether 56% or 70%, have been devastating real incomes of workers and small businesses. The currency has also been collapsing for two years now, having fallen from an exchange rate of roughly 16 to the US$ in 2017 to 52 to the dollar, after hitting a 60 to the dollar low yesterday. That falling will almost certainly continue in coming weeks. And with the 20% collapse of the peso this past weekend, inflation will now accelerate even faster once again.

Add to that the Argentine real economy has been in recession, contracting the past four quarters on average by more than -5%, with unemployment officially at double digit levels and likely much higher. Industrial production has fallen nearly -10% over the past 12 months, with manufacturing double that, at around -20%.

In other words, living standards have been falling sharply due to both accelerating inflation and chronic double digit job loss for the vast majority of workers and small businesses ever since Macri took office in 2015 and instituted his austerity reforms demanded by the IMF. That austerity has included cutting pensions, slashing government jobs, raising utility costs, eliminating past household subsidies. A third of all Argentina households now officially live in poverty. Is it any wonder then that Argentinians expressed their discontent in the primaries this past weekend? US business media and pundits of course don’t choose to look at this human cost of US neoliberal policies and its corollary of Argentina austerity. For them, it’s just about whether Argentina continues to service its debt to global bankers and whether the stock market in Argentina, the Merval, continues to produce capital gains profits for investors.

But wait. Didn’t Argentina recently receive a record $56 billion loan from the IMF? Isn’t that boosting the economy? No, it isn’t. Because the $56 billion is not going into the real economy. So where is the $56B IMF loan going? It’s going to pay the debt that Argentina owes to global bankers and investors, including the ‘vulture capitalist’ hedge funds, who Macri welcomed back in 2015 after he took office.

The IMF never gives money to a country to spend on stimulating its real economy. Quite the opposite. It extends loans with the condition that the country introduces austerity measures that reduce government spending or raise taxes. So what if that does the opposite—i.e. slows and contracts the real economy. That’s not its objective.

The IMF officially says it lends money to help stabilize a country’s currency. Translated, however, that means lending with the understanding the country first pays off foreign investors to whom it owes money. In fact, IMF loans never even get routed directly to the country. The IMF loan goes directly to paying of principal and interest to the investment banks, hedge funds, and billionaire ‘vulture capitalists’ who get the country indebted in the first place. The IMF actually pays them off and then send the ‘bill’ to the country for repayment—i.e. payment of the principal and interest on the debt it owes the IMF now instead of the private investors. And the debt payments are made with the money extracted from austerity programs levied on workers and the real economy. The IMF is thus the bill collector for big finance capital, and transfers the debt owed from their private investor and banker balance sheets onto its own IMF balance sheet.

The IMF recently loaned Argentina the largest amount it has ever loaned a country, the $56 billion. But it wasn’t the first time it did so. In 2001, caught in a recession that originated in the USA, Argentina couldn’t repay interest on the $100 billion debt it had incurred with private investors in the late 1990s. The IMF stepped in and did its duty. It loaned Argentina money to bail out the private investors. But some of them—led by hedge fund US billionaire Paul Singer—didn’t think the IMF loan terms didn’t pay them enough. Singer and his consortium of vulture capitalist hedge funds kept demanding Argentina pay more. The dispute went on until 2015, when the pre-Macri government was replaced by Macri, an election engineered with the assistance, financial and otherwise, of the Obama government on behalf of Singer and his buddies.

The first thing Macri did when he took office was to pay off Singer and friends the full amount they were demanding since 2001. Where did he get the money for that? From the IMF of course, which loaned Argentina the $56 billion. The payoff also opened the door for Macri & his business friends to get more private loans from US investors. They immediately trotted off to New York, met with the US bankers, and came back with a bag full of private loans. In other words, they loaded up on more private investor debt after ‘borrowing’ from the IMF to pay off the old private investor hedge fund debt.

So how is it that Macri—with big loans from not only the IMF but from New York bankers as well—couldn’t get the Argentina real economy back on its feet the past four years? The IMF money went directly to the hedge funds and vultures. But where did the new private money go? It certainly didn’t go into the real economy—i.e. investment, jobs, household income for consumption, and thus GDP. Likely it’s been skimmed off the top by Macri and his friends in part. The rest diverted to financial markets in Argentina, in the USA, or Europe.

Despite the nearly $100 billion in capital provided by the IMF and New York investors, the Argentina economy has performed poorly ever since Macri took office. In 2016 the Argentina economy contracted. It recovered briefly and slightly from recession in 2017. But in 2018-19 it has fallen into recession once again, this time more deeply as its currency has collapsed, from 16 to the dollar to more than 50 to the $US—with more collapse to come. The loans it arranged since 2015 from New York investors, moreover, have been heavily denominated in US dollars. Argentina has one of the worst run-ups in dollarized private bond debt in the world. That means as the US dollar rises the cost of making payments on that debt also rises.

Not only is the prospect of default on the IMF $56 billion debt in the near future now rising, but the parallel default on corporate debt is also rising. The value of a US dollar denominated bond dropped since last week to 58 cents on the dollar, from 77 cents. Defaults are on the horizon, both government and private, in other words.

The peso’s precipitous collapse also has further ‘knock on’ negative effects that are now intensifying the crisis in the country. Here’s how: As currencies fall in relation to the dollar, what happens is capital flight accelerates from the country. That reduces investment further in the country, in turn exacerbating the recession and layoffs even more. To slow the capital flight from the country, its central bank then typically raises interest rates dramatically. Argentina’s central bank benchmark rate is now an amazing 75%. Rising domestic interest rates further slow the real economy. In turn, the slowing real economy results in domestic stock and bond markets collapsing further—thus feeding back into the financial sector and making it even more unstable and driving financial asset price deflation even more.

What results, in other words, is a negative feedback effect between all financial markets in the country, an effect that dries up the availability of credit in general forcing more layoffs and a deeper recession. That’s what is going on now in Argentina.

But Argentina is just the leading edge of a similar general process of global financial asset price deflation. Argentina is just an intense example of financial asset markets declining everywhere globally. And in that sense its current financial and economic collapse may be the harbinger of things soon to come.

USA and other emerging market economies’ stock markets are now contracting sharply since the beginning of August. The 20%-30% decline of US stock markets last November-December 2018 has resumed. We are beginning to see November-December 2018 events déjà vu all over again. The 2018 stock market contraction was halted temporarily by the US central bank, the Fed, capitulating in late December to Trump and financial interests demanding the bank stop raising interest rates. The Fed halted raising interest rates in January 2019 and both US and emerging market economies’ financial markets regained their losses in the first quarter 2019. Aiding the halt of rate hikes by the Fed was the appearance of an imminent agreement between the US-China on trade, as negotiations resumed between February to May 2019, which also helped to restore stock market losses of 2018.

But two events happened in late July-early August 2019 that have resulted in stock and other financial markets resuming their trajectory of decline of last November-December 2018: the US Federal Reserve cut rates on July 28 by only a token 0.25% when financial markets expected more aggressive action by the Fed; and Trump a day later scuttled the prospect of a trade deal with China by raising more tariffs on $300 billion of China imports. Add to these two events the rise of Boris Johnson as the new UK prime minister and the almost now certain ‘hard Brexit’ coming after October 2019; evidence of German and Italian banks increasingly in trouble; and central banks around the world in a ‘race to the bottom’ to cut their domestic interest rates to lower their currencies exchange value to boost exports as global trade stagnates—now growing at only 0.5% annually and is about to contract for the first time since the 1930s.

Together, all these current events have translated into investors worldwide selling their stocks and other financial assets, and diverting the money into ‘safe havens’—like US Treasuries, the Japanese Yen, and gold. Argentina’s economic mismanagement by Macri has occurred in the context of a global financial asset deflation that only exacerbates Argentina’s crisis—and makes it increasingly difficult to deal with by Argentina alone, notwithstanding the record $56 billion IMF loan.

Look around. The global economy is on the precipice of a potential financial asset market price deflation not seen since 2008. It’s not quite there yet. But the momentum is now clearly in that direction.

Not only have stock prices globally contracted sharply worldwide in just a few weeks, but so too have other financial market prices:

Government bond interest rates are falling rapidly everywhere in the advanced economies. More than $15 trillion in bonds globally are now yielding negative rates. Trillions of Euro bonds are now in negative territory, up more than a $trillion in just the past year, including in Germany, and are continuing to fall further. Currencies are also contracting everywhere (driving up the value of the US dollar). Property prices are leveling off, and have begun to drop. Global oil futures, a financial asset, have fallen 20% again, from $75 a barrel to the low $50s and may soon to fall below $50. The same for many other commodities.

Financial asset prices are deflating across the board and investors are dumping them and converting to cash—i.e. a sure sign of pending global recession. What’s rising in price are the ‘safe havens’ into which the cash is flowing: gold, the Yen, US Treasuries, high end residential properties in select markets in the advanced economies, art works, and even cryptocurrencies. Also rising sharply is the cost of insuring bonds with credit default swap derivatives. In Argentina the CDS cost has accelerated to $38 for every $100 of Argentina debt, and that’s in addition to regular debt principal and interest payments.

But Argentina is just the ‘worst case’ scenario of this global financial asset deflation underway. Its financial asset prices are deflating faster and deeper than others at the moment. It is just the worst case of a more general scenario emerging globally. Global trade volumes have already collapsed, and a recession in the global economy will necessarily follow. Global manufacturing is already in recession. And a global recession tomorrow will only exacerbate Argentina’s current recession today.

Argentina today is therefore likely a harbinger of things to come, i.e. the canary in the global economy coal mine, and the victim of a ‘made in the USA’ global slowdown driven by Trump trade and US monetary policies. Of course, Argentina’s economic crisis can’t be explained alone by US government policies. Macri’s austerity and loading up again on private foreign investor debt and IMF loans since 2015 is also responsible. And Macri’s recent austerity policies to pay for that debt by cutting more pensions, social subsidies, raising utility costs and taxes on households has contributed heavily to Argentina’s current crisis. But that debt and austerity too can be traced back to US vulture capitalists and their friends in the IMF and among New York bankers.

Dr. Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity press, October 1, 2019. He blogs at jackrasmus.com and his website is http://kyklosproductions.com. He tweets at @drjackrasmus and hosts the Alternative Visions radio show weekly on the Progressive Radio network.

posted July 25, 2019
China-US Trade War Deja Vu: G20 Buenos Aires to Osaka

This past June 29, 2019 Trump and China president, Xi, met again at the G20 in Japan in the midst of a potential further escalating trade war. Has anything changed as a result of their meeting? Or is it just deja vu of their prior G20 meeting in Buenos Aires on December 2, 2018?

In the months leading up to the December Buenos Aires meeting between Trump and Xi, US neocon trade negotiators (Lighthizer, Navarro) had scuttled in May 2018 what was then a pending trade deal negotiated by US Treasury Secretary, Steve Mnuchin, and his Beijing counterparts. Thereafter, China had refused throughout the summer and fall 2018 to meet with Trump, despite Trump’s repeated attempts to lure Xi back to the bargaining table with threats and ‘happy talk’ praising Xi before the US November midterm Congressional elections. Xi did not take the bait. Trump and Xi finally met again at the G20 in Buenos Aires December 2, 2018. The outcome was more typical Trump public ‘happy talk’ laced with platitudes about how he and Xi had such a great relationship; how the two countries trade teams would now work toward an agreement; and how Trump in the interim would not impose a further hike in existing tariffs on China $200 billion imports, scheduled for January 2019. Stock markets began to recover, after their 30% swoon of late 2018, in expectation of a trade deal—assisted at the time as well by the US central bank, the Fed, capitulating in late December 2018 to Trump demands to stop raising US interest rates.

Following the Buenos Aires G20, the two countries’ trade teams resumed negotiations in February 2019 and it seemed were about to reach an agreement once again. But, once again, as in May 2018, the negotiations broke down a second time this past May 2019—once again scuttled by the US neocons and anti-China hardliners who had retained control of the trade negotiations and access to Trump’s ear.

In the aftermath of the Japan G20 meeting of June 29, once more the same ‘spin is in’ that followed the Buenos Aires meeting: i.e. Trump declares publicly he has such a great relationship with Xi; Trump announces there’s a great deal now pending between the two countries; and the US and China trade teams will soon begin again to thrash out the details on the remaining 10% or so of US-China trade differences. In the interim, Trump announced he will withhold imposing his threatened increase in tariffs (this time on an additional $325 billion of China imports to the US).

In other words, coming out of the latest G20 it’s almost an exact déjà vu all over again on June 29, 2019, as it was at last December 2018’s G20 meeting between Trump and Xi in Buenos Aires.

The key question is—in the wake of the second collapse of a pending US-China trade deal this past May 2019—will we now also see a repeat again of the US maneuvers that occurred following the break up of the first deal of May 2018? Or has Xi and the Chinese finally ‘got Trump’s number’, as they say, and will refuse to come back to the negotiating table until after the 2020 election, unless Trump provides firm assurances of a compromise. Moreover, that compromise, should it occur, will have to include the US withdrawing its latest demands for a China capitulation on the technology issue, which has always been the crux of the US-China trade dispute.

The First Trade Deal Blow Up: May 2018

In March 2018 the US launched its first salvo against China with US trade representative, Lighthizer’s, report that China was stealing US technology and that China’s 2025 program was a plan for it to surpass US next generation technology development (G5, AI, cybersecurity)during the next decade. Trump administration public statements, in contrast, focused on the China trade deficit and on China policies preventing US corporations’ majority ownership of its operations in China. Trump immediately imposed tariffs on an initial list of China imports to the US; China responded with a smaller list.

China quickly engaged with the US on these various issues, sending a team to finalize terms on a trade deal to the US in May. Trade negotiation teams traveled back and forth between Beijing and Washington. It looked like a deal was imminent.
As a deal got closer, in May 2018, US Treasury Secretary, Steve Mnuchin, assumed control of the negotiations with the Chinese. Neocon trade advisor, Peter Navarro, a member of the US trade team, was thrown off the US team. Mnuchin had apparently cut a deal with China: the latter would buy trillions of more US farm and manufacturing goods over the next five years, US bankers and multinational corporations would be given 51% or more access to ownership of their operations in China, and China would pass legislation placing limits on US corporate tech transfer in China.

But then the neocons struck back. With friends in the Pentagon and Congress they went after China corporations. First it was ZTE. Then Huawei. Navarro was put back on the US trade team. Lighthizer was put in charge again, and Mnuchin formally a co-chair of the US trade team but in reality demoted to a role of watching over Lighthizer and the neocons now once again running the show. The technology issue was back in as the priority issue. That’s next generation technology—i.e. 5G, Artificial Intelligence, and cybersecurity. The key technologies not only for the industries and trade of the coming decade, but also the key technologies for military hegemony for another decade. The neocons, the Pentagon, the US Military Industrial Complex, and their friends chairing the powerful military committees in the Senate and House demand that China not simply restrict tech transfer from US corporations doing business in China. No, the demand was the limiting of China nextgen tech development. China would not be allowed to leapfrog the US militarily in the 2020s.

The trade team neocons—Lighthizer, Navarro, and now Bolton in the background—had gained Trump’s ear and whoever gets to Trump last usually gets him to do what they want. Moderates, including the generals, were leaving the Trump administration like rats departing the ship at dockside. Besides, during the summer 2018 Trump had turned his attention to the NAFTA 2.0 negotiations and the upcoming November 2018 US midterm elections. Further progress on US-China trade could wait. The US had already gained concessions from China on two major themes: China purchases of US farm goods and 51% ownership. That would still be on the table when negotiations resumed. Let China think about the tech issue further in the interim, until after the November US elections. Trump tried over the summer and fall of 2018 to entice Xi to return to the table, but Xi did not take the bait. To do so would only give Trump another event to boast to his political base during the November 2018 elections. Xi would wait. And he’ll now wait again.

Delaying negotiations after the May 2018 blow up of negotiations would, of course, mean US farmers would continue to feel the pinch of China reduction of purchases of soybeans and other commodities. But Trump softened that blow with tens of billions of dollars of US subsidies to US farmers in 2018, to be followed by tens of billions more in early 2019.

G20 Buenos Aires Meeting and After

Immediately after the November 2018 elections, Trump renewed efforts to meet with Xi. They did so at the end of 2018 at the G20 in Buenos Aires. Lots of fanfare and typical Trump hyberbole followed: President Xi was such a good buddy. A great deal was in the works and would soon be announced. In the interim, Trump suspended raising tariffs to 25% on existing $200 billion of China imports as negotiations resumed February 2019. Lots of happy talk about all the progress being made at the G20, as the US stock markets recovered nicely in the first quarter of 2019.

But negotiations broke down once again, a second time, in May 2019 (as they had a year previous in May 2018). The official US line fed to the media was that the Chinese had reneged at the last minute, and added new demands and proposals—when in fact it was the US that introduced last minute demands it knew the Chinese could not accept, in the week before the China delegation was to come to Washington to finalize the deal.

This time the Lighthizer-Navarro-Bolton team not only demanded stronger limits on tech transfer from US corporations in China. Now the demand was China would have to sever all its companies’ relations with US tech companies in the US —and not just Huawei. A new US offensive was launched to intimidate US researchers doing joint tech research work with Chinese counterparts in US universities to end their joint cooperation; US tech companies in China were quietly told to start planning to move their supply chains out of China in the medium to long run; and the Chinese were told the US would not stop its proceedings against Huawei; moreover, it would escalate its pressure on US allies to sever 5G investment plans with Huawei as well. And that was not all. As the China delegation made final plans to come to Washington, the US team signaled publicly that the US would retain tariffs even if there were a deal. The excuse was the US needed to retain tariffs as a threat if China didn’t fully implement its concessions to the US. And then there was the especially insulting demand by the US: China would have to share even its independent technology development in 5G, cyber, and AI with the US as part of a deal.

The China delegation came over anyway, but obviously no deal was concluded. Perhaps it was to verify whether Trump really agreed with these onerous terms thrown up at the last minute by the Lighthizer-Bolton neocons. They left empty-handed. Apparently it was true.

How Trump and the US Now Negotiates

The Trump approach was predictable. This is how he did business before becoming President. And it is how he now runs the US government: Make public declarations about what a great person his negotiating partner is. Make public statements how a trade deal is imminent. Then at the last minute throw up unacceptable demands, threats, and intimidating statements. Allow negotiations to break off. When the other side does so, blame them for failing to make a deal. Then wait and see if the other side makes concessions and signals it wants to return to the bargaining table. When they do, privately or publicly, return to negotiations with more demands for concessions. If necessary, play this same game over again.

China and Xi were burned once by these maneuvers back in May 2018. Now they met again at the recent G20 in Japan and the negotiations will once again resume. Trump adviser Larry Kudlow has noted ‘phone calls’ are occurring back and forth between the US and China negotiating teams. But there’s no indication of any meetings in the works between Trump and Xi. Nor will there likely be soon. It is not likely the Chinese will be burned again. In fact, they have publicly declared no deal unless Trump at minimum withdraws his May 2019 trade team threat to retain tariffs whether a deal is reached or not. That’s likely a ‘non-starter’ until Trump takes it off the table. Positions may be hardening, not softening.

In the interim, as during the days following Buenos Aires, following the most recent Osaka G20, Trump is again repeating platitudes and praise for Xi. He’s publicly announced that China has made great concessions to buy record levels of US farm goods. But China had conceded that and put it on the bargaining table almost a year ago! It had promised to buy $1 trillion more in US goods over the next five years. So Trump’s just repeating what has already been agreed to some time ago. Nevertheless, for Trump ‘spin is in’ once again post-Osaka.

That should hold US business and farm criticisms at bay for several more months—along with the $20 billion more in farm subsidies announced by Trump—likely paid for by cuts to US food stamps, housing subsidies, education funding, etc. Should another, third round of farm subsidies follow in 2020 if no trade deal is concluded, total direct Trump farm subsidies will exceed $50 billion.
What’s Next: More Déjà vu? Or a Deal?

It should be clear that as of July 2019 there’s no imminent China-US trade deal. Trump is just buying time. No additional tariffs—i.e. $325 billion on remaining China imports—will likely be imposed in the interim. A hiatus has occurred at least for the remainder of 2019. US business pressure and growing criticism of Trump’s trade policy, and growing farm sector discontent, will prevent Trump from raising more tariffs—at least for now.

But US pressure to drive China tech companies out of the US economy and, if possible, from the economies of US allies in Europe and elsewhere, will no doubt continue. So too will continue US pressure to isolate China company and University researchers in the US and force them to leave. And longer term, the US will continue to press US corporations to relocate their supply chains from China to elsewhere in Asia (Vietnam? South Korea?) or even Mexico.

When will a China-US trade deal then be concluded? Not likely this year. Trump probably now wants to wait until closer to the 2020 election. And the neocons still have his ear and are still driving US trade policy (indeed, US foreign policy on a number of fronts as well). And they don’t want a deal…ever! Unless of course China agrees to capitulate on the central issue of nextgeneration technology development.

For the remainder of 2019, US policy will be to squeeze China tech corporations, to make operations so uncomfortable for them they will have to leave the US, as well as US allied economies. Trump will continue to collect tariffs from China imports, which he sees as a plus, while increasing his public threats that China not to allow its currency, the Yuan-Reminbi, to devalue which would negate the hikes in US tariffs. Meanwhile, domestically Trump policy ‘spin’ will try to publicly make it appear (to Trump’s farm base and US business in general) that the US and China are working in good faith toward an agreement.

Longer term, into 2020, if the US neocons retain control of negotiations and Trump’s ear, they will continue to insist the US retain tariffs, insist on China capitulating on the tech issue, and continue to go after China tech companies in the US and worldwide. That means there will be no agreement even in 2020.

From Tariff-Trade War to Economic War?

It’s probably becoming increasingly clear to the Chinese that the US has not launched a ‘tariff war’, as Trump likes to call it. In fact it’s a stretch to even call it a ‘trade war’. US policy is driving longer term toward a bonafide economic war between the US and China.
In the nearer term, the current differences may well transform the ‘tariff’ war into a ‘currency war’ that will spread contagion and reverberate globally across other economies—at a time at which the global capitalist economy is slowing fast and approaching as well a new financial instability.

And China doesn’t have to ‘manipulate’ its currency. All it has to do is allow the Yuan-Renminbi to devalue naturally in response to US policy and the slowing global economy. That devaluation would more than offset most Trump tariff hikes. So far, China has intervened in global money exchange markets to prevent this—contrary to the Trump/Neocon charge it is manipulating its currency. All it needs to do is allow it to occur according to prevailing economic and market forces and just not intervene in global money markets further to prop up the Yuan.

Then there’s China’s $1.3 trillion of US assets, mostly Treasuries, held by its central bank. It could slow its purchase of new US government debt, which it appears it recently may now be doing. Should the trade-economic war intensify, it could stop or even sell off its dollar hoard. That would drive up long term interest rates in the US and the value of the US dollar still more, further slowing global growth and negatively impacting emerging market economies and US multinational profits repatriation from those economies.
Rising US rates and the dollar could precipitate another stock and junk bond sell-off, similar to that which occurred in late 2018. And Trump doesn’t like stock market declines.

There are numerous other ‘actions’ the Chinese could take in response to US neocons intensifying or prolonging the US-China tariff-trade war, further driving the US-China differences into a broader economic war. Even if US neocons don’t understand this, or don’t care, which is more likely, widespread business and banking interests do and could intervene more forcefully should the drift toward economic war continue.

And there’s a wild card in the trade war deck that may yet check the neocons influence perhaps. That’s the current softening of the US and China economies. That could force both sides to an agreement. Should the US economy slip into a recession by 2020, or even late 2019, as this writer has predicted—Trump may grab the major concessions already on the negotiating table, i.e. China purchases of $1 trillion more US goods and China’s concession to allow US majority ownership rights in China. Trump could then announce (and exaggerate) having a big victory in trade negotiations over China—all just before the 2020 US elections.

China’s economy is slowing, but so too is the US. The US 1st Quarter GDP numbers were propped up by temporary factors associated with inventory over-investment and net exports, both of which are fading rapidly this quarter. Moreover, consumption is barely growing and business investment is turning negative. The US central bank, the Federal Reserve, is projected to start lowering US interest rates this month, giving further impetus to the projected massive $1.5 trillion in stock buybacks and dividend payouts scheduled by Fortune 500 corporations this year. That may succeed in putting a temporary floor under stock markets. But the real economy is being driven to slowdown, or worse, by year end. And the bond markets and yield curves are clearly signaling that development.

A more rapidly slowing US economy, now clearly beginning, may change the trade negotiations dynamic. And if the US slips into recession the pressure to cut a deal will grow. Trump may yet be convinced to take the China concessions on the table and postpone US demands for a China capitulation on nextgen technologies, to be raised anew after the 2020 elections or even before to allow Trump to appear aggressively ‘America First’ targeting China to his political base in the weeks just before the 2020 election.

Because for Trump a ‘deal is never a deal’, it’s never concluded, but reopened whenever he wants it to be.

Breaking an agreement is standard practice for Trump. Just ask the Mexicans, where Trump threatened more tariffs even after concluding a new NAFTA 2.0 deal. Or the Iranians, who thought they had an agreement with the US. Or the Europeans who thought they had a Climate deal. For Trump, negotiations are a long term process, punctuated by happy talk events, followed by more threats, insults, new sanctions, and intimidations, and the reopening of deals once thought concluded by opponents.

In other words, even if a China-US trade deal is done next year the trade war will not be over. It will have just begun, as it evolves toward a broader ‘economic’ war after the 2020 elections, or even before.

The key to a China trade deal sooner rather than later is whether Trump and US big economic elites can convince the neocons and military industrial complex to agree to a short term deal with China that provides only token nextgen technology concessions—with the assurance that the US will reopen and resume the trade-economic offensive after the 2020 elections once again.

For US economic and political elites are in general agreement with the neocons behind the Trump daily trade war circus. They will not allow China to challenge the US next decade by leveraging the nextgen technologies that are the key to both economic and military hegemony by 2030. It’s just a question of timing. Should they decide for domestic political reasons to take two bites of the bargaining apple from the Chinese now, and come back later for the big bite: i.e. the fight over nextgen technology. Or will they continue to insist on three bites now, all at once.

This writer’s guess and prediction is that the slowing US and global economy will result in the former. The US will grab the China concessions now on the negotiating table, and demand more after the 2020 elections. For the current tariff-trade war is just the opening salvo in an epic struggle between the US and China. The technology war dimension between the two has already begun, albeit still in early stages. What appears on the surface as a trade war is to a significant extent the cover for a more fundamental technology war beneath the surface, and a broader economic war over technology that will fundamentally characterize US-China relations in the 2020s.
Just as European and American imperialists jockeyed and maneuvered in the years leading up to 1914, with a focus on markets and natural resource control, in the 21st century the jockeying and maneuvering has begun—albeit with a different focus on nextgen technologies and control over global money flows, currencies, and other levers of financial power.

The 2020s decade will prove a highly dangerous period. The global capitalist economy is slowing, as it does periodically. A new restructuring of the US and global capitalist economy is on the agenda next decade, as it was in the late 1970s, in the mid-1940s, and on the eve of 1914.

Trump trade and other policies should be understood as a broad reordering of US economic and political policies in order to ensure the continuation of US global economic and political-military hegemony for the coming decade. Nextgen technology development is at the core of that restructuring and restoration of US hegemony. Trump is just the appearance and the human agent and vehicle of the deeper transformations in progress.

Dr. Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump, Clarity Press, September 2019; and the recently published ‘Alexander Hamilton and the Origins of the Fed’, Lexington books, March 2019. He blogs at jackrasmus.com and his website is www.kyklosproductions.com . Dr. Rasmus tweets at @drjackrasmus and hosts the Alternative Visions radio show on the Progressive Radio Network.

posted July 10, 2019
Is Deutsche Bank the Next ‘Lehman Brothers’? + What About China’s Debt?

    DEUTSCHE BANK: WILL IT BE THE NEXT ‘LEHMAN BROTHERS’?

s biggest investment bank, Deutschebank, is in big trouble. This Sunday it will announce a major restructuring. It’s also a harbinger of a bigger problem with European banks in general, which are loaded with trillions of euros in non-performing bank loans they haven’t been able to shed since the crisis of 2008-10 (and subsequent Eurozone double dip recession of 2011-13).

Deutsche, the biggest, is among the worst shape, much like the largest Italian banks. Deutsche soon will announce this Sunday, according to reports, a 20,000 cut in jobs, as well as asset sales of entire divisions, as it pulls out of the US and other economies and consolidates back to Germany. (It formerly tried to challenge US investment bank giants, Goldman Sachs and Morgan Stanley, by acquiring the large US bank, Bankers Trust, several years ago but has now clearly lost out in that competition and is trying merely to survive.)

But even before the next financial crisis hits Europe, which is coming soon, Deutsche is already in the process of being ‘bailed out’. One means of bail out is forcing a merger with another large bank. That was recently attempted by the German government, with German Commerz bank, but the effort failed. Another bailout measure is to get the bank in trouble to raise capital by selling off its best assets. Now firesales of its better assets are underway. Another approach is to set up what’s called a ‘bad bank’ in which to dump its non-performing assets. That’s going on with Italian banks. But those solutions may not be enough should the bank’s stock price collapse further even more rapidly. At only $7 a share now, speculators could soon jump in and drive it to near zero, as what happened in the month preceding Lehman’s collapse.

Like Lehman in 2008, another major problem with Deutsche is the composition of its risky asset portfolio of derivatives contracts undertaken in recent years and the potential for it to precipitate a global ‘contagion effect’ should its financial condition worsen rapidly.

Deutsche currently holds $45 trillion in derivative trades with other institutions. And some sources and analysts are beginning to compare it with the Lehman Brothers investment bank collapse in 2008 in the US. Like Lehman, the derivatives connection is the historic channel through which contagion and asset value collapse is transmitted across other financial institutions, leading in turn to a general credit freeze across multiple financial markets in Europe. The giant US insurance company/shadow bank, AIG, over-issued and held trillions of Lehman derivatives which it could not pay when Lehman collapsed. Deutsche may thus represent a kind of Lehman-AIG in a single institution.

Whether the European Central Bank, ECB, could successfully bail out Deutsche in the event of a crash is another related question. Unlike in 2008, the ECB is no longer in as strong a position to do so. Its policies since 2015, of QE and driving down government interest rates to negative levels, may mean a Deutsche bailout could intensify a European crisis. An ECB bailout might inject even more liquidity into the European banking system, driving interest rates significantly further into negative territory. Negative interest rates already range from 64% to 69% of all government bonds in Europe.

A recent reader of this blog raised a series of questions about Deutsche as a repeat of Lehman and asked my response. The following are his questions, and my replies:

    Reader’s Question:

The largest bank in Germany is Deutsche Bank,and it is also the largest bank in the EU. Its stock has been plummeting. It laid off 20,000 employees, and I noticed that its PE ratio is 600 to 1, which means it is earning about 10 cents per share. It seems like it is getting close to being a zombie bank. The bank, however, has 45 trillion dollars in derivatives, and these appear to be heavily interconnected to U.S. banks. Can a bank be too big to fail and too big to save? If it goes under, is there a chance of contagion? Can a bank collapse and yet leave its $45 trillion in derivatives unaffected? On a scale of 1 to 10, what are the chances of a Lehman collapse and global contagion with Deutsche Bank in your view

    My Reply:

The percentage potential for collapse is probably around 7 out of 10 should the next recession hit Europe. It also depends of course on which institutions are counter parties to the $45 trillion. That’s unfortunately not knowable because of the opacity of derivatives contracts (except for rate swaps). And it also depends on how financially fragile other institutions are, apart from the Deutsche-derivatives connection. My view is that European banks and financial institutions are quite fragile–given the trillions in non performing loans, negative rates, etc. Along with certain emerging market economies’ sovereign debt (and dollarized corporate debt) loads (Argentina, Turkey, etc.), India’s shadow banks leverage and NPLs, and China’s debt, Europe banks may prove the next locus of the global financial crisis on the agenda. That more general financial fragility (and thus instability) would certainly raise the probability of Deutschebank repeating the role of Lehman in the next crisis. In short, you can’t evaluate Deutschebank just in relation to its (and its counterparties) derivatives exposure. Contagion will not occur just within a certain subset of the banking system; it will soon spread via expectations to other sectors of the credit system (as it did in 2008), and that will quickly feedback negatively on the Deutschebank-partners derivatives exposure condition.


ON CHINA DEBT COMPARED TO EUROPE’S

    A reader of my blog, jackrasmus.com, recently noted the magnitude of the debt problem in China and argued it will be the locus of the next debt-financial crisis–not Europe. Making good points in support of his view, my reply follows arguing it is not the magnitude of the debt load that is, by itself, key. True, the quantity of debt–and the quality of that debt–are important. But the ability to ‘service’ that debt (paying interest and principal when due) is just as critical. And that ability to ‘service’ in turn depends on the assured cash/near cash assets available, which depends on maintaining price levels and sales levels (i.e. revenue) and returns on near cash assets in order to make the payments. The various terms and conditions associated with the servicing may also be critical (i.e. can the borrower roll over the debt, what’s the interest rate and term structure of rates, can it legally suspend payments, are the covenants that relieve payments generous or not, etc. Here’s the reader’s notable comments and my reply:

      The Reader’s Comments on China debt:

    I came across some of your writings and been reading for a few hours… I am curious to know why you seem to be thinking the financial crisis isn’t coming from collateral shortage in Eurodollar Markets ? Since baoshang 30 % haircuts, AA bonds no longer accepted, AAA 2 to 1 value only sovereign bonds accepted at face value in china repo. Eurodollar markets seem to want Sovereign Bonds and stopped accepting HY Bonds, Gold furious bid indicates Collateral problems, Gold collateral of last resort in money markets.

    European banks are the starting crisis point, due to Trillions in USD loans to EM’s and china china has 3.5-4 Trillion US bond issuance, on paper borrowing 100 Bil USD + a Quarter… Then add 250 Trillion + of derivatives between Big 9 of New York and EU, the biggest financial collapse the world will ever see. China is the catalyst by far right now, they make Wall St look noble. Their 10 year isn’t being bid much which indicates serious cash flow problems in their banks, while every other sovereign bond in the world is being full blown bought, money dealers and banks running towards liquid and accepted collateral, credit cycle is done… Baoshang sealed it, no way European banks are making it out, Chinese collateral is bunk, not worth much and big haircuts, PBOC isn’t gonna cover much on foreign debt… Hengfeng bank failing now, 16 more to go.

    I think you are hell bent on America and the ” Establishment ” but give credit where it’s due… China was the biggest cause to Inflation in this cycle, they will be the biggest cause to deflation, gravity Jack… What goes up, always comes down

    Please let me know your thought process behind China not being the catalyst given they accumulated close to 80 % of world’s debt in this cycle ( Corporate, Local Gov, Household and Central Gov )… Price Per Income is 45-50 in Tier 1’s, their income to mortgage average in the country is 330 %, it doesn’t make sense the amount of leverage, everybody is indebted to their eyeballs with over 100 Trillion Yuan in shadow banking loans to consumer, their Consumption GDP is the lowest in the world in net terms, highest investment GDP in the world… I don’t get how you think they are even growing at 4 %, with debt servicing they are negative growth, M1 growth is horrendous in China

      My Reply:

    Indeed, China debt is extremely high, in all sectors, government, household, etc. But debt magnitudes are not the entire picture when it comes to an asset crash. Servicing of the debt is key, and in turn price levels and revenue from sales of output which generate the income with which to service the debt. When debt servicing reaches a point where income is insufficient and then defaults occur, that’s the threshold to watch. China has shown its willingness, and has the resources, to absorb defaults. Also, it can respond quickly before the expectations of creditors deteriorate too far, and they precipitate a general asset price collapse that begins to snowball. The US, EU, Japan-S.Korea can’t respond as quickly as China might. Also, China is still growing, although far more slowly than reported. That growth generates income for debt servicing. In contrast, Europe is not growing at all, hasn’t really since 2009, and has never really recovered from the 2008-09 and 2011-13 crises. Its bank lending is still mostly flat. Money capital keeps flowing offshore. Central banks’ QE has not gone into real investment in Europe but has been diverted elsewhere. Negative rates have not proven effective in stimulating bank lending in Europe. Non-performing loans totals are very large. QE has failed miserably and it will again when they try it again soon. In contrast, China can turn to boosting government investment quickly in lieu of revenue from exports now slowing because of the global trade slowdown and US trade war. Europe cannot or will not seek to offset its exports slowdown with government direct investment as an alternative. Its bankers driving policy and the Euro system have structured austerity systemically. It’s therefore far more dependent on export revenue but the global slowing of manufacturing and exports means less ‘income’ from revenue with which to service debt.

    In short, my point is that magnitude of debt is not the only determining variable of financial fragility and instability and eventual financial crashes. Excessive debt levels and leverage are necessary conditions for a crisis, but the quality of that debt, the ability to service it, the means and willingness of government to avoid or cut short defaults preventing contagion, etc., are all important.

    Read my equation in the appendix of the Systemic Fragility in the Global Economy book written in 2016. It considers the role of debt in relation to ability to service the debt and the numerous terms and conditions and covenants that may be associated with debt servicing.

    I’m currently developing these equations further, using neural network data analysis to determine the actual multiple causal relations between government, household, corporate, bank debt as well as, within each of these sectors of the economy (government, household, business), the degree of causality between debt levels, quality of debt, income available to service the debt, and terms and conditions of debt financing.

    But you’re right, the situation in China is worse than it appears. But so is Europe even worse. China debt may be higher in absolute terms, but Europe’s debt servicing ability, after eight years of double dip recession and near stagnant growth (what I call an ‘epic’ recession that still continues), is weaker than China’s ability to ensure debt servicing and thus avoid defaults contagion that sets off a general financial asset price crash. And let’s not forget EMEs like Argentina, Turkey, Pakistan, as well as India which has a very serious problem with its shadow banks. Their debt servicing ability may be even weaker than Europe’s.

    I think the crisis will involve feedback effects between Asia (China, India, Japan) and Europe and EMEs. Where it first erupts is important. I’m leaning toward Europe as the initial focal point, although I could be wrong.

posted June 9, 2019
On the Nature of Capitalist Crises & Restructuring

An Interview of Dr. Jack Rasmus by Mohsen Abdelmoumen, American Herald Tribune, June 8, 2019
Dr. Jack Rasmus: “Capitalist Crises & Restructuring in the 21st Century” (Formerly entitled ‘Capital is Cannibalistic’)

Mohsen Abdelmoumen:

In your very interesting book ‘Epic Recession: Prelude to Global Depression’, you make a wise review and provide solutions. Why is the crisis inevitable?

Jack Rasmus:

Because the solutions applied to the last crisis will inevitably lead to a more generalized, and potentially deeper and more serious crisis next time. Here’s how: the excess liquidity injected by the central banks to stabilize the financial markets after 2008-09 has been generating even more debt and debt leveraged investment. That has created financial asset bubbles today in global stocks, junk bonds, leveraged loans, triple BBB (junk) rated investment grade bonds, bubbles in derivatives and other asset markets, commercial real estate, etc. The debt levels have reached a magnitude such that once asset market prices begin to unwind and contract (some of which are now occurring), servicing of the excess debt will fail. That unwinding will contract asset prices further, causes defaults and bankruptcies, and generates a credit crash. The contagion then spills over to the real economy. Non-financial sectors of the economy then begin to contract in turn, as credit availability disappears. Production cutbacks, cost cutting, and layoffs follow. Households, already carrying severe debt loads ($13.5 trillion in US alone) default on their loans. Banks with existing severe non-performing loans (more than $10 trillion globally, centered in Europe, Japan, and India will have to write them off en masse. Business and household defaults result in the collapse of bank lending. Business confidence plummets, real investment dries up further, and prices for assets, goods, and inputs deflate, causing a still further deterioration. In other words, the excess liquidity injected into the global economy by central banks after 2008 (more than $25 trillion) temporarily stabilized the financial system. But in doing so it generated more even cheaper credit and debt that flowed into highly leveraged investment in both financial assets and real assets. The solution—i.e. excess liquidity and more debt and leveraging—thus becomes the basis for renewed bubbles and financial crisis. The now even greater debt and leveraging intensifies contagion effects, amplifies the scope and magnitude of the next crisis, and accelerates the propagation across markets and economies. The solution to the last crisis becomes the fundamental cause of the next. That’s why it’s inevitable. Again, watch the most fragile financial markets associated with junk bonds, leveraged loans, BBB corporate bonds, stock markets, already non-performing loans in Europe and Asia, and government bonds of economies like Argentina, Turkey, and others. I’d throw in exchange traded funds, a form of derivatives, probably as well once stock markets correct more than 20% next time. Another problem is that central banks in Europe and Japan already have negative interest rates. Once the next crisis appears they will be limited as to what they can do. They’ll likely double down on even more QE (note: Quantitative Easing), interest free loans to businesses and other banks, and even more draconian measures like bail-ins of depositors money where depositors are forced to convert their cash to near worthless bank stock.

Mohsen Abdelmoumen:

In your book Systemic Fragility in the Global Economy, you explain that traditional economic policies have failed and that the next crisis may be worse than 2008-09. Is not the capitalist system out of breath and unable to regenerate itself?

Jack Rasmus:

Thus far, it has been able to regenerate—but only temporarily. As the economy is restructured following a major crisis—as it was in 1909-14, 1944-53, and again 1979-88—the restructuring regenerates the leading capitalist economy (e.g. the US) but at the expense of working classes and some capitalist competitors. The recovery thereafter dissipates and the crisis then reappears in more severe form. This has been the case since the early 1970s in particular. Reagan’s restructuring succeeded in generating a recovery—at the expense of Europe, Japan, and American working class—but the same restructuring led to financial instability and crises in all three sectors of global capital and culminated in the crash of 2008-09. The US recovery thereafter was rapid for capital incomes, but slow and tepid for wage incomes. And the recovery never really took hold in the weak links of Europe and Japan where subsequent recessions occurred after 2008-09, in a kind of ‘stop-go’ slow and shallow recovery punctuated by recessions—i.e. what I’ve called a classic ‘epic recession’.

Mohsen Abdelmoumen:

You also wrote Central Bankers at the End of Their Rope ? : Monetary Policy and the Coming Depression. Your analyzes and your work constantly warn about a major economic crisis to come. Why, in your opinion, can’t the capitalist system learn the lessons of previous crises?

Jack Rasmus:

After a crisis capitalists do find a way to restore profitability and expand capital. However, the restoration is only temporary, as I’ve said. But that’s acceptable for them. They’ll take a temporary recovery for all so long as it’s a significant temporary recovery for capital incomes. An alternative, longer term solution to the crisis would not as quickly restore profitability and growth, so they do not undertake it. A broader based, longer term restoration also risks strengthening opposition (to capitalism) forces and they don’t want to ‘go there’, as they say. For example, the US policy makers after 2008-09 embarked on a massive central bank money injection to bail out the banks and large corporations to the tune of more than $10 trillion, half of which was QE direct subsidy by the Fed buying bad securities. Tens of trillions in tax cuts for corporations and investors followed as well. Profits and capital incomes accelerated, as the bailout by the Fed (monetary) and Congress (fiscal tax cuts) was redistributed by corporations to shareholders. More than $1 trillion a year was thus redistributed in the form of stock buybacks and dividend payouts just from the Fortune 500 alone. In 2018 it was $1.4 trillion. In 2019 it’s running at more than $1.5 trillion. Meanwhile, wage incomes are stagnating for the bottom 90% of the 162 million labor force in the US due to the restructuring of labor markets to the disadvantage of working class folks. So the ‘lesson’ capitalists have learned is how to quickly ensure they recover from a crisis by using monetary and fiscal policies to directly subsidize their incomes. Such policies in the 21st century are more about the State subsidizing capital incomes than they are about stabilizing the unstable, crisis prone economy.

Mohsen Abdelmoumen:

You wrote ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’. Why in your opinion can the capitalist system only generate crises?

Jack Rasmus:

Crisis generation is embedded in the very ‘economic DNA’ of 21st century capitalism. It constantly over-expands (externally & geographically and internally & technologically). The over-expansion gets away with itself and results in severe global imbalances of various kinds: financial investment over real investment; money capital outflow excesses from the advanced capitalist core economies (US, Europe, Japan) to the emerging market economies; labor inflows from the periphery economies to the advanced core; trade imbalances or goods flow imbalances; technological change imbalances within the advanced economies; imbalances in the price systems as asset bubbles expand faster than goods or factor input prices; employment imbalances as need for skilled labor goes unfulfilled as unskilled labor accumulates on the sidelines as unemployed, underemployed, and contingent-gig service workers. All these, related imbalances generate the crises. But capitalism feeds off the crises it creates. It feeds off its ‘dead and rotten’ destruction it creates during the. It creates a kind of ‘carrion capital’ during the crisis which it then devours in order to jump start a re-expansion process once again. Capital is by nature cannibalistic. It needs periodic destruction in order to resuscitate itself. The problem is the destruction is growing in magnitude and severity and causing increasingly severe consequences for the working classes, while leading to more intense competition among capitalists sectors globally as well. To use a metaphor, Capitalism is like sharks. It is reborn after a crisis like fetal sharks in the belly of the mama shark. The larger devour their smaller brethren while still in the womb. The few then emerge and reborn even stronger, larger, and more voracious than before.

Let me now provide you a more general, longer answer to your questions and the topic of capitalist crises.

Excess debt is the ‘marker’ of financial and general economic ‘fragility’. Fragility is the condition wherein markets and economies are more prone—i.e. more sensitive and likely to respond to—instability and contractions. Fragility also means the instability is more susceptible to amplification and faster propagation across financial asset markets of various kinds when crises occur, as well as from financial asset markets to the real economy of goods and services production.

There are six major changes in the global capitalist economy since the 1970s that increase the potential fragility, instability, and the amplification and propagation rate of the fragility-instability events:

1. Greater Integration of the Former Colonial Elites into the Capitalist Global Economy as Partners

This began in the 1970s as global capitalism integrated the petro-economies, allowing them to nationalize oil and related resource production and share significantly in the revenues from that production—so long as it was understood those elites would recycle much of their income back to the capitalist core economies through direct purchases or the global banking system. In the 1980s, the US added Japan to this wealth recycling arrangement with the Plaza accords of 1986. Europe was to a lesser extent thus integrated as well via the Louvre agreements of that decade. In the 1990s it was Eastern Europe and to a lesser extent south Asia. In the 2000s it was China in part. The recycling benefited US capital greatly. US dominated institutions like the IMF and World Bank were put in service of helping facilitate the integration. The recycling was accompanied by a major acceleration of US foreign direct investment into the economies of the new partners. The dollars flowing back to the US in the form of US Treasury bonds and bills purchases allowed the US to run chronic massive budget deficits, caused by accelerating defense-war spending and simultaneous business-investor tax cutting in the amount of tens of trillions of dollars. The recycling allowed the US to build up its military into a global force on nearly all continents, with a budget of a $trillion a year, the most advanced technology, and more than 900 bases worldwide. Integration economically with the US enabled the US to more effectively wield a ‘carrot and stick’ policy within its global empire to ensure partners would adhere to its fundamental political interests in turn.

But global financial and economic integration also means that crises that build and erupt in the US and/or within the key core partners of the US economic empire (aka Canada-Mexico, Japan, Europe), now more quickly spread across the integrated markets and economies. Integration increases the amplification magnitudes and propagation rates of crises.

2. Financial Restructuring of the Global Economy and the Relative Shift to Financial Asset Investing

I argued in some detail in ‘Systemic Fragility in the Global Economy’ that what has been underway since the early 1980s decade is a relative shift toward financial asset investing. This shift is structural and has not abated. In fact, technology is accelerating it. The opportunity for greater financial market profits is also a key driver. The financial asset investing shift, as I call it, has had the result of distorting real investment in plant, equipment, etc. The latter still goes on and may also grow during periods, but in relative terms it is slowing and even declining compared to financial asset investing. At the core of this is the explosion of free money provided by the central banks, made possible by the collapse of the Bretton Woods International monetary system in the 1970s. Technology and new forms of what is money have also contributed, and increasingly so after 2000, to the explosion of credit enabled by money and near money forms. With excess credit comes excess debt—at all levels: government, banking, non-bank businesses, households, ‘external’, etc.

The magnitude of debt is not per se the problem. The failure to service that debt (i.e. pay interest and principal) is the problem, and that occurs when prices collapse (asset and goods and inputs prices). Price deflation occurs when financial asset bubbles implode. Assets are all substitutes for each other, and when one key asset collapses it has a contagion effect across others. So the price system is the transmission mechanism. This idea is quite counter to mainstream economics which purports the price system stabilizes the economy and markets via supply and demand. But that’s a myth. The price system is a destabilizer. And there isn’t just ‘one price system’, another mainstream error. There are three key price systems that are inter-related but behave differently. They are financial asset prices, goods & services prices, and in put prices (e.g. wages). The relative shift to financial asset investing tends to drive up financial asset prices into bubble range, that then bust and drag down goods and input prices in turn, causing the recession to deepen and recovery to occur slowly. But the financial asset shift and inflation has a further negative effect: it reduces productivity as real investment slows. That slows wages (price for labor) while causing greater unemployment or underemployment (especially the latter).

Financialization is measured not by the share of profits or jobs going to the banking sector. It is defined by the explosion of financial asset securities (especially derivatives), the new highly liquid markets worldwide created in which to trade those securities, and the new financial institutions that dominate that trade—i.e. what are called the shadow banking system. Around this securities, markets, and institutional new framework (that functions globally due to technology) a new global finance capital elite has emerged as the human ‘agents’ of this new global financial structure that I define as ‘financialization’. That global finance capital elite now manages more investible assets than do the traditional commercial banking system (which by the way is increasingly integrated with the shadow banking system). But the shadow banks are virtually unregulated and thus prone to engage in excess risky financial investing, which is behind the chronic shift to financial investing and the financial instability globally it is creating.

3. Global Restructuring of Labor Markets & Collapse of Unionized Labor

Not all of contemporary capitalism is of course financialized. There is still much non-financial production going on and, in the (non-financial) services sectors, actually growing. It’s just that it isn’t as profitable as financial investing and thus is getting relatively less money capital than it otherwise would for purposes of expansion. Financialization is diverting more money capital to itself relative to non-financial investing—i.e. a shift that is slowing productivity gains in the latter and, as a consequence, wages and raising underemployment as businesses cut costs in order to offset the slowing productivity and higher costs of investing in real assets.

We thus now see major transformations in labor markets worldwide that is resulting in lower wage income gains. The ‘global integration’ process in item #1 above is accompanied by the ‘offshoring’ of higher wage manufacturing and other sector jobs to the emerging markets, following the capital outflow from the capitalist core (US, Europe, Japan) to the periphery of EMEs (note: Emerging market economies). Simultaneously, businesses still producing in the core intensify their cost cutting to compete with producers in the EMEs. That means the rise of contingent labor (part time, temp, gig, etc.) which is paid less and paid fewer benefits. The rise of contingency and offshoring reduces union membership and in turn bargaining power. Whereas in the past unions recovered some of income lost during the recession and downturns during the business cycle upswing, this is no longer occurring as unionization has collapsed. The offshoring of jobs also increases worker insecurity and means less likely worker resistance to wage compression by strikes and collective bargaining. As unions decline their political influence also wanes, and with it the ability to achieve wage and benefit improvements via political action. Minimum wage legislation in particular suffers.

Labor market restructuring thus becomes a popular project of business elites and their politicians. It takes the form of job offshoring as the State increasingly subsidizes foreign direct investment. It takes the form of job creation that is now almost totally contingent in character in the advanced capitalist core of US-Japan-Europe (60%-80% of jobs created in Europe in recent decades have been contingent—part time, temp, etc.). As unions weaken economically, it means the restricting and limiting of what union labor may legally negotiate over. As unions weaken politically, it means slower legislated wage adjustments (min. wages) and cut backs in ‘social wages’ like pensions, national health insurance, etc. As union effectiveness weakens, they are attacked and removed by business action or abandoned by workers who see them ineffective in defending their interests. Business led political parties then propose national legislation to, in part, codify the changes and in part to drive them deeper.

Just as the financial restructuring of the capitalist economy leads to accelerating income and wealth accumulation by the financial elite and business class, the restructuring of labor markets had the effect of compressing and stagnation (or for some sectors of the working class even reducing) wage incomes. The former financial restructuring causes income and wealth inequality to accelerate even faster than the labor market restructuring causes wage, working class, incomes to stagnate and decline. Both restructurings result in accelerating income inequality that we see today. And with income inequality, wealth (i.e. assets) grows in turn. Conversely, more asset accumulation produces even more non-asset income inequality. So the two, income and wealth, inequality in favor of financial and business classes feed off each other to expand even further. Meanwhile wage income stagnates.

Thus de-unionization, wage compression, social benefits cut backs, job offshoring, decline of collective bargaining and strike activity, labor market ‘reform’ legislation, etc. are all the consequence (and objectives) of labor market restructuring. Labor market restructuring is largely for the benefit of those sectors of capital still mostly doing business in the domestic economy.

Financialization, subsidization by the State of foreign direct investment, and free trade agreements are largely for the benefit of the multinational corporate sector. Free trade agreements subsidize multinational corporations in two major ways: They are primarily about legalizing terms and conditions for US multinational corporate and banking penetration of other economies on favorable terms. Free trade deals also serve as a multinational corporation cost cutting aid, as corporations are able to bring back their goods and services and not pay the tariff (tax) to re-import back to the US. For example, 49% of the US’s more than $500 billion a year in goods trade deficit with China involves goods made by US corporations in China.

4. Destruction of Former Social Democratic Parties and Movements

Everywhere globally we see the collapse of social democratic parties that once dominated government. This has been true even in the ‘heartland’ of social democracy, in Europe, but also in USA, in South America, Israel, and select economies in Asia where ‘weak forms’ of social democracy previously participated. The rise of right wing ‘populism’ should be viewed as a direct result of the political vacuum created by the demise of social democracy. It is the consequence. So why have they declined? And how has this decline fueled the global integration, financial restructuring, restructuring of labor markets, the financial investing shift, and the accelerating income and wealth inequality? Those are key questions that remain largely unanswered still today among the so-called ‘left’ or ‘progressive’ movements everywhere. Some likely causes of the collapse of social democracy at the political level parallels include the destruction of their political base, the unions, and their significant loss of political influence. To some extent it has been the result of strategic errors by these parties, allowing themselves to become too closely associated with the neoliberal offensive that began circa 1980. But whatever the cause, their decline has opened the floodgates to legislative and other capitalist initiatives to restructure the capitalist financial system and capitalist labor markets globally along lines noted above. Capital has never been more powerful relative to labor than it is today. That’s why, in desperation, working classes vote in mere protest of conditions without being able to propose and promote solutions in their interest.

Thus we get Brexits. Support for far right parties that promise to change the system and argue falsely the change will better the conditions of workers. That’s why we get Donald Trump. Bolsonaros and Macris in South America. Salvinis and Orbans in Europe. Dutertes in Asia. Etc. Working classes worldwide have been ‘de-organized’ both economically and politically. Into the vacuum step the far right movements, ideologues, and their parties, who take power often by default. The working classes are left with mere periodic protest votes and they vote for parties and movements that say they are going to ‘stick it to’ the capitalists that have created their declining working conditions and standard of living—even if they know little will come of that pledge.

5. Transformation of Mainstream Capitalist Political Parties

Political change has taken the form not only of the demise or rise of certain political movements and parties, but also the change in formerly ruling parties.In the US the Republican party has assumed the mantle of the far right populism. Its former challenger of the past decade, the Teaparty, has been integrated and transformed that party fundamentally.Its ideology, policy mix, and willingness to undermine democratic norms and even institutions has signified a basic change in the composition and strategy (and tactics) of the Republican party. A similar transformation to the ‘left of center’ is in the early stages with the US Democratic party.Not just in the US is this process occurring. In the UK the formerly dominant parties are in crisis and losing popular support.A ‘Brexit’ right wing populist party is emerging within the Conservative party, while the Labor party continues to lose support to nationalists and environmentalists in its ranks as well.At earlier stages a similar development is occurring in France and even Germany, where both the national front and AfD are growing support. And of course, Italy is well ahead in the rightward shift. The parties of the ‘center’ are collapsing in various stages everywhere.

These political party changes are the consequence of the intensifying income and wealth inequality, and the forces driving it associated with global capitalist economic integration, financial restructuring, and labor market restructuring.On the periphery of the political system are the demise of social democracy and rise of the populist right parties;but ‘in the middle’ as well the traditional capitalist parties are becoming fluid and experiencing internal instability.

6. Increasing Subsidization of Capital Incomes by Capitalist States

Capitalists have totally captured the direction of fiscal and monetary policy and have turned it to the benefit of their direct interests.In past periods, the primary mission of fiscal-monetary policy was to stabilize capitalist economies when recessions or goods inflation occurred. Fiscal-monetary policy was also employed in a manner that shared the benefits of such policy with working classes and other sectors. But 21st century capitalist fiscal-monetary policy (taxation, government spending, budget-national debt management, interest rates, inflation targeting, employment, etc.) has been transformed. Today the primary mission of such policy is to directly subsidize capital incomes, both in periods of economic contraction and in subsequent periods of recovery.Keeping interest rates low chronically allows constant cheap credit and the issuance of multi-trillions of dollars of corporate and household debt.Providing excess liquidity fuels financial asset market (stocks, bond, derivatives, etc.) bubbles that boom capital incomes from financial investing. Equally massive, multi-trillion dollar tax cuts for businesses, corporations and investors, bankers and shadow bankers, results in the US alone more than a $1 trillion a year annually in redistribution to shareholders from stock buybacks and dividend payouts (in 2018 rising to $1.4 trillion in US alone).Ever more funding is simultaneously provided for defense and war production.

The direct subsidization fuels the financial asset investing shift and in turn the financial asset bubbles, corporate and household excess debt, and generates the financial fragility and instability in the form of the next crisis. It also results in escalating government sector debt and rising debt servicing costs.

Thus all three major sectors of capitalist economy—business, households, government—keep loading up on debt and leverage. In the US, government debt (national and local, central bank and government agency) is well over $30 trillion. Another $20 trillion could easily be added by 2030. Corporate and business bond and loan debt may be as high as $20 trillion today.And household debt nearly $14 trillion and rising rapidly. The problem of debt is multiplied many fold across the global capitalist economy, with areas of high concentration of either corporate and/or government debt.The amount is easily more than $75 trillion. It is worth repeating, however, that the sheer magnitude of debt is not by itself the problem.The problem is when the incomes for servicing the debt cannot keep up.And that gap widens rapidly when financial asset prices, and other prices, rapidly collapse and contagion spread just as rapidly from the financial to the real economy. Price collapse, beginning with financial markets, is the critical chemical additive that makes the debt problem explode. And when that explosion takes place, the massive debt accumulation at government levels prevents traditional fiscal-monetary policy from playing an economic stabilization role. All it is then used for is to subsidize the losses incurred by owners of capital incomes.

A Digression on the Failure of Economic Theory

My view is not the typical mainstream (e.g. bourgeois) economics analysis of what causes (i.e. ‘cause’ here means distinguishing between what enables, or precipitates, or fundamentally drives) a crisis. There are different ‘forms’ of causation which mainstream economists do not distinguish between, but which I think are necessary. I would not characterize my view as a Keynesian, Schumpeter, Fisher, or even an Austrian (Von Mises-Hayek) economist view.None of these mainstream approaches to economic crisis analysis understand finance capital or how it determines, and is determined by, real (non-financial) capital. They don’t understand how financial and labor markets have both changed fundamentally since the 1980s.Their conceptual framework is deficient for explaining 21st century capitalism and its crises.Nor is my view what might be called a traditional Marxist approach. It too does not understand finance capital.It too tries to employ an even older conceptual framework, from the 19th century classical economics, to explain 21st century capital and crises.
Mainstream economics focuses only on short term business cycles and fiscal-monetary policy measures as solutions. But short term business cycle fluctuations aren’t really ‘crises’. A crisis suggests a fundamental crux or crossroad has been reached requiring basic changes in the system. Mainstream economics doesn’t even raise this as a subject of inquiry. Reality is just a sequence of short term events patched together. Or it attempts to apply business cycle analysis, and associated fiscal-monetary policy solutions, to what is a more fundamental, longer term, chronic instability condition.Consequently it fails both at predicting crises turning points and/or posing effective solutions to them. The two main trends in mainstream economics—what I call Hybrid Keynesians (which is not really Keynes) and Monetarists along with their numerous theoretical offshoots in recent decades—are both incapable of explaining longer term crises endemic in capitalism that have required the periodic restructuring of the capitalist system itself over the last century. That is, in 1908-17, 1944-53, and 1979-88.

Marxist economists have fared little better understanding or predicting 21st century capitalism. This is especially true of anglo-american Marxist economists, although the European and others outside Europe have been more open-minded. Marxist economists do consider the problem of longer term crises trends but attempt to explain it based on the conceptual economics framework of 18th-19th century classical economics, which is insufficient for analysis of 21st century capital. They assume industrial capital is dominant over finance capital, that only workers who produce real goods explains exploitation, and that finance capital and financial asset markets are ‘fictitious’. Hobson-Lenin-Hilferding and others attempted to better understand and integrate the relationship between industrial and finance capital at the turn of the 20th century.This led to an analysis of what’s sometimes called ‘Monopoly Capital’, a school of which still exists today.But subsequent capitalist restructurings of 1944-53 and 1979-1988 in particular have rendered such a view and analysis inaccurate.A century later, today in the early 21st, the relationships between finance capital and industrial capital have significantly changed from how Marx saw them in the 19th century, as well as how Hobson-Hilferding-Lenin envisioned them in the early 20th. In other words, contemporary Marxist economists don’t understand modern finance capital any better than do contemporary mainstream economists. Moreover, they still insist on employing classical economics concepts like the falling rate of profit, on productive v. unproductive labor, and explain money and banking based on 19th century financial structures.Nor do they pay much attention to the new forms of labor exploitation today or explain why the unions and social democratic political parties have declined so dramatically in the 21st century.

My critique of all these mainstream and Marxist economic ‘schools of analysis’, and their numerous spinoffs and offshoots, is contained in Part 3 of my 2016 ‘Systemic Fragility in the Global Economy’ book. That book also advances the analysis I originally began to develop in the 2010 book, ‘Epic Recession: Prelude to Global Depression’. My books published thereafter, 2017-2019, subsequent to ‘Systemic Fragility’, expand upon the key themes introduced in ‘Systemic Fragility’. Looting Greece: A New Financial Imperialism Emerges, August 2016, expands upon analysis in chapters 11, 12 in ‘Systemic Fragility’, addressing financial restructuring of late 20th century capitalism. Central Bankers at the End of Their Ropes (August 2017)expands on ‘Systemic Fragility’, chapter 14, on monetary contributions and solutions to crises.So does ‘Alexander Hamilton and the Origins of the Fed’ (March 2019), which is a prequel to ‘Central Bankers’ as a 18th-19th century historical analysis of US banking.And my forthcoming, September 2019, The Scourge of Neoliberalism book,will expand on Chapter 15 in ‘Systemic Fragility’ addressing fiscal policy, deficits and debt.

So all my work is an attempt at a more integrated analysis of 21st century capitalist economy, its contradictions, its increasing financial—and thus general economic—instability, the profound changing relations between finance and industrial capital, its fundamental changes in production processes and both product and labor markets, the increasing failure of traditional fiscal-monetary policies to stabilize the system, and the growing likelihood of a crisis coming within the next five years, or even earlier, that could prove far more intractable and deeper than even that of the 1920s-1930s.

The Three Restructurings of US & Global Capitalism, 1909-2019

Thus far, American capital, the dominant and hegemonic form of global capital over the last century, has restructured itself successful on three occasions: the first in the period just prior to world war I (1909 -1918) and during that war, as US capital ascended in the 1920s as a global player more or less equal to British capital. British capital in this period was eclipsed as hegemonic and had to share hegemony with American capital. In the wake of the second world war British capital was displaced by American as hegemonic, starting 1944 with the Bretton Woods international monetary system created by US capitalists, for US capital, in the interests of US capital.That second restructuring (1944-1953) began to break down in the early 1970s as global capitalist stagnation set in once again. That 1970s decade witnessed a general crisis of global capitalism, especially in the US and throughout the British empire (or what was left of it). But elsewhere among advanced capitalist economies in Europe and Japan as well.

A third restructuring was launched in the late 1970s by Thatcher and Reagan.This is sometimes called ‘Neoliberalism’ (a term I don’t like but use since it is generally accepted but is somewhat ideological). The third, Neoliberal restructuring re-stabilize US and global capital and expanded US capital, from roughly 1979 to 2008. It underwent a crisis with the Great Financial-Economic crash of 2008-09 in the US, and subsequent European and Japan multiple recessions and general stagnation that followed 2010 in the ‘advanced capitalist economic periphery’ of Europe-Japan which is now the weak link of global capitalism. Trump’s regime should be understood as an attempt to restore and resurrect neoliberalism—as both a restructuring and a new policy mix—albeit in a more violent, aggressive and nasty form of neoliberalism (2.0? perhaps).

I do not believe Trump will be successful in the longer term with this restoration. He’s had definite success with tax restructuring favoring capital, but is still contending with restoring monetary system to neoliberal principles (i.e. free money/low rates/low dollar value),and is in the midst of a major conflict and resistance to restore US hegemony in international trade and money affairs, in particular from China. Should Trump fail in restoring a harsher, more aggressive Neoliberalism 2.0, it will almost certainly mean a ‘fourth’ major capitalist restructuring will follow in the 2020s. That fourth restructuring will be even more exploitive and oppressive than Neoliberalism, especially for working classes as well as for US capitalist competitors in the advanced capitalist economic periphery and emerging market economies.

My Basic Thesis On Capitalist Crises

Is that capitalism experiences periodic crises every few decades (not ‘business cycles’ that may occur in between the crises but are not crises per se) and it must, and does, restructure itself periodically in order to survive.It creates multiple imbalances within itself whenever its shorter term fiscal-monetary policy solutions no longer are able to re-stabilize a system that grows increasingly unstable over time—i.e. a system which inherently and endogenously tends toward crisis periodically. Each restructuring, however, proves to have limits. Its effect at resurrecting capitalism inevitably dissipates over time, typically 2-3 decades.As a consequence of periodic restructurings, stability and growth is restored for a couple decades, but the fundamental contradictions that lead to renewed crisis arise and intensify once again during the periods of apparent growth and stability. Thus even basic economic restructurings as solution are temporary. Think of fiscal-monetary policy as solutions for only the very short term in the case of business cycles that are due to policy errors or other non-financial forces that cause ‘normal’ recessions. Think of periodic restructurings as producing solutions for the medium term (2-3 decades).But the capitalist system’s longer term crisis is that even periodic restructurings don’t prevent the inevitable crises from reappearing.

Mohsen Abdelmoumen:

You are a brilliant economist and a prolific author. Unlike most economists linked to the establishment who see nothing, you keep warning with very solid arguments and careful work that we are heading for another cycle of crises more serious than the previous ones. Is the capitalist system reformable or should we not seek an alternative as soon as possible?

Jack Rasmus:

It depends what you mean by ‘reforms’.There are obviously minor reforms that, while important for protecting average folks income, their standard of living, protecting their basic rights and civil liberties, etc., don’t challenge or stop the fundamental drift of US and global capitalism, including its growing tendency toward crises that I noted above. These should be distinguished from structural ‘reforms’ that do attempt to fundamentally change the direction of 21st century global capitalism. These fundamental reforms are, of course, strongly resisted by capitalists and their political representatives. What then are these transformable ‘reforms’?

They would be changes that halt and roll back the financialization and the multiple forces now accelerating income and wealth economy, with emphasis on ‘roll back’ here.They would reverse the changes in the labor markets of recent decades, by prohibiting for example the excess hiring of part time, temp and otherwise ‘contingent’ labor. They would restore an even field for the recovery of unions and collective bargaining. They would democratize the central banks and give them a new mission to serve not only the banks but the rest of society; central banks would become part of a broader public banking system and their decisions made by elected representatives accountable to all of society (my recent book provides proposals of legislation that would do this). The tax shift of recent decades that gave ever more income to businesses, investors and wealthy 1% would be reversed, perhaps via a financial transaction tax system and would make tax fraud and offshore tax sheltering a criminal offense with guaranteed jail time. And of course the massive $ trillion a year war budget would be significantly reduced by fundamental reforms. All these fundamental reforms challenge the trajectory and dynamics of 21st century capitalism. Capitalists and politicians would vigorously resist them. In that sense the system is not ‘reformable’. Minor reforms are sometimes allowed, and concessions granted especially in times of system crisis. But both kinds of reforms should be aggressively pursued.

There are four great challenges confronting 21st century US dominated global capitalism. It is questionable whether the system can overcome them. If it can’t it will be perceived by the general, non-capitalist populace that it is failing and no long can deliver on improving standards of living or even maintaining past levels of living standards. If that occurs, it’s a game changer. Here are the four great challenges it faces:

1. Will Capitalism be able to resolve the crisis of climate change in the next two decades.

If it can’t do that, the economic negative impacts of climate change by 2040 will have reached such a level that they will become economically unresolvable.The system will be appropriately blamed for not resolving the problem. It remains to be seen if the private profit and capital expansion system of capitalism can co-exist with the climate crisis. Can profits be maintained and the climate crisis simultaneously resolved? We shall see, but I’m not optimistic the two can coexist.

2. Can the system control the coming huge negative impacts of technological change?

We’ve seen how technology has transformed financial and labor markets, to the great detriment of 80%-90% of the working classes. It has spawned new business models like Amazon, Uber, and others that have devastated jobs and wage incomes.In the US more than 50 million are already ‘contingent’ labor of some kind (in Europe and Japan even more) and it’s just the beginning. The real crisis will begin when next decade the technological effects of Artificial Intelligence and machine learning software have an even greater impact. A recent Mckinsey Consultant study predicts a minimum of 30% of all occupations and jobs will be replaced or reduced. How are these people going to earn a decent living, start families, afford housing, etc.? Some say a Guaranteed Basic Income will have to be the answer. I don’t see capitalists going along with that.It’s a ‘structural reform’ they’ll resist tooth and nail. What are the economic and political consequences of AI (note: Artificial Intelligence) if they allow it to happen and drive down living standards for hundreds of millions of workers worldwide? Here again I don’t see the capitalist system, as it pursues profits via AI, being able or willing to soften its massive negative effects on jobs, income and living standards.

3. Will They do anything about accelerating Income Inequality?

Capitalists and politicians talk about this but so far put forward no solutions to it.And the realization of ‘them vs. us’ is beginning to deepen in the consciousness of more workers. That resentment is fueling the right wing populism globally. It is also making the young workers, the millennials and next ‘generation Z’ coming, to turn against the system in droves. Polls in the US show a majority of under 30 year olds now reject the capitalist system as it is and prefer some kind of ‘socialism’. We shouldn’t make too much of this yet, but ‘socialism’ means to them ‘none of the above’ currently.

4. Can capitalists ‘manage’ the radical right populist surge underway?

They think they can but are losing in that effort thus far. They thought they could control Trump, but he is transforming the Republican party by driving out traditional capitalist representative from it and from their initial placement in his administration.He is terrorizing the opposition from within. It’s not unlike what’s going on elsewhere in Europe and South Asia countries where authoritarian right ideologues like Trump and his neocons are slowing changing the political rules of the game in their favor, at the expense of the traditionalists, sometimes called ‘globalists’. But it’s really about an internal internecine intra-capitalist class fight going on the US and elsewhere.A more aggressive and violent wing views the crisis of living standards as an opportunity to assert itself, take control of the institutions of government, transform the State apparatus and bureaucracy to serve it and not the traditionalists, and govern in a more direct way, even approaching a kind of dictatorship of its wing over the formal institutions of government and state. In short, I don’t see that the capitalists have had much success so far in containing this development, this shift toward a more radical right. There are of course some historical parallels here. It’s what Hitler was able to do in the early 1930s. There are numerous disturbing historical parallels between Trump and his movement and Hitler’s early strategies. Of course, the process was accelerating in Germany as the economic and social crisis was more intense and concentrated in a shorter time frame in the 1920s there. The crisis is not as intense yet in the US and the process of Trump’s take over of the political system is more drawn out and protracted. But there are similarities to the process nonetheless. The traditionalist capitalist wing and globalists are clearly ‘losing’ in the US. And if Trump should win another term in 2020, which he might if there’s no recession in the US in the interim, then this transformation of American democracy and American political institutions and culture will then become quite obvious. Meanwhile, we see a similar rightward drift and transformation of the capitalist political systems occurring in the UK, in central Europe, maybe even France soon, in the Philippines, in India, in Brazil-Argentina, in places in Africa and elsewhere. I think the traditionalists have no idea or strategy of how to stop it.

Mohsen Abdelmoumen:

Your article ‘Financial Imperialism: The case of Venezuela’ dated last March caught my attention, as all your work that I advise our readership to read. You wrote: “Venezuela today is a classic case how US imperialism in the 21st century employs financial measures to crush a state and country that dares to break away from the US global economic empire and pursue an independent course outside the US empire’s web of entangling economic and financial relations.” In your opinion, how can Venezuela resist the US-led imperialist war against it?

Jack Rasmus:

It’s important to understand how in 21st century capitalism, where the US is clearly the hegemonic power, how the US expands, maintains, and intervenes to maintain its economic empire. If 21st century global capitalism is increasingly a financial capitalism and depends more on financial means to expand, then its imperialism is more financial than ever before. Unfortunately, the ‘left’ and progressives, including Marxists, are looking in the rear view mirror at imperialism.They still see it in the prism of 19th century, or early 20th century, in its forms. One of my projects is to analyze and explain how financial measures are used by US to maintain its economic empire. It is quite different from classical British imperialism, which collapsed fully after world war II and was replaced by the American empire. In my article, ‘Financial Imperialism: The Case of Venezuela’ I explained how some of these financial measures work, and continue to work, to destabilize Venezuela’s economy and set it up for violent political change, either from within or without via invasion of some kind that is organized and managed by the US. My 2016 book, ‘Looting Greece: A New Financial Imperialism Emerges’, looked at how it works in the Eurozone as well, with Greece a microcosm case example that has implications elsewhere.

What can Venezuela do to resist the US-led imperialist war against it is your question. First, it is essential for Venezuela to organize, mobilize and arm its base of popular support. This I think it has been doing. But I’m not sure it has a strategy how to use that mobilized base against its opponents, internal and external.I may be wrong there, since I have no way of knowing what it may be doing internally in that regard. Second, the Maduro regime must retain support of the Venezuelan military.So far it appears it is succeeding in that regard. The recent attempted uprising by the US-puppet, Gaido, failed miserably in its attempt to co-opt and ‘turn’ the military against the government. Third, its important that popular forces find a way to throw out Bolsonaro in Brazil and Macri in Argentina.Those two US-assisted governments would probably send the military forces should a military invasion occur in Venezuela. The US will use the OAS (note: Organization of American States)and their militaries as proxies. But if they’re out of the picture or preoccupied with serious problems at home, its unlikely they could be used.The people of Brazil and Argentina can thus play a role here as well. State allies of Venezuela could help significantly as well by trade and loans to help Venezuela.And by purchasing its oil and restoring its refinery production to offset US sabotage and sanctions.Notably here are China, Russia, Cuba and other South American countries not already the clients of Washington like Brazil, Argentina, and perhaps now Ecuador. Finally, within the US progressive forces can work more aggressively and coordinate better their efforts to reveal to American people what’s really going on in Venezuela, how the US neocons are intensifying the attack in preparation for invasion, what’s really behind the problems in the country’s economy, etc. There needs to be something similar to the Latin American defense movement that arose in the 1970s after the Chilean coup engineered by the US and the defense of central American progressive forces in the 1980s.

Mohsen Abdelmoumen:

How to explain why the influence of neocons in the US continues despite changes in presidents and administrations?

Jack Rasmus:

The neocons represent a particular right wing radical social and political base in America that has existed for some time. In fact, it’s always been there, going back at least to McCarthyism in the early 1950s, and even before. This is a radical ideological right, even pro- or proto-fascism base in the US. It was checked by the great depression and world war II temporarily but quickly arose again in the late 1940s with the advent of the cold war and China’s successful war for independence. It formed around Barry Goldwater in the 1960s. It arose again in the 1970s with Nixon.When Nixon was thrown out, it reorganized and set forth a plan to take over the American government and political institutions.It even developed position papers and internal proposals how this takeover might be achieved.

Ideologues like Dick Cheney, Donald Rumsfeld, and others assumed positions of power in the Reagan administration. Their movement took over the US House of Representatives in 1994 and vowed to create a dysfunctional government that would be blamed for gridlock and give their more radical proposals a hearing as to how to break the gridlock and govern again in their interests.We saw them reassert their influence when Cheney was made vice president in 2000.He was actually a co-president, and perhaps more, as George W. Bush, was the publicized president but really a playboy figurehead. Cheney and his radical right ran foreign policy, giving us Iraq and setting the entire Middle East afire in its wake.This radical right is also behind the decline of democratic and civil rights since 2000, using the 9-11 events as excuse to push their anti-democratic agenda. The Koch brothers, the Adelman and Mercer families, and scores of others are the moneybags in their ranks.They funded the teaparty movement that has since entered the Republican party, terrorized the party’s moderates and driven them out of office and the party itself. Without them, their money, their grass roots organizations, their control now of scores of states’ legislatures, their stacking of judgeships across the country, the Trump phenomenon would not have been possible in 2016. Ideologues like Steve Bannon, John Bolton, Navarro, Abrams, Miller and others are now running the Trump administration and its domestic (immigration) and foreign (trade fights, Israel, No. Korea, Venezuela, Iran) policies.

The point is they’ve always been there, a current in US politics below the radar, but since 1994 aggressively asserting itself and penetrating US institutions with increasing success—aided by media like Fox News and their analogues in radio and on the internet.

Mohsen Abdelmoumen:

Trump made promises of employment during his election campaign and was elected on the slogan “America first” by the disadvantaged classes, especially in rural areas. Isn’t Donald Trump the president of the rich in the United States? What is your assessment of Trump’s governance?

Jack Rasmus:

That assessment must first distinguish between governance in the interest of whom? It’s been a disaster for working-class America. All Trump’s promises of bringing jobs back is just a manipulation of concerns by workers of massive job losses and wage stagnation due to offshoring of US jobs and free trade. While Trump talks of bringing jobs back, he opens the floodgates to skilled foreign engineers and workers taking more jobs based on H1-B and L-1 visas, covered up by cuts to unskilled workers entering from Central America.

Trump is a free trader, just a bilateral free trader not a multilateral one. Trump’s trade offensive is about the US reasserting its hegemony in global markets and trade for another decade as the global economy weakens. It’s a phony trade war against US allies. Just look at the deals made with South Korea, the exemptions given for steel and aluminum tariffs, the go slow and go soft with Japan and Europe. Contrast that with the increasingly aggressive attack on China trade relations—which is really about the US trying to stop next generation technology development by China in AI, cyber security, and 5G wireless. These are technologies that are also the military technologies of the 2020s. The neocons and military industrial complex in the US, along with the Pentagon and key pro-military chairpersons in Congress, want to stop China’s tech development. It’s really a two country race in tech now, with almost all the patents roughly equally issued by China and the US and everyone else way behind. So the trade war has delivered nothing for the working classes except rising prices now, and even for farmers who are the losers (but they’re given direct subsidies to offset their losses, unlike working families that have to bear the brunt of the tariff effects).

Look at the tax legislation of 2018 and the deregulation actions of 2017 by Trump. Who benefited. Business got big cost cuts. The rest of us got higher taxes to offset the $4 trillion actual Trump tax cuts for business and investors and wealthy households.US multinational corps got $2 trillion of that $4 trillion. And households will have to pay $1.5 trillion in more taxes, starting this year and accelerating by 2025. In deregulation, we get the collapse of Obamacare and accelerating premiums, while the bankers got financial regulations of 2008-10 repealed. As far as political ‘governance’ is concerned, what we’ve seen under Trump is widespread voter suppression, gerrymandering by his ‘red states’ to help him get re-elected next time, the approval of two conservative judges to the US Supreme court engineered by Trump’s puppy, McConnell, in the Senate. Then there’s the now emerging attacks on immigrants, including jailing their kids, and the attacks on womens’ rights that was once considered unimaginable.

Politically Trump has been engineering a bona fide constitutional crisis. He’s appeared to have gotten away with the Mueller investigation which should have led to his impeachment but hasn’t. He continually undermines US political institutions verbally. He clearly is moving toward bypassing Congress and governing directly by ‘national emergency’ declarations, refusing to allow executive branch employees to testify to Congress despite subpoenas, ordering the launching of a new McCarthyism by ordering his Justice dept. to start investigating opponents, etc.—i.e. all of which were the basis of Nixon’s impeachment.

In short, Trump’s governance has been a disaster for working-class America, immigrants of color, small farmers and even manufacturing companies, but a boon to far right and white nationalists whom he publicly supports. It’s been especially beneficial to wealthy households, businesses and investors, moreover. And maybe that’s the most important reason why the capitalists still tolerate him and let him remain in office. If they really wanted to impeach and remove him from office they could find a way. But he’s delivering for them financially and economically. He’s ‘good for business’, in other words. But so was Hitler.

Mohsen Abdelmoumen:

You have worked on trade union issues and you have been a trade unionist yourself. In the face of the fierce neoliberal offensive, do we not have a vital need for a very strong trade union movement to defend the working class?

Jack Rasmus:

Absolutely. One of the great tragedies in recent decades is the destruction and co-optation of what’s left of that trade union movement. The destruction was planned in the 1970s and the implementation of a strategy of union destruction began in earnest under Reagan and has not ceased ever since. One of the greatest and most successful union strike waves occurred in 1969-71. Workers won wage and benefit gains of 25% in the first year of contracts at that time. First construction trades, then teamsters, then auto and steel, then longshore. Employers could not stop them. They were too well organized and remembered how still to fight from the traditions left over from the 30s and 40s. That’s when a plan was developed first to destroy the building trades. That was implemented back in the late 1970s, even before Reagan. Under Reagan the attack was directed at manufacturing and transport unions. At its core was the offshoring of their jobs and the deregulation of their industries to intensify competition to drive down wages. The beginning of the ‘contingent’ labor transformation began in the 1980s as well, then accelerated. Free trade wiped out more jobs, especially under Clinton in the 1990s. Pensions were destroyed in the private sector in the 80s and 90s. Minimum wages were allowed to lag. Healthcare costs were privatized and shifted to workers. Some workers fought back, a rear-guard action.

But the explanation for the demise of unionization in America in the private sector cannot be understood as solely the result of capitalist offensives. That was important. But so was the lack of leadership by unions at the top. They thought it would temporary, under Reagan, and they could recoup losses thereafter in membership, wages, and benefits. But it was not temporary. It continued under Democrats in the 1990s. The problem was that unions, as they weakened, turned to the Democratic Party to save them. It didn’t. As they got weaker they pleaded with Democrats even more, but the latter simply took their support for granted and did little in return. The Democrat party insisted the Unions not embarrass them by strikes, especially under Clinton. The leadership abided by the party’s request. And got weaker still, losing more members. Then came NAFTA, China, and H1-B visas giving hundreds of thousands of jobs to skilled labor coming to the US. Millions of jobs were lost after 1997 to trade. Then came tax cuts for business that subsidized the replacement of labor by capital and machinery. That devastated at least as many jobs as free trade deals. Then came the collapse of housing markets and permanent loss of millions of construction jobs. Filling the gap of jobs were more low paid service employment and more contingent part time, temp work, at lower pay and no benefits. All the while the leaders of unions pleaded with Democrats to help them. Obama promised reforms to help unions organize new members in 2008, then buried the promise once elected and having received union members’ contributions in the millions for his campaign.

The problem of declining unions is a problem of capitalist restructuring and change, of capitalist offensives to de-unionize and weaken collective bargaining. But it’s also a consequence of wrong union strategies, especially becoming more dependent on Democratic party leaders who abandoned unions once they took their campaign contributions. If unions are to resurrect themselves, and I believe they will, it will have to be an independent union movement, not depending on either wings of the corporate party of America—aka the Democrats and the Republican wings of this single, essentially capitalist party. It will probably have to assume a new kind of organizational form as well. Not organized along lines of ‘smokestacks’, for this or that industry, and not placing contracts as its key objective but forming alliances and new organizations that include allies outside of work and pursuing political-legislative objectives as equally important strategies.

Having personally lived and worked in unions when they were at their peak, and then experienced and witnessed the decline, from within and from afar, it is clear union labor will have to undergo a major organizational and strategic restructuring of its own if it is to become a force it once was. But this is not the first time historically it has undergone such a transformation and arose to resume its critical economic and political role. I’m convinced it will do it again. But only if that resurrection attempt is done independently and it breaks as an appendage of either of the wings of the corporate party of America.

Mohsen Abdelmoumen:

In your opinion, does not the working class need alternative media to defend its interests knowing that the dominant media are in the hands of a handful of capitalists? And isn’t the alternative press a bulwark against mass misinformation that serves the interests of imperialism and big capital?

Jack Rasmus:

Again, the answer is absolutely yes. I think, however, it will have to come mostly from digital communications sources which are still more ‘open’, compared to traditional TV, print, and radio sources. On the negative side, it is also becoming clear that capitalist sources are doing their best to capture the internet and regulate it to their advantage. The tech companies like Facebook, Google, etc. are, step by step, being ‘brought to heel’, as they say. They once demanded full independence of government as their business model, but that is changing as they are made the target of, and blamed for, the growing problems of violation of privacy, blackmail, money laundering, unregulated money creation (via cryptocurrencies), and foreign political manipulation (which, by the way, all countries including the USA are now engaged in). Surveillance capitalism, as it is called, will become an important element of capitalist ideology transmission and control. This augurs poorly for the future. But I don’t underestimate the potential for clever people to find a way around the surveillance. It’s not as easy for capitalist political enforcers to control the internet of things, as it has been the more centralized TV and radio transmission. It should be noted as well in closing comments that capitalist ideology, in general, has become more powerful than ever before. By ideology here I mean the manipulation of ideas and truth, the purposeful creation of misrepresentation of reality, in the service of certain political and economic interests. Technology has provided capitalist ideology an enormous weapon with which to advance its interests and its dominance. Average working folks are more confused than ever before about who their friends and allies are, and who are their real enemies. Digital technology media is a battle ground of class confrontation and class conflict in the 21st century.

Mohsen Abdelmoumen:

In the face of imperialist wars and neoliberal domination, shouldn’t peoples throughout the world unite to fight together for a better world?

Jack Rasmus:

Yes. But the question is how best to do that? As in the case of uniting to fight within a particular country, across

posted June 6, 2019
Central Banks Worldwide Rush to Cut Rates

Central banks are lowering interest rates worldwide, in anticipation of the US Federal Reserve soon to do so, as the global economy continues to weaken.

Both the IMF and World Bank have this past week cut their estimates of economic growth… again. Global oil prices continue to decline (as I predicted earlier this year after prices rose following last year’s 40% collapse). US and Europe factory orders and output are flat. Manufacturing globally is stagnating. (Watch for US jobs, a lagging indicator, likely to soon retreat as well). Emerging market economies are slipping into recession, one by one. Advanced economies like UK and Australia now beginning to contract. Bond prices worldwide are booming as bond (long term) rates fall everywhere due to weakening global economies, dragging down short term rates, as the Fed prepares to ‘catch up’ by cutting its own benchmark rate now lagging behind the real economy.

Can the Fed and other central banks boost the sagging US and global economy? Can European central banks even try–with more than $10 trillion in negative interest rates already, with trillions of dollar equivalent in non-performing bank loans(NPLs)? With trillions $ more in bad bank debt and NPLs in Japan, India and China?

Why the Fed’s official 2% inflation target is, and has always been, a phony target and number. And subsidizing capital markets and incomes always its true target. Why monetary policy and central banks are at the end of their fraying ropes and their imminent rate cutting moves will prove ineffective.

For my discussion of these and related questions about the ineffectiveness of monetary policy approaches to the economy (including the emerging popular notion of modern monetary theory–i.e. ‘QE turned on its head’–listen to my 2-part hour long interview with Radio4All on my 2017 book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’.

    GO TO: (for part 1 of the interview)

http://www.radio4all.net/index.php/program/102429

    GO TO: (for part 2 of the interview)

http://www.radio4all.net/index.php/program/102732

posted May 31, 2019
Mueller Talks…and the Tyrant Walks

Today special counsel Mueller went before the cameras and in nine minutes essentially said his report was all he had to say and he wouldn’t go before Congress, even if subpoenaed, to say anything else.

Mueller summarized his recent report in the nine minutes. Here’s what he concluded were its main points:

First, there was insufficient evidence to conclude Trump colluded to a criminal extent. Insufficient evidence. Not no evidence. Insufficient. And much of that was destroyed by Trump (erased emails). Or Mueller couldn’t get it because the Trump administration wouldn’t release it. Or key witnesses refused to testify to the Muller commission, including Donald Trump Jr. who had direct conversations with the Russians but was prevented talking to Mueller by Trump from speaking. Which raises the question: why didn’t Mueller subpoena Trump Jr.? Or even Trump himself? After all, special prosecutor Starr subpoenaed and questioned Bill Clinton in his impeachment. Why were the Trumps let off the hook by Mueller?

In short, the first conclusion was that some kind of collusion between Trump and the Russians was likely, according to the Mueller Report, but not enough evidence was provided to prove the more demanding charge of criminal intent.

Second, in contrast, the Report concluded there was an abundance of evidence that Trump obstructed the investigation. In fact, multiple times and in various ways. Take a look at the summary of evidence on Trump’s obstruction of justice in vol. 2 of the Mueller Report. It’s overwhelming.

Nixon was impeached in 1974 in large part based on his obstruction of the Watergate investigation. And if obstruction is a criminal act, why then did Mueller not also indict Trump on that evidence, as Nixon had been?

In the Nixon case, impeachment was actually based on three findings: Nixon was found to have engaged in obstruction of the investigation of the “Watergate” burglary inquiry, of misuse of law enforcement and intelligence agencies for political purposes, and of refusal to comply with the House Judiciary Committee’s subpoenas.

The Mueller report substantiates without a doubt that Trump obstructed the investigation many times and in many ways. But History here is repeating itself, as they say. Trump’s recent order to have his Justice Dept. start investigating the origins of the Mueller investigation, using law enforcement and intelligence agencies, is an act for which Nixon was also impeached. It’s using government agencies to go after political adversaries. And then there’s Trump’s recent additional order in recent weeks, that no one in his executive branch should respond to Congressional subpoenas if called on to testify before the House (which includes Mueller, by the way, who technically works for Trump as a member of the Justice Dept. Maybe that’s why Mueller stood before the cameras and won’t stand before Congress). As in the case of Nixon, refusing to cooperate with Congress in an investigation is also an impeachable act.
So Trump is not only impeachable based on his actions and events that preceded the Mueller Report release. He’s impeachable based on his repeated follow up acts since the Report. In other words, the obstruction continues.

So why is Trump not being impeached? Do you hear that Nancy Pelosi? (Not that Nancy doesn’t already know, of course). Pelosi’s excuse is that impeachment might cause the Democrats to lose the House in 2020 and the presidency. She should tell that to the Republicans who, after their failed impeachment of Bill Clinton, actually gained House seats in 2000 and won the election that year as well! So much for false historical analogies.

This leads to the third essential, and most important, point made by Mueller today in his brief appearance before the cameras: Mueller said he couldn’t indict Trump, based on the rules of the Justice Department no matter what were Trump’s criminal acts. What? Trump engages in criminal acts but is above the law simply based on a rule his own Justice Dept. created to protect presidents while in office?
Mueller apparently places his obligation to abide by a rule created by the bureaucracy above his obligation to recommend action due to obvious criminal activity! Maybe that’s the new modus operandi of the FBI, of which he is a former director.

Mueller was supposed to be the paragon of right and justice, according to the eastern elite establishment media that elevated him to a rank just short of secular saint during his investigation. He was the incorruptible, a straight shooter. So how does one explain Mueller’s decision to place bureaucratic rules above the prosecution of criminals then?

Is it because he’s always been a Republican and Republican pols always cover each other’s ass? Or maybe he just preferred to toss the hornet’s nest into the lap of Congress and retreat to the sidelines to personally avoid being engulfed by the firestorm that might result if he indicted Trump. Or maybe he just didn’t want to go ‘head to head’ with Justice Secretary, Barr, who happens to be an old buddy of Mueller. Their families have reportedly socialized together for years. Of course, I would not think of suggesting that had any effect on Mueller’s decisions in his report.

Regardless the his motive, before the cameras today Mueller made it clear he agrees with the Executive-Justice Dept. rule preventing him from indicting Trump for criminal obstruction of justice—examples of which abound in the report. That’s the real take-away from Mueller’s Report and his 9 minute historical contribution to the further demise of Democracy in America.

Just consider that carefully folks. It’s worth repeating. That interpretation, that rule, means a president can engage in any kind of criminal act. He could launch world war III on a whim. He could order the incarceration of protestors en masse. He could strangle his grandmother on the white house lawn, but nevertheless he can’t be indicted because it, the Justice Dept., issued a rule that said he can’t while in office!

You know what that is? That’s Tyranny. Which is the definition of someone in power who is ‘above the law’.

We now have a tyrant in the oval office and the Justice Dept., the highest government office responsible for upholding law and prosecuting criminals, simply says it’s not allowed. What bureaucrat assumed the authority to make that rule?

Barr and Mueller agree that the Justice Dept. rules preventing indictment of a sitting president for criminal activity is based on the US Constitution. Oh Yeah. So where does the Constitution say that? I couldn’t find it anywhere in Article II of the US Constitution on the Presidency. Nor in Article I on the legislative powers of Congress. Nowhere does it say a rule created by a department of the executive branch of government negates criminal law. Or can stop an investigation of the president relevant to impeachment proceedings.

What I did find is that the Constitution doesn’t even require a criminal act to justify impeachment. (Hear that Nancy?). Criminality certainly strengthens the case for impeachment. And we have now three clear cases of criminal activity by Trump that a former crook, Richard Nixon, was impeached on: obstruction of justice, using law enforcement and intelligence agencies to investigate his political opponents, and refusing to respond to Congressional subpoenas.

So here we are in 2019. A President is above the law. Bureaucratic rules absolve criminal activity. The president continues to move toward unilateral governing by the executive branch, thumbing his nose at the legislative. Trump repeatedly violates the US Constitution by arbitrarily diverting money appropriated by Congress for specific legislation to whatever he wants. He orders investigations of his opponents—i.e. McCarthyism write large. He orders employees of the Executive branch to refuse to cooperate with Congress, including subpoenas, ignoring Congress’s Constitutional right to investigate. He repeatedly invokes phony ‘national emergency’ declarations to take unilateral action, bypassing Congress. He has publicly declared he will pardon himself if convicted. And so it goes, as the US drifts into a bona fide Constitutional Crisis not seen since the 1850s.

What’s next? Could Trump refuse to leave the White House if defeated in 2020? Don’t think that’s outrageous. It’s more than just possible.

And what would the leaders of the Democratic party do in that case, when they can’t even show enough backbone to take up their Constitutional duty to confront a criminal in the White House, who almost daily abridges their Constitutional rights and marginalizes them as a governing body.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy From Reagan to Trump’, Clarity Press, September 2019, and the recently published ‘Alexander Hamilton and the Origin of the Fed’, Lexington books, March 2019, and ‘Central Bankers at the End of Their Rope’, Clarity Press, August 2017. He blogs at jackrasmus.com, tweets at @drjackrasmus, and hosts the Alternative Visions show on the Progressive Radio Network.

posted May 13, 2019
China-US Trade War: Hiatus or Busted Deal?

This past week the US and China failed to reach agreement on a new trade deal, despite high level China representative Lie He meeting in Washington on Thursday-Friday, May 9-10.

In the wake of the meeting, Trump and his administration mouthpieces attempt to put a positive spin on the collapsed talks, while placing blame on China for the break up. The ‘spin’ at first was that China had reneged on a prior agreement and changed its terms when they arrived in Washington. China had caused the breakdown, not the US. The stock markets swooned. Trump quickly jumped in and said he got a nice letter from China president, Xi, and that it wasn’t all that bad.

But make no mistake, a trade negotiations ‘rubicon’ has been reached. The real trade war may be starting. Or, it may all be theater to make it look like both sides are acting tough and that an agreement will be reached this summer. But that scenario may now be fading. Trade wars—like hot wars—have their own dynamic. Once launched, they drive their adversaries in directions they may not have initially sought.

So who’s actually responsible for last week’s trade breakdown?

To listen to Trump and his neocons running the US foreign (and trade) policy show now, it was the Chinese. They changed the agreement at the last minute. But who really did the changes? Who set off the process? And how?

If the Chinese backtracked on some terms of the deal, it was clearly in response to the Trump-Neocon trade team initiating the backtracking. Here’s what the Trump team did:

• The US publicly declared the week before that the US would keep tariffs on even after an agreement. This violated the understanding that both sides would remove the new tariffs once an agreement was reached ($100 billion China on US; $250 billion US on China)

• Trump threatened tariffs on the remaining $300 billion of China imports

• The US signaled that China would have to not only stop technology transfer from US corporations doing business in China, but that China would have to share its tech development with the US if it wanted an agreement. That included the military-sensitive nextgen technologies like 5G, AI, and cybersecurity.

• The US demanded that China stop subsidizing its state owned enterprises (SOEs) with low interest rate loans that put US multinational corporations in an uncompetitive position in China (even as the US continued to subsidize via tax cuts, trade credits, etc.)

• The US indicated it would continue its global efforts to prevent US allies from doing business with China tech companies like Huawai, ZTE, China Mobile, etc. regardless if an agreement was reached.

If one wanted to scuttle negotiations at the last minute, this was certainly a way to do it. And as this writer has been saying for the past year, scuttling is just what the neocon China hard-liners driving the US negotiations have wanted all along. They don’t want a deal to reduce the US goods trade deficit with China, and they are willing to forego China’s significant concessions already made to the US in negotiations on US company access to China markets, if they can’t also stop China’s technology development—especially in the key nextgen technologies of AI, cybersecurity and 5G.

These are not only the new industries of the next decade, they are also the new technologies with major military implications. Should China reach parity or leapfrog the US in these areas, it could upset the US empire’s military dominance.

From the very beginning of negotiations with China, back in March 2018, the tech issue was central. Neocon, China hard-liner and head of the US negotiation team, Robert Lighthizer, issued way back in August 2017 a warning report that China’s 2025 plan aimed at surpassing the US in these three tech areas. That report promised to show that China was in fact stealing US technology from US companies in those areas. Lighthizer’s March 2018 subsequent report than allegedly proved it. The US-China trade war was then launched that month.

At first it was led by Treasury Secretary, Steve Mnuchin. He led a team to Beijing and came back indicating a deal was reached with China. As part of the deal, it was later revealed publicly, China had agreed to allow US banks and businesses a 51% or more ownership of joint venture companies in China. This was the US bankers’ main demand. China also indicated, revealed later, that it would purchase $1 trillion more of new farm, natural gas, and manufacturing goods from the US over the next five years. So much for the goods trade deficit imbalance and issue. Both concessions were major wins for Mnuchin and the US. But China refused apparently to budge on the major issue of nextgen tech. It suggested concessions, but, failing a final agreement, would not agree to US demands before hand or up front.

Over the summer in 2018 the neocon faction reasserted control over the US trade negotiating team. Mnuchin’s firing of anti-China neocon, Peter Navarro, was reversed and Lighthizer put him back on the team. Over the summer Neocons deepened their influence and control of the Trump foreign policy, as Pompeo policy took charge at the State Dept., and as notorious neocon, John Bolton, took over as main Trump foreign policy adviser. His buddies (Abrams, Miller, etc.) were given enhanced roles in the administration as well. These were the guys that gave us Iraq war in 2003 and after. And they’re on the same path again.

In the area of trade they have clearly convinced Trump that a more aggressive stance on trade negotiations will eventually produce a bigger ‘win’ for the US. They are the originators of the ‘use national security’ as an excuse to impose sanctions and use tariffs and sanctions to intimidate and force opponents (including allies) into major concessions.

We see this aggressive, high risk brinkmanship not only in trade negotiations with China. It’s behind the collapse of negotiations with North Korea on missiles and nukes. (The North Koreans offered to dismantle a number of sites if the US removed an equal number of sanctions. But the neocons refused, saying all the sites must be dismantled before the US would even consider lifting any sanctions at all. That’s a non-starter in negotiations with anyone. If effect, it says: capitulate and then we’ll think about lifting sanctions). It’s there in the imminent attack and invasion of Venezuela. The recent US failed coup there is only the beginning. It’s there in the refusal to stop supporting Saudi Arabia in Yemen. It’s there in the escalation of military threats toward Iran. It’s even there in the current threat of sanctions on Germany if it doesn’t stop buying Russian gas and buy US gas instead. It’s everywhere in US foreign policy. And it’s there in the recent blowup of negotiations on trade with China.

The neocon, anti-China hardliners—Lighthizer, Navarro, and Bolton—don’t want an agreement with China. They want a capitulation on the tech issue. They are aligned with the US Pentagon, Military Industrial Complex, Congress right wing—faction on the US trade team.
There has been in fighting on the trade team from the beginning. The neocon faction has been contending with the US bankers-big business faction that want the 51% and the deeper control in China. China has already conceded that and in fact has begun implementing it. The farm-manufacturing-natural gas faction wants more purchases of their products. China has already agreed on that as well. But since last mid-2018 the neocon faction has Trump’s ear and they are driving the policy.

That’s why the US ‘moved the goalposts’ the week before the China delegation was to come to Washington last week to finalize a deal. They announced or leaked all the backtracking US terms well before the China team was to come: the retaining of US tariffs despite an agreement, the required sharing of tech regardless of limits on tech transfer in China, the demands that China stop subsidizing its SOEs (even as the US would continue subsidizing US corporations via massive tax cuts, export-import bank, and direct payments from the US government), and so on.

China’s reply was to send its vice-chairman and head of its negotiating team, Liu He, to Washington last week nevertheless. Their reply was they would respond in kind to US tariffs with more tariffs of their own and that China would not capitulate on matters of ‘principle’ (read technology development and its 2025 plan).

So where does it go from here? Is this a bona fide breakdown or just a hiatus, with both sides posturing to look tough?

Trump advisor, Larry Kudlow, trotted out on national syndicated talk shows on Sunday, May 12, and admitted that Trump and China president Xi would not meet until June at the next G20 meeting—maybe. No doubt some discussions will continue next in Beijing in the interim. But it is now far less likely a deal will be made this year. But that’s what the US necons prefer, short of China capitulation.
The neocons have apparently convinced Trump a deeper trade war with China would be good politics domestically. The US economy is showing signs of slowing in key areas of business investment and household consumption. The trade war with China has produced a sharp decline of imports from China. Lower imports translates into higher ‘net exports’, a category in US GDP calculations that raises GDP. So less imports from tariffs means higher GDP. That could offset some of the slowing US economy in 2019-20.

The neocons believe China’s economy is also slowing and that its stock market is fragile. China cannot conduct a deeper trade war over tariffs with the US. It will eventually capitulate and agree to US demands, including tech, they no doubt argue. And Trump buys it.
But there are potential economic consequences to wars, including trade wars, that the neocons and their obsession with US imperial power do not understand or else do not want to acknowledge. Maybe they think they’ll prevail before the economic negatives occur. The negatives mean a corresponding severe contraction of US stock values as well. This now appears emerging. The negatives include a sharp rise in US consumer inflation, as the higher tariffs on China imports get passed on in the US economy. That will reduce an already fragile US consumer spending and US business investing, as costs rise for both. Both business and consumer confidence are poised for a major contraction, and the trade war may just be enough to tip the balance. And rising inflation may force a new conflict with the central bank, the Fed, as it raises interest rates again to fund an even larger US budget deficit and debt caused by the economic slowdown.

But if the worse economically happens, the neocons no doubt are whispering in Trump’s ear that he can then blame the US stock market collapse and economic recession coming on the Chinese—as well as on the Democrats. He can resurrect his extreme ‘economic nationalism’ appeals of 2016 to his base, once again claiming it’s the ‘foreigners’ and the ‘socialists’ (e.g. everyone proposing a reversal of his war spending, tax cuts for the rich, cuts to education and social programs, etc.).

These are indeed dangerous times for the US, economically and politically. As even Democrat Party leaders are now saying, a bona fide Constitutional Crisis is brewing in the US as Trump insists on governing for his 35% supporters and to hell with the rest of the country, and as he governs increasingly at the expense of Congress’ s constitutional rights.

It is also a dangerous time for the US economy, and the global economy as well. We can thank the growing influence, and disastrous policies, of the neocons who are now again firmly in control of US policy as Trump is now aligned with them on almost every policy front.

Jack Rasmus
May 13, 2019

Dr. Rasmus is author of the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, September 2019; and the just published ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019. He blogs at jackrasmus.com and hosts the radio show, ‘Alternative Visions’. His twitter handle is @drjackrasmus.

posted May 12, 2019
Condition of US Economy April 2019: GDP & Jobs

Article 1: 1st Quarter US GDP: The Facts Behind the Hype

By Jack Rasmus
April 28, 2019

US GDP for the 1st quarter 2019 in its preliminary report (2 more revisions coming) registered a surprising 3.2% annual growth rate. It was forecast by all the major US bank research departments and independent macroeconomic forecasters to come in well below 2%. Some banks forecast as low as 1.1%. So why the big difference?

One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. First preliminary issue of GDP stats are typically adjusted significantly in the second revision coming in future weeks. (The third revision, months later, often is little changed).

There are many problems with GDP accuracy reflecting the real trends and real GDP, that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3% (and $500b a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2% ‘real’ GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9%. If actual inflation were higher, which it is, the 3.2% would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the ‘rent’ that 50 million homeowners with mortgages reputedly ‘pay to themselves’.

Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2% are some red flags revealing that the 3.2% is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end next month with the conclusion of the US-China trade negotiations. How does the trade war boost GDP temporarily?

Two ways at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade dispute initially result in lower imports. In US GDP analysis, lower imports result in what’s called higher ‘net exports’ (i.e. the difference between imports and exports). Net exports contribute to GDP. The US economy could be slowing in terms of output and exports, but if imports decline faster it appears that ‘net exports’ are rising and therefore so too is GDP from trade.

Looking behind the 1st quarter numbers it is clear that the 3.2% is largely due to excessive rising business inventories and rising net exports contributions to GDP.

Net exports contributed 1.03% to the 3.2% and inventories another 0.65% to the 3.2%. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), US GDP in the quarter would have been only 1.3%. (And less if adjusted more accurately for inflation and if the 2013 phony re-definitions were also ‘backed out’). US GDP in reality probably grew around the 1.1% forecasted by the research departments of the big US banks.

This analysis is supported by the fact that around 75% of the US economy and GDP is due to business investment and household consumption typically. And both those primary sources of GDP. (the rest from government spending and ‘net exports).
Consumer spending (68% of GDP) rose only by 1.2% and thereby contributed only 0.82% of the 3.2%. That’s only one fourth of the 3.2%, when consumption typically contributed 68%!

(Durable manufactured goods collapsed by -5.3% and autos sales are in freefall). And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act).
Similarly private business investment contributed only a tepid 0.27% of the 3.2%, well below its average for GDP share.

Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined ‘intellectual property’, and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest. In the first quarter 2019, structures declined by -0.8%, housing b y -2.8% and equipment investment rose only a statistically insignificant 0.2%.

This poor contribution of business investment contributing only 2.7% to GDP, when the historical average is about 8-10% normally, is all the more interesting given that Trump projected a 30% boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7% is a long way off 30%! The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors). And they compressed household consumer spending to boot.

Sine Trump’s tax cuts there’s been virtually no increase in the rate of Gross private domestic investment in the US. It’s held steady at around 5% of GDP on average since mid-2017. Within that 5%, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising.

In short, both Consumer spending and core business investment contributions to US GDP have been slowing, and that’s true within the 3.2% GDP. First quarter GDP rose 3.2% due to the short term, and temporary contributions to inventories and net exports–both driven artificially by Trump’s trade wars.

The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1% in 1st quarter GDP. (Conversely, nondefense spending was reduced -5.9% in the first quarter GDP).

Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken.

Trump is betting on his 2020 re-election and preventing the next recession now knocking at the US and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end.

Meanwhile, beneath the surface of the US economy the major categories of US GDP–business structures, housing, business equipment, and household consumer spending (especially on durables and autos)–will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.

Bottom line, however, the 3.2% GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.

Jack is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump’, Clarity Press, Summer 2019, and ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019. He blogs at jackrasmus.com, tweets at @drjackrasmus, and hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network on Fridays, 2pm eastern time.

(For those interested in a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).
GO TO:
http://prn.fm/alternative-visions-us-gdp-latest-release-preview-new-book-scourge-neoliberalism/
OR GO TO:
http://alternativevisions.podbean.com

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Article 2: How Accurate Are US Jobs Numbers?

May 6, 2019

The just released report on April jobs on first appearance, heavily reported by the media, shows a record low 3.6% unemployment rate and another month of 263,000 new jobs created. But there are two official US Labor dept. jobs reports, and the second shows a jobs market much weaker than the selective, ‘cherry picked’ indicators on unemployment and jobs creation noted above that are typically featured by the press.

Problems with the April Jobs Report

While the Current Establishment Survey (CES) Report (covering large businesses) shows 263,000 jobs created last month, the Current Population Survey (CPS) second Labor Dept. report (that covers smaller businesses) shows 155,000 of these jobs were involuntary part time. This high proportion (155,000 of 263,000) suggests the job creation number is likely second and third jobs being created. Nor does it reflect actual new workers being newly employed. The number is for new jobs, not newly employed workers. Moreover, it’s mostly part time and temp or low paid jobs, likely workers taking on second and third jobs.

Even more contradictory, the second CPS report shows that full time work jobs actually declined last month by 191,000. (And the month before, March, by an even more 228,000 full time jobs decline).

The much hyped 3.6% unemployment (U-3) rate for April refers only to full time jobs (35 hrs. or more worked in a week). And these jobs are declining by 191,000 while part time jobs are growing by 155,000. So which report is accurate? How can full time jobs be declining by 191,000, while the U-3 unemployment rate (covering full time only) is falling? The answer: full time jobs disappearing result in an unemployment rate for full time (U-3)jobs falling. A small number of full time jobs as a share of the total labor force appears as a fall in the unemployment rate for full time workers. Looked at another way, employers may be converting full time to part time and temp work, as 191,000 full time jobs disappear and 155,000 part time jobs increase.

And there’s a further problem with the part time jobs being created: It also appears that the 155,000 part time jobs created last month may be heavily weighted with the government hiring part timers to start the work on the 2020 census–typically hiring of which starts in April of the preceding year of the census. (Check out the Labor Dept. numbers preceding the prior 2010 census, for April 2009, for the same development a decade ago).

Another partial explanation is that the 155,000 part time job gains last month (and in prior months in 2019) reflect tens of thousands of workers a month who are being forced onto the labor market now every month, as a result of US courts recent decisions now forcing workers who were formerly receiving social security disability benefits (1 million more since 2010) back into the labor market.
The April selective numbers of 263,000 jobs and 3.6% unemployment rate is further questionable by yet another statistic by the Labor Dept.: It is contradicted by a surge of 646,000 in April in the category, ‘Not in the Labor Force’, reported each month. That 646,000 suggests large numbers of workers are dropping out of the labor force (a technicality that actually also lowers the U-3 unemployment rate). ‘Not in the Labor Force’ for March, the previous month Report, revealed an increase of an additional 350,000 added to ‘Not in the Labor Force’ totals. In other words, a million–or at least a large percentage of a million–workers have left the labor force. This too is not an indication of a strong labor market and contradicts the 263,000 and U-3 3.6% unemployment rate.

Bottom line, the U-3 unemployment rate is basically a worthless indicator of the condition of the US jobs market; and the 263,000 CES (Establishment Survey) jobs is contradicted by the Labor Dept’s second CPS survey (Population Survey).

GDP & Rising Wages Revisited

In two previous shows, the limits and contradictions (and thus a deeper explanations) of US government GDP and wage statistics were featured: See the immediate April 26, 2019 Alternative Visions show on preliminary US GDP numbers for the 1st quarter 2019, where it was shown how the Trump trade war with China, soon coming to an end, is largely behind the GDP latest numbers; and that the more fundamental forces underlying the US economy involving household consumption and real business investment are actually slowing and stagnating. Or listen to my prior radio show earlier this year where media claims that US wages are now rising is debunked as well.
Claims of wages rising are similarly misrepresented when a deeper analysis shows the proclaimed wage gains are, once again, skewed to the high end of the wage structure and reflect wages for salaried managers and high end professionals by estimating ‘averages’ and limiting data analysis to full time workers once again; not covering wages for part time and temp workers; not counting collapse of deferred and social wages (pension and social security payments); and underestimating inflation so that real wages appear larger than otherwise. Independent sources estimate more than half of all US workers received no wage increase whatsoever in 2018–suggesting once again the gains are being driven by the top 10% and assumptions of averages that distort the actual wage gains that are much more modest, if at all.

Ditto for GDP analysis and inflation underestimation using the special price index for GDP (the GDP deflator), and the various re-definitions of GDP categories made in recent years and questionable on-going GDP assumptions, such as including in GDP calculation the questionable inclusion of 50 million homeowners supposedly paying themselves a ‘rent equivalent’.

A more accurate ‘truth’ about jobs, wages, and GDP stats is found in the ‘fine print’ of definitions and understanding the weak statistical methodologies that change the raw economic data on wages, jobs, and economic output (GDP) into acceptable numbers for media promotion.

Whether jobs, wages or GDP stats, the message here is that official US economic stats, especially labor market stats, should be read critically and not taken for face value, especially when hyped by the media and press. The media pumps selective indicators that make the economy appear better than it actually is. Labor Dept. methods and data used today have not caught up with the various fundamental changes in the labor markets, and are therefore increasingly suspect. It is not a question of outright falsification of stats. It’s about failure to evolve data and methodologies to reflect the real changes in the economy.

Government stats are as much an ‘art’ (of obfuscation) as they are a science. They produce often contradictory indication of the true state of the economy, jobs and wages. Readers need to look at the ‘whole picture’, not just the convenient, selective media reported data like Establishment survey job creation and U-3 unemployment rates.

When so doing, the bigger picture is an US economy being held up by temporary factors (trade war) soon to dissipate; jobs creation driven by part time work as full time jobs continue structurally to disappear; and wages that are being driven by certain industries (tech, etc.), high end employment (managers, professionals), occasional low end minimum wage hikes in select geographies, and broad categories of ‘wages’ ignored.

Jack Rasmus is author of the forthcoming book, ‘The Scourge of Neoliberalism: US Policy From Reagan to Trump’, Clarity Press, September 2019, and previously published ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017 and ‘Alexander Hamilton and the Origin of the Fed’, Lexington Books, March 2019. He hosts the Alternative Visions Radio show on the Progressive Radio Network and blogs at jackrasmus.com. His twitter handle is @drjackrasmus.

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Article 3: What Government Job Stats Are Inaccurate: Reply to Doug Henwood’s Apology for Government Stats

May 7, 2019

In his reply to my just published article, “What’s Wrong with Government Job Statistics,” Doug Henwood, a ‘left’ New York intellectual who has for years accepted without question government reported stats as ‘gospel truth’, has taken the opportunity to challenge my analysis.

The nub of our differences is that Henwood accepts government Labor Dept. definitions, assumptions, and methodologies as near sacrosanct, whereas I do not. And when I challenge them, he engages in nasty personal attacks to carry his critique. I’ll not engage in that kind of exchange, but will address his various points here as follows.

For Henwood doesn’t like my most recent view that government job stats reported may not reflect a labor market as sanguine and booming, as official government and business commentary suggest. And he apparently doesn’t appreciate anyone challenging his friends over at the Labor Dept.

So let’s take a look at our latest disagreement.

In his blog today, May 6, he starts out with his first lightweight critique that in my article I refer to the two labor department jobs surveys, the CES and CPS, as two reports instead of two surveys; there being only one report, the Labor Dept.’s monthly ‘Employment Situation Report’.

Yes, there’s one umbrella ‘Situation’ report but the CES and CPS are really separate reports that are then combined but kept separate in the single ‘Situation’ report. They are indicated as ‘Tables A’ and ‘Tables B’ in the ‘Situation’ Report. This is just a semantic difference as to what’s a report and what’s a survey. But if Doug thinks that’s significant, OK. He can have that one.

What is significant is that Henwood thinks the CES (Current Employment Survey) is more important and accurate than the CPS (Current Population Survey). But the CES is not really a survey; it’s a partial census and thus a statistical population that gathers data from, as Henwood admits, 142,000 establishments. As a group the 142,000 send in their data to the government every month. But because, according to Henwood, the CES 142,000 compares to the CPS ‘only’ 60,000 monthly interviews of households (actually 110,000 individuals interviewed), he argues “the CES is much larger (than the CPS)…it’s far more accurate”.

But the CPS is not just a “household survey”; it is also a survey of employment conditions of millions of smaller businesses through the survey of worker households. In fact, it can be argued that, in surveying 110,000 individuals each month, and then rotating and adding more households throughout the year, (roughly doubling the number contacted) the CPS in fact reflects a much larger body of business hiring, layoffs, and thus total employment, than does the CES.

Henwood further argues that the CES 142,000 is more accurate because it is checked against the unemployment insurance system. But unemployment insurance has nothing to do with the numbers of employed or unemployed. And checking it is done to determine, among other things, if the 142,000 are not cheating the system by underpaying unemployment payroll taxes. Contrary to Henwood’s point referencing it, saying the CES is checked against unemployment insurance rolls adds nothing to the idea that the CES misses coverage—i.e. job creation or decline—for 9 million small and medium businesses.

Henwood is confused about the CES and CPS in another important way. There are more than 9 million businesses in the US economy. The 60,000/110,000 CPS survey is a statistically significant survey of employment in those 9 million. The comparison therefore should be 142,000 businesses vs. 9 million businesses. Henwood thus erroneously compares a population (CES 142,000) to a sample (60,000), when the comparison should be a business population (CES 142,000) to a business population (CPS 9 million businesses).

In short, it makes little sense to argue as Henwood does that 142,000 is more accurate than 9 million based on number of businesses compared. If it’s just a question of the size of total businesses addressed, the CPS makes more sense. But comparing size to size makes little sense as well. The two sources look at different things. My point is don’t defend one at the exclusion of the other. Look to both for a more comprehensive view of the condition of the labor market. And the CPS suggests perhaps the 263,000 jobs may not be all that accurate.

But Henwood would have readers believe the CES, with 142,000 businesses, and the 263,000 jobs created last month in that group, is all that matters. Forget the other roughly 9 million businesses where, as even most economists admit, most of the job creation in the US occurs (or does not). Like the business press and government politicians, to believe Henwood we should take the 263,000 as the final word of the state of the US job market and forget all the rest.

For years I’ve been arguing there is a problem with government job stats that rely on two different, often conflicting populations to determine employment/unemployment: the job gains (or losses) and unemployment rate should be calculated from the same survey, but aren’t. Instead we get jobs created by large businesses (CES) and unemployment from the 9 million population of all businesses. This problem leads to often conflicting data reported by the two sources, CES and CPS.

This problem gives us the 263,000 jobs created in the CES from a survey of larger businesses, while it gives us the 191,000 full time jobs decline in the CPS, and in the preceding month, an even larger 228,000 full time jobs decline, from the CPS survey of the 9 million businesses. Which is correct? How does Henwood choose to explain this? By simply claiming the reported 191,000 full time job loss in the CPS in April is just normal short term volatility—which, by the way, is the typical government excuse one hears whenever there’s a contradiction in the numbers.

Henwood further assumes the role of slavish apologist of government stats by defending the U-3 unemployment rate as the best and final word on the state of the US labor market. He does refer to the U-6 unemployment rate, but unquestionably accepts the government’s current (and chronic) low estimates for the U-6.

The U-6 picks up ‘involuntary part time’ employment. (U-4 and U-5 reflect what’s called ‘marginally attached’ and ‘discouraged’. These latter numbers too are grossly underestimated in the official stats). Henwood disputes my claim that the U-3 is essentially an estimate of ‘full time’ jobs and says “No, it refers to work of any kind, not just full-time”. But if that were true, why add on ‘part time’ as the U-6 category separately? If there were part time unemployed in the U-3 and part time in the U-6 there would be likely ‘double counting’ of part time unemployed. No, U-3 is mostly full time and excludes all involuntary part time. Either that or there is indeed double counting. Maybe he means the U-3 includes voluntary part time. Even if so, however, the overwhelming number of the 162.5 million in the labor force is still full time jobs.

But this does not in any way contradict the anomaly of the CES reporting April’s 263,000 (mostly full time) jobs gain, while the CPS reports 191,000 (and 228,000 in March) full time jobs declines. And if the CPS reports 155,000 part time job creation, should it not mean that only 108,000 full time jobs were created in the CES report? How do you square the 108,000 full time jobs created in the CES with the 191,000 full time jobs lost in the CPS, Doug? What’s your explanation?

And if you say this contradiction is just a short term statistical volatility problem, how then do we know if the 263,000 is also not just a short term inaccurate statistically volatile (and inaccurate) number?

Given the CPS number showing full time job decline (191,000), and the otherwise CPS rise in part time jobs last month (155,000), in my prior article I suspected that there are more workers taking on second and third jobs. Henwood pooh poohs this and trusts the government numbers on ‘multiple job holders’ showing little change. Once again, trust the government numbers!

Official government stats show multiple job holders as of December 2018 at 7.7 million. Comparing that to December 2006, the last full year before the great recession,the number was 7.9 million. Does anyone out there really believe this number? That folks working part time second and third jobs has actually declined, given all the low paid service jobs, part time work, temp work, Uber, Taskrabbit, gig economy jobs created since the great recession, now accelerating? Doug does. Government bureaucrats can do no wrong and always report the facts.

Henwood provides charts that show that Temp jobs (almost always part time) have not been changing for at least the past two decades. As he says, temp jobs have been steady as a percent of the total work force for the past two decades, peaking at 2% of total jobs. “It’s barely changed for five years.” Sure, Doug. No one’s been hiring attempts except through agencies. That’s all the government data you slavishly offer as a rebuttle show. If you were more ‘skilled and knowledgeable’ (an insult you direct to me) you would know the Labor Dept. data you cite refers only to Temp Agency hiring. I suggest you try talking to your local auto worker and ask him how many temps have been hired since 2009. It’s about at least a third of the auto work force today. It’s the same throughout manufacturing, and other sectors as well. But trust the government stats, Doug. They’re always right and never misleading or wrong.

The Labor Dept. has been covering up the growth of temp jobs since the 1990s. It produced three one-off reports, then George Bush stopped it. Too volatile. (There’s that word). Henwood says “It’s nowhere big a deal as Rasmus would have you believe”. The basis for his comment is, of course, you guessed it: the government’s data and reports.

How the government purposely underestimates labor stats that are embarrassing to it was clearly revealed, yet again, last year in its report on ‘precarious jobs’ (meaning temp, part time, gig, otherwise contingent, etc.). I and others have dissected that official report which claimed the gig economy was insignificant. But it turned out what the report defined as ‘gig’ was only full time uber/lyft drivers. Drivers as second and third jobbers were left out. There are many ways to lie. One is to simply redefine it away. Another to quietly omit data and facts. Another to insert false data and facts. Another to change the causal relation between facts and propositions. And more.

As far as my suggestion that the April jobs numbers may reflect hiring of census workers, it is true the government to date has not indicated how many hired. I simply suggested it may explain some of the 155,000 part time job gains in the CPS report. My suggestion was based on past practice by the government during census years. By April 2009 the government had hired 154,000 for census work. By April 1999, it had hired 181,000. If the hiring is really negligible to date in government reports, either Trump is not planning to do the census properly (another of his violations of the US Constitution), or the hiring is in fact underway but not yet reported, or, if not, excess hiring will soon have to occur. Trump likely wants to create chaos in the census, which suits his political purposes. Again, my point here was only a suggestion that census workers were part of the hiring, not a claim they were.

Henwood does give a backhanded concession to me that maybe my point of the 646,000 ‘Not in the Labor Force’ reported number indicates something is going on with the government data underestimating the total actually unemployed by having left the labor force in recent years. But he just can’t let himself admit it. It would not be in keeping with his personalized attack style or nasty comments that pepper his critique.

My point concerning the ‘Not in the Labor Force’ numbers (646,000 rise last month) is that it likely corroborates that more workers are long term dropping out of the labor force because they can’t find decent full time jobs and the part time jobs pay less and less in real terms (requiring taking on second and third jobs?). Once again, he gives a backhanded comment that a point is made but says ‘the bigger point eludes me’(Rasmus).

Really? I’ve only been writing about the collapsing labor force participation rate and how it’s not being properly picked up in jobs numbers since 2005 and especially since 2013. A drop in the labor force participation rate from 67.3% of the total labor force in December 2000 to the latest participation rate of 62.8% represents more than 7 million workers either leaving or not entering the labor force. And if they’re not counted in the labor force, that reduces unemployment rates.

They should be added to the ‘unemployment’ rolls. They’re not working. The labor force today should be 170 million not 162.5 million. Maybe they’re not working because they can’t afford to live on the part time, temp, contingent jobs that have been steadily replacing full time jobs that have been stagnant or declining, while part time/temp/gig has been accelerating? But given his commitment to government stats, Henwood could never agree to that interpretation, could he?

Here’s another difference on the veracity of government labor stats he and I have. In 2006 the labor force was approximately 152 million. It has grown by roughly 10 million–not including the dropping out of 7.3 million represented by the falling labor force participation rate. Henwood accepts as accurate the Labor Dept’s estimate of discouraged workers (U-5) as accurate. In November 2007 just prior to the great recession the discouraged workers category represented only .2 of 1% of the labor force. Given the 10 million increase in the labor force since then, it is today still .2 of 1%. Can it be true that the percentage of discouraged workers has not risen at all in the intervening years–given the impact of the great recession, lagging economic recovery for years, and the fact of 7 million have dropped out of the labor force? It makes no sense that there should not be a corresponding increase in the percent of discouraged workers given the changed conditions of the last decade. The government data must be underestimating the discouraged worker category of unemployed (defined as out of work but having given up looking for the past year).

Yet Henwood once again sees no problem here at all with this category of U-4, discouraged worker unemployment. All he can do is defend his buddies at the Labor Dept. and agree with their stats. Accept all their assumptions, definitions, and methodologies as absolutely correct. Reproduce all their graphs based on those definitions, assumptions and methodologies. And then use them as evidence to attack my alternative interpretations of the data.

Doug, you should spend less time performing his task of defender of government data and stats that Americans know increasingly contradict the reality they face.

You can show all the graphs you want. But they’re graphs based on data (and the definitions, assumptions and methods behind the data) that are sometimes erroneous. And while not all government data is incorrect or inaccurate, to slavishly defend it as you do is a gross disservice to the truth. You defend your positions by employing the very government data that I am arguing is not always truthful. It may be factual, but facts are selective and not necessarily truthful.

You can attack me personally all you like, Doug, but your attack shows one irrefutable conclusion: You believe unconditionally in the government’s data instead of challenging it when called for. In that regard you are an apologist and, when it comes to government data, you are clearly in the camp of the bureaucrats and other government conscious mis-representers of the truth. Misrepresentation by clever statistical manipulation, by omission of facts and alternative interpretations, and by obfuscation based on methodologies that are intended to conceal rather than reveal—-all of which you defend.

You help them maintain the fiction that the economy is doing great, that jobs are plentiful and well-paid, and we’re all better off than we think. That makes you an ideologist, not an economist. I think you’d be great writing editorials for the Wall St. Journal. Given your style and content, you really have more in common with those guys. I’ll write them on your behalf and see if they’re interested.

posted May 1, 2019
US 1st Quarter 2019 GDP: Facts Behind the Hype

Last week’s US GDP for the 1st quarter 2019 preliminary report (2 more revisions coming) registered a surprising 3.2% annual growth rate. It was forecast by all the major US bank research departments and independent macroeconomic forecasters to come in well below 2%. Some banks forecast as low as 1.1%. So why the big difference?

One reason may be the problems with government data collection in the first quarter with the government shutdown that threw data collection into a turmoil. First preliminary issue of GDP stats are typically adjusted significantly in the second revision, coming in future weeks. (The third revision, months later, often is little changed).

There are many problems with GDP accuracy reflecting the real trends and real GDP that many economists have discussed at length elsewhere. My major critique is the redefinition in 2013 that added at least 0.3% (and $500b a year) to GDP totals by simply redefining what constituted investment. Another chronic problem is how the price index, the GDP Deflator as it’s called, grossly underestimates inflation and thus the price adjustment to get the 3.2% ‘real’ GDP figure reported. In this latest report, the Deflator estimated inflation of only 1.9%. If actual inflation were higher, which it is, the 3.2% would be much lower, which it should. There are many other problems with GDP, such as the government including in their calculation totals the ‘rent’ that 50 million homeowners with mortgages reputedly ‘pay to themselves’.

Apart from these definitional issues and data collection problems in the first quarter, underlying the 3.2% are some red flags revealing that the 3.2% is the consequence of temporary factors, like Trump’s trade war, which is about to come to an end next month with the conclusion of the US-China trade negotiations. How does the trade war boost GDP temporarily?

Two ways at least. First, it pushes corporations to build up inventories artificially to get the cost of materials and semi-finished goods before the tariffs begin to hit. Second, trade disputes initially result in lower imports while negotiations are underway. In the latest US GDP analysis reported last week, lower imports resulted in what’s called higher ‘net exports’ (i.e. the difference between imports and exports). Net exports contribute to GDP. The US economy could be slowing in terms of output and exports, but if imports decline faster it appears that ‘net exports’ are rising and therefore so too is GDP from trade.

Looking behind the 1st quarter numbers it is clear that the 3.2% is largely due to excessive rising business inventories and rising net exports contributions to GDP.

Net exports contributed 1.03% to the 3.2% and inventories another 0.65% to the 3.2%. That is, over half. Even the Wall St. Journal reported that without these temporary contributions (both will abate in future months sharply), US GDP in the quarter would have been only 1.3%. (And less if adjusted more accurately for inflation and if the 2013 phony redefinitions were also ‘backed out’).

US GDP in reality probably grew around the 1.1% forecasted by the research departments of the big US banks.

This analysis is supported by the fact that around 75% of the US economy and GDP is due to business investment and household consumption typically. And both consumption and investment are by far the primary sources of GDP. (The rest is from government spending and ‘net exports).

Consumer spending (68% of GDP) rose only by 1.2% last quarter and thereby contributed only 0.82% of the 3.2%. That’s only one fourth of the 3.2%, when consumption, given its size in the economy, should contribute 68%!

Durable manufactured goods collapsed by -5.3% and autos sales are in freefall. And all this during tax refund season which otherwise boosts spending. (Thus confirming middle class refunds due to Trump tax cuts have been sharply reduced due to Trump’s 2018 tax act).

Similarly private business investment contributed only a tepid 0.27% of the 3.2%, well below its average for GDP share.

Business investment is composed of building structures (including housing), private equipment, software and the nebulously defined ‘intellectual property’, and of course the business inventories previously mentioned. The structures and equipment categories are by far the largest categories of business investment. However, in the first quarter 2019, structures declined by -0.8%, housing by -2.8% and equipment investment rose only a statistically insignificant 0.2%.

This poor contribution of business investment contributing only 2.7% to GDP, when the long term historical average is about 8-10% normally, is all the more interesting given that Trump projected a 30% boost to GDP is his business-investor-multinational corporate heavy 2018 tax cuts were passed. 2.7% is a long way off 30%! The tax cuts for business didn’t flow into real investment, in other words. (They went instead into stock buybacks, dividend payments, and mergers and acquisitions of competitors). And they compressed household consumer spending to boot.

Since Trump’s tax cuts, there’s been virtually no increase in the rate of Gross private domestic investment in the US. It’s held steady at around 5% of GDP on average since mid-2017. Within that 5%, housing and business equipment contributions have been falling, while IP (hard to estimate) and inventories have been rising.

In short, both Consumer spending and core business investment contributions to US GDP have been slowing, and that’s true within the recent 1st quarter US 3.2% GDP.

In other words, 1st quarter GDP rose due to the short term, and temporary contributions to inventories and net exports–both driven artificially by Trump’s trade wars.

The only other major contribution to first quarter GDP is, of course, Trump war spending which rose by 4.1% in 1st quarter GDP. (Conversely, nondefense spending was reduced -5.9% in the first quarter GDP).

Going forward in 2019, no doubt war spending will continue to increase, but business inventories and household consumption will continue to weaken. Meanwhile, business investment on structures, housing, and equipment and household consumption will continue to remain weak at best.

Trump is betting on his 2020 re-election and preventing the next recession now knocking at the US and global economy door. He will keep defense spending growing by hundreds of billions of dollars. He’ll hope that concluding his trade wars will give the economy a temporary boost. And he’ll up the pressure on the Federal Reserve to cut interest rates before year end.

Summing up, beneath the surface of the US economy the major categories of US GDP–business structures, housing, business equipment, and household consumer spending (especially on durables and autos)–will continue to weaken. Whether war spending, the Fed, and trade deals can offset these more fundamental weakening forces remains to be seen.

Bottom line, therefore, the 3.2% GDP is no harbinger of a growing economy. Quite the contrary. It is artificial and due to temporary forces that are likely about to change. It all depends on further war spending, browbeating the Fed into further submission to lower rates, and what happens with the trade negotiations.

(For those interested in a further discussion of these trends, listen to my April 26, 2019 Alternative Visions Radio show).

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More articles by:Jack Rasmus

Jack Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.

posted April 1, 2019
The Capitulation of Jerome Powell & the Fed

This past week, on March 20, 2019, Federal Reserve chairman Jerome Powell announced the US central bank would not raise interest rates in 2019. The Fed’s benchmark rate, called the Fed Funds rate, is thus frozen at 2.375% for the foreseeable future–i.e. leaving the central bank virtually no room to lower rates in the event of the next recession, which is now just around the corner.

The Fed’s formal decision to freeze rates follows Powell’s prior earlier January 2019 announcement that the Fed was suspending its 2018 plan to raise rates three to four more times in 2019. That came in the wake of intense Trump and business pressure in December to get Powell and the Fed to stop raising rates. The administration had begun to panic by mid-December as financial markets appeared in freefall since October. Treasury Secretary, Steve Mnuchin, hurriedly called a dozen, still unknown influential big capitalists and bankers to his office in Washington the week before the Christmas holiday. With stock markets plunging 30% in just six weeks, junk bond markets freezing up, oil futures prices plummeting 40%, etc., it was beginning to look like 2008 all over again. Public mouthpieces for the business community in the media and business press were calling for Trump to fire Fed chair Powell and Trump on December 24 issued his strongest threat and warning to Powell to stop raising rates to stop financial markets imploding further.

In early January, in response to the growing crescendo of criticism, Powell announced the central bank would adopt a ‘wait and see’ attitude whether or not to raise rates further. The Fed’s prior announced plan, in effect during 2017-18, to raise rates 3 to 4 more times in 2019 was thus swept from the table. So much for perennial academic economist gibberish about central banks being independent! Or the Fed’s long held claim that it doesn’t change policy in response to developments in financial markets!

This week’s subsequent March 20, 2019 Fed announcement makes its unmistakenly official: no more rate hikes this year! And given the slowing US and global economies, and upcoming election cycle next year, there’s essentially no rate hikes on the horizon in 2020 as well.

Central bank interest rate policy is now essentially ‘dead in the water’, in other words, locked into a ceiling at 2.375%, which makes it now a useless tool to address the next economic downturn around the corner.

The US Economic Slowdown Has Arrived

For those who believe the business press and government ‘spin’ that the US economy is doing great, and recession is not just around the corner, consider that US retail sales have fallen sharply in recent months. In December they declined by -1.6%, the biggest since September 2009. Residential and commercial construction has been contracting throughout 2018. In January, manufacturing, led by autos, dropped by -0.9%. The manufacturing PMI indicator has hit a 21-month low. Despite Trump’s early 2018 multi-trillion dollar business-investor tax cuts, investment in plant and equipment growth by year end slowed by two thirds over the course of 2018. Recent surveys show CEO business confidence has declined the last four quarters in a row—i.e. a bad omen for future business spending on equipment and inventories. Despite Trump’s ‘trade wars’, the US trade deficit finished the year at a record $800 billion in the red. Service sector revenues rose a paltry 1.2% in the fourth quarter 2018 compared to the same period a year earlier.

And word is out that the US GDP for fourth quarter 2018 will soon be revised downward. Initially posted at 3.1%, in February it was reduced to 2.6%. Next week, in April, it will be reduced still further, to 1.8% or less, according to JP Morgan researchers. Meanwhile various bank research and other independent sources are predicting a 1st quarter 2019 US GDP of only 1.1%, and possibly even less than 1%. The economic scenario predicted by this writer a year ago is thus materializing.

Trump’s economy is clearly in trouble. And now he’s on an offensive to get the central bank not only to halt rate hikes, but to start lowering interest rates before the end of this year. And if Powell doesn’t comply, watch for the Trump and right wing to push for firing Fed chair, Powell, as well.

To head off Trump-Investor offensive against the central bank, Fed chairman Powell held an historically unprecedented public interview with the national 60-minutes TV show in early March. He attempted to placate Trump and the growing attacks. Only Fed chairman, Ben Bernanke, held a similar public interview—during the worst depths of the collapse of the US economy in 2008. Trump’s latest tactic has been to nominate Steven Moore as a Fed governor. Moore is one of those right winger economists affiliated with the Heritage think tank. He publicly called for Trump to fire Powell during the December near-panic over the US stock market’s plunge. Watch Powell and the Fed therefore drift over the course of 2019, toward not just freezing Fed rates, but lowering them as well by year end.

Monetary Policy Tools Collapsing?

The current peaking of the Fed’s rate at 2.375% compares to a Fed peak interest rate of 5.25% in 2007 just before the onset of the last recession; a 6.5% peak on the eve of the preceding recession in 2000; and the 8% peak rate just before the 1991 recession. In other words, Fed rate policy effectiveness has been deteriorating over the longer run for some time, and not just recently.

That deterioration is traceable to Fed policy since the 1980s, which has been shifting from using interest rates to stabilize the economy (low rates to stimulate economic growth/higher rates to dampen inflation) to a policy of ensuring long term low interest rates as a means for subsidizing banks, businesses and capital incomes in general.

Chronic, low rates subsidize business profits by lowering borrowing costs and, in addition, by incentivizing corporations to also issue trillions of dollars of new (low cost to them) corporate bond debt. Money capital from the record profits and the cheap debt raised are then distributed to shareholders and managers via stock buybacks and dividend payouts—which have averaged more than $1 trillion a year every year since 2010 and in 2018 alone hit a record $1.3 trillion. But the chronic, low rates are the originating source of it all, i.e. the ‘enabler’.

While Fed (low) rate policy has become a major means for subsidization of capital incomes, after each business cycle the rates cannot be restored to their pre-recession levels—leaving the Fed now with its mere 2.375% rate level as it enters the next recession. The rate level at the end of the cycle ratchets down. In other words, the Fed’s interest rate gun is reloaded with fewer bullets. It is now close to being out of ammunition.

Beyond Quantitative Easing, QE

The declining effectiveness of interest rate policy has forced the Fed, at least in part, to develop another monetary tool the past decade, so-called Quantitative Easing (QE). The introduction of QE in 2009 in the US (and earlier by the Bank of Japan which originated the idea) should be viewed in part, therefore, as a desperate attempt to create a new tool as interest rates have become increasingly ineffective at stopping or even slowing a business cycle contraction or at stimulating an economic recovery from recession. With QE the central bank goes directly to investors and buys up their bad debt by providing them virtually free money at ultra-low (0.1%) rates. QE is therefore about the Fed transferring the bad debt from investors and banks’ balance sheets directly onto the Fed’s own balance sheet. But that subsidization via debt off loading and low long term rates also reduces the effectiveness of monetary policy performing its historic role of economic stabilization—i.e. stimulating economic growth or dampening inflation.

During the period 2009 to 2016 the Fed’s QE program transferred between $4.5 trillion to $5.5 trillion from investors to its own balance sheet. And if one counts other major central banks in Europe, Japan, and China the amount of debt offloaded from bankers and investors to central banks amounted to between $20 to $25 trillion.

To prepare for the next business cycle crash and recession, the Fed and other central banks in recent years announced they would begin to ‘sell off’ their bloated balance sheet debt. The purpose was to ‘clean up’ the central bank’s balance sheet so it could absorb and transfer even more corporate-investor bad debt to itself during the next crash. (This debt sell off was called ‘Quantitative Tightening’ or QT). The Fed was first among central banks to begin the sell off, with a token $30 billion a month. Other central banks in Europe declared they too would do so but have since abandoned the pretense. The Bank of Japan with its $T to $5T debt never even pretended. So the world’s central banks remain bloated with tens of trillions of dollars equivalent in off-loaded corporate-investor debt from the last crisis of 2008-09 and face the prospect of even tens of trillions more—and possibly much more—in the next crisis.

However, Powell further announced on March 20 that the Fed will also halt, by September 2019, its QT sell off. Like interest rate policy, QE/QT policy, is also likely now ‘dead in the water’.

Can the Fed add $5T to $10T more in QE come the next crisis? (And the world’s major central banks add another $30T more in addition to their current $20T?) Perhaps, but not likely.

Doubling QE and Fed balance sheet debt is not any more likely than the Fed significantly lowering interest rates come the next crisis. Even less so for the Europeans and Japanese, whose interest rates are already less than zero—i.e. negative.

Central Banks as Capital Incomes Subsidization Vehicles

What’s becoming increasingly clear is that in the 21st century capitalist economies—the US and others—are having increasing difficulty generating profits and real investment from normal business activity. Consequently, they are turning to their Capitalist States to subsidize their ‘bottom line’. Central banks have become a major engine of such subsidization of profits and capital incomes. But that ‘subsidization function’ is in turn destroying central banks’ ability to perform their historic role to stimulate economic growth and/or dampening inflation. The latter historic functions deteriorate and decline as the new subsidization of profits and capital incomes become increasingly paramount. The historic functions and the new function of central banks as engines of capital subsidization are, in other words, mutually exclusive.

The same subsidization by the State is evident in fiscal policy, especially tax policy. Once the Fed started raising rates in late 2016 the policy shifted from monetary tools to subsidize capital in comes to fiscal tax policy as primary means of subsidization.

Since 2001 in the US alone business and investor and wealthy households have been provided by the Capitalist State with no less than $15 trillion in tax reductions. Like low rates & QE, that too has mostly found its way into stock buybacks, dividend payouts, mergers & acquisitions, etc. which have fueled in turn unprecedented financial asset market bubbles in stocks, bonds, derivatives, foreign exchange speculation, and property values since 2000. And by such transmission mechanisms, the accelerating income and wealth inequality trends in the US and elsewhere.

Business-Investor Tax Cutting as Subsidization Vehicle

While subsidization via tax cutting has been going on since Reagan, it accelerated since 2000 under Bush and continued under Obama. But it has accelerated still further under Trump. The impact of the Trump tax cuts is most evident on 2018 Fortune 500 profits. No less than 22% of the 27% rise in 2018 in Fortune 500 profits has been estimated as due to the windfall of the Trump tax cuts for businesses and corporations. The total subsidization of business-investors over the next decade due to the Trump tax cuts is no less than $4.5 trillion—offset by $1.5 trillion increase in taxes on middle class households and Trump’s phony assumptions about GDP growth that reduces the $4.5 trillion further to a fictitious $1.5 trillion negative hit to the US budget.

The subsidization via tax cutting has also generated record US budget deficits and national debt levels that have been doubling roughly every decade—from roughly $5 trillion in 2000 to $10-$11 trillion by 2010, to $22 trillion by 2019, with projections to $34-$37 trillion or more by 2030. Roughly 60% of the US budget deficits and debt are attributable to tax policy and loss of tax revenues.

Bail-Ins: Next Generation Monetary Tool?

Long touted by mainstream economists as ‘tools of stabilization and growth’, in reality both central bank monetary policy (rates, QE, etc.) and government fiscal policy (business-investor tax cuts) have been steadily morphing into means of subsidization of capital incomes. Having become so, the ability of both monetary (central bank) and fiscal policy to address the next major crisis could prove extremely disappointing.

Monetary policies of low interest rates and even QE are now ‘played out’, as they say. And with US debt at $22.5 trillion, going to $34 trillion or more by 2027, fiscal policy as means to stimulate the economy is also seriously compromised.
So what are the likely policy responses the next recession? On the monetary side, watch for what is called ‘bail ins’. The banks and investors will be bailed out next time by forcing depositors to convert their cash savings in the banks to worthless bank stock. That’s a plan in the US and UK already ‘on the books’ and awaiting implementation—a plan that has already been piloted in Europe.

On the fiscal-tax side, watch for a renewed intensive attack on social security, medicare, education, food stamps, housing support and all the rest of social programs that don’t directly boost corporate profits. The outlines are clear in Trump’s just released most recent budget, projecting $2.7 trillion in such cuts. And of course Trump & Co. will continue to propose still more tax cuts, which has already begun in a number of forms.

In other words, as both monetary and fiscal policy become increasingly ineffective in the 21st century as means to address recessions and/or restore economic growth, they are simultaneously being transformed instead into tools for subsidizing capital incomes–during, before, and after economic crises!

Jack Rasmus is author of the just published book, ‘Alexander Hamilton and the Origins of the Fed’, Lexington books, March 2019; and its sequel, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017. He blogs at jackrasmus.com, hosts the radio show, Alternative Visions, on the Progressive Radio Network. His website is htttp://kyklosproductions.com and his twitter handle is @drjackrasmus

posted March 28, 2019
Trump vs. Powell: How Independent Is the Fed?

It was just a few months ago, October 2018, that Federal Reserve Chairman, Jerome Powell, announced the Fed would continue raising its benchmark federal funds interest rate in 2019 and 2020. A next hike was due in December 2018, followed by four more in 2019, and a possible three more in 2020. That would put the fed funds rate at around 4% by the time of the 2020 November national elections.

Powell cited, as justification for the 7 to 8 more hikes, a strong US labor market with robust job creation and moderate, though rising, average wages; inflation remaining stable around the Fed’s target 2% annual rate; and indications of a continued growth in the US economy well above a 2.5% annual GDP.

If Not the Economy—What?

Fast forward just a couple months—to January 2019—following Powell’s fall announcement to stay the course on rate hikes. Somehow the entire economic scenario had reversed, justifying Powell to announce a halt in future rate hikes. The keyword Powell offered for the media was that the Fed was now adopting a policy of ‘patience’, as he called it, with regard to future rate hikes. Translated, the reference to ‘patience’ really meant no more rate hikes in the foreseeable future unless US economic data strongly recovered. But had the US economy downshifted that much since October 2018 to assume it was now so weak, in January 2019, that a halt to all future rate hikes was justified? Had the GDP, jobs, and the US economy dramatically ‘reversed course’ between October 2018 and January 2019, in just a few months, to justify Powell’s abrupt reversal of Fed policy?

Not really. US GDP growth rate, QoQ, from late October to late December 2018, had declined only 0.1%, and after December 21, 2018 up until Powell’s announcement in January the US economy was forecast to continue to continue to grow at 2.7%–i.e. a normal post-holiday seasonal softening and comfortably still above the Fed’s 2.5% GDP target. The same lack of data indicating a dramatic shift in employment or wages over the October to January period was also evident. Average hourly earnings rose 0.3% on average each month in the 3rd quarter 2018 (0.9% for the quarter). And it continued to rise at the same 0.3% per month in the 4th quarter. Employment from October through January 2019 grew on average at 241,000 jobs a month. At the same time, the Fed’s target inflation indicator, the PCE, continued to hover around 2-2.2%, suggesting no change in rates necessary in either direction.

So if the US real economy hadn’t radically shifted direction after October, i.e. had not fallen off an economic cliff in just two months, what then lay behind Powell’s mid-January 2019 decision to reverse course and abruptly halt 2019-2020 anticipated rate hikes?

One possible explanation is that President Trump’s repeated and intensifying criticism of Powell’s rate hikes resulted in the Fed chairman doing an ‘about face’ with regard to Fed interest rate policy that had been in place since 2016. But if Powell shifted policy direction in response to Trump criticism that would mean that the oft repeated claim that the Federal Reserve acts independently of the government is something of a fiction. So was Powell’s shift in response to Trump criticism? Or was it a response to something else? And if something else, what?

Central Bank Interference—From Elected Politicians?

The idea of the Fed always acts independently is somewhat a myth of conventional wisdom. The notion of central bank independence became generally accepted only around the early 1970s, when monetary policy (and the central bank) arose as the preferred policy choice compared to fiscal policy, which had been viewed as the primary policy choice before that decade. According to the notion, elected government officials were too prone to change policy to ensure their re-election, it was argued. Only appointed, long term, ‘experts’ in monetary theory and practice would not be influenced by personal gain and would decide on behalf of the economy and not their careers.

But the idea that central bankers would not be responsive to outside pressure is a fiction. Moreover, the source of outside pressure need not be limited to elected politicians. Since the emergence of the notion of central bank independence there have been several notable cases of political interference to the contrary. And who knows how many cases of private sector pressure on the Fed resulted in Fed policy shift—given the rising frequency of ‘revolving doors’ career changes between appointed Fed governors and Fed district presidents in recent decades.

The more obvious cases of political interference have been occurring since the 1970s.

President Richard Nixon sacked the standing Fed chairman, McChesny Martin, when he came into office in 1969 and replaced him with his personal friend, Arthur Burns, who proceeded to do Nixon’s bidding by lowering interest rates—despite a massive fiscal stimulus at the time—in order to help ensure Nixon a booming economy in 1972 and his re-election.

In 1979 president Jimmy Carter was pressured to replace his standing Fed chairman with a new chair, Paul Volcker. Who were the private and political forces, outside as well as inside government, who forced Volcker on Carter?

In 1985, president Reagan, together with his de facto policy vice-president, James Baker, Secretary of the Treasury and later Secretary of State, engineered the removal of Fed chair, Paul Volcker. Volcker had refused to go along with Baker’s demand to shift Fed interest rate policy more aggressively, to drive down interest rates further and more rapidly in order to boost the stock market. Volcker refused and was gone. His replacement, Alan Greenspan, who had done Reagan’s bidding as chair of his Social Security Reform commission, readily agreed to Baker’s demands upon assuming the Fed chair in 1986. That shift in Fed rate policy contributed heavily to accelerating financial speculation that followed Greenspan’s appointment.

Excess liquidity from the Fed lowered rates, which in turn played a central role in the subsequent stock market crash of 1987, the concurrent junk bond bubble at the time, and the residential housing bubble and crash that followed both.

Another case example was the relationship between president George W. Bush and Fed chairman, Alan Greenspan, during Bush’s first term in office, 2001-2004. As Bush took office in early 2001 the US economy slipped into a moderate recession following the dot.com Tech bust of 200-2001. Though moderate, the 2001 recession showed signs of faltering once again in 2002. The economy appeared to be slipping back into a second contraction after a brief recovery in late 2001 due to a quick infusion of US government spending in the aftermath of 9-11 and accelerated government spending for the invasion of Afghanistan in the fourth quarter of 2001. However, Fed interest rates were already low in 2002 by historical standards. Nevertheless, Bush met with Greenspan and the Fed lowered rates still further after 2002, to an unprecedented 1% fed funds rate. That boosted a housing market that was already long ‘in the tooth’, as they say, and had largely run through a normal cycle that began seven years earlier in 1996-97. The Fed’s further lowering of rates to 1% resulted in the housing market an artificial second wind again in 2003, boosting the US economy out of recession and setting the stage for a robust recovery in 2004 just before Bush’s re-election. Bush thereafter named Greenspan to an extended term as Fed chair. Greenspan continued on the job as chair. Bush got re-elected. But at the cost of the artificially low 1% rates driving the housing market into a bubble starting 2003 for another four years until it bust in 2006-07. Perhaps more of a ‘smoking gun’ case example, the Bush-Greenspan relation suggests the Fed bowed to Bush pressure (i.e. interference) and represents a case of a central bank acting less than independently. Certainly Greenspan must have known that stimulating the housing market so late in its cycle, with so unprecedented low 1% rates, could only have resulted in an inevitable bubble with all its consequences.

Were these examples of Presidents—Nixon, Carter, Reagan, G.W. Bush—pressuring Fed policy in order to ensure their re-election chances? In the case of Nixon. perhaps. Certainly not in the case of Carter. By appointing Volcker—who had publicly indicated he would quickly raise rates in the 1980 election year as high as necessary if he were appointed—Carter surely must have known it would seriously jeopardize his re-election prospects that year. The rapid escalation of rates in fact played an important role in the 1980 recession and Carter’s losing the election that year.

In the case of Reagan, it appears that stimulating financial asset markets were the primary motive for removing Volcker. There was no re-election on the horizon in 1985. Which raises the question: on behalf of whom and whose interests was James Baker acting by driving out Volcker and replacing him with a more compliant Greenspan? If the motivation was not political re-election, and it was clear the real economy was not in recession and in need of a low interest rate boosting, why then was Baker so determined to have rates lowered? Who would it benefit? In retrospect, the main beneficiaries were the financial markets and investors, especially those associated with junk bond financed mergers and acquisitions and the residential housing-commercial property markets.

In the case of Bush, both financial markets and re-election appear the likely motivations for the Fed policy shift. The financial sector in 2003-2007 had a lot to gain from selling securitized assets and related derivatives on subprime mortgages. Their lobbying the Bush administration, and undoubtedly Greenspan as well, was intense at the time. Lower Fed rates played a crucial role in keeping the quantity of new housing contracts rising—upon which the securitization and derivatives financial boom at the time depended. Of course, it may not have been solely financial markets motivated. Bush got his recovery—and thus economic cover to invade Iraq in 2003 and his re-election in 2004 with a strong economy and a war.

The point is that presidents don’t interfere with central bank policy only for their own personal political gains. They interfere as well on behalf of other private interests, who may also be ‘interfering’ by lobbying the Fed behind the scenes as well—or lobbying key committee members of Congress and the President to interfere on their behalf as well. It is therefore too simplistic to argue that politicians’ interference in central bank policy is always for personal political reasons, just as it is too simple to assume that private investors and bankers have no access to the Fed and never try to influence Fed policy behind the scenes.

This does not mean that private interests do so on the eve of every Fed rate policy decision before its Open Market Committee meets bi-monthly to decide on short term rate changes. The interference typically intensifies when a strategic shift in Fed policy is desired.

Central Bank Interference—From Bankers?

Reaching back further in US central banking history, the original Federal Reserve created in 1913 was essentially the economic sandbox of private sector bankers. It was structured so the Fed districts and their presidents were primarily staffed by bankers themselves, while the Washington Board of Governors was dominated by representatives of the big New York banks as well. This private banker dominated and run structure prevailed for more than two decades following the founding of the Fed.

Only when the Fed screwed up during the great depression of the 1930s, and especially by raising rates in 1932 into a rapidly collapsing US economy—which it did in order to try to protect the financial assets of bankers and investors—did the era of direct banker control of the Fed come to an end. Fed rate hikes in the midst of the depression caused an even worst contraction. Thereafter, central bank reforms were introduced under Roosevelt to bring more direct government appointed governors onto the Fed’s Washington Board of Governors. Other reforms also dampened banker influence at the district Fed. One may argue with evidence, however, that the era of direct banker-investor operation of the Fed ultimately gave way in the course of ensuing decades to a more subtle, indirect banker-investor influence over Fed strategic directions by more indirect means.

The direct dominance by banking interests over Federal Reserve day to day, tactical decision making during the Fed’s first two decades was generally considered normal and acceptable at the time. There was no notion that the Fed should be ‘independent’ of the bankers themselves.

With Roosevelt’s 1935 Fed reforms, for the next two decades at minimum the central bank was relegated to a more passive policy role. The US Treasury Secretary effectively ran monetary policy from the background. It was widely accepted from World War II and immediately beyond that the central bank, having screwed up in the early 1930s, should relinquish its independence to the government—i.e. to the US Treasury. The Fed was relegated to serving as the government’s fiscal agent and to selling bonds to pay for the US debt incurred during depression and war time. Its interest rate policy was ultimately decided by the US Treasury. It wasn’t until the 1950s that the Fed was permitted to slowly reassert a more independent and active role in monetary policy matters. And it was not until the 1960s that monetary policy itself was perceived as an activist economic tool once again. Through the 1950s and 1960s fiscal policy was still king.

The Fed gained more policy independence in the 1970s, as fiscal policy failed to stabilize the economy and, in fact, was viewed as having contributed heavily to its destabilization. It was at this time that the notion of central bank independence gained more credence. The collapse of the postwar Bretton Woods international monetary system in 1973, and the dollar-gold standard as means to stabilize currency exchange rates, provided further impetus to monetary policy as primary and thus to a greater role for central banks’ in the ‘managed float’ international monetary system that replaced Bretton Woods. With the even greater reliance on central banking and monetary policy in the post-1980 period in the US, and globally, the notion that central banks were, and should remain, independent grew concurrently.

Behind Trump’s Attack on Powell

President Trump’s recent attack on Powell and the Fed, building throughout 2018 as the Fed continued its rate hikes, and intensifying at year end 2018, is thus in the long tradition of presidential interference in Fed policy—its strategic direction if not its tactical day to day decision making.

But this still leaves open the question of ‘why presidential interference’? Is it because the president wants a robust real economy prior to a re-election? Trump’s attack on Powell and the Fed peaked the week of the Christmas holiday, well after the midterm elections. It’s unlikely therefore that political motivation lay behind Trump’s attacks. Nor could a deteriorating real economy been the motivation. As noted early, nearly all real economic indicators at the time of October-December 2018 show no collapse or even downward trend.
On the other hand, financial markets were in freefall after October 2018. US stock markets had collapsed by 30%. Oil was falling by 40%. Emerging markets’ currencies were plummeting, and as a consequence depressing US multinational corporations’ offshore profits repatriation from those economies. For the first time, virtually no high yield corporate bonds were sold.

As Trump turned up the heat on Powell in late December, it is likely that representatives of financial interests and investors in the private sector were demanding political action by Trump to halt financial asset deflation—and the massive loss of wealth and values that deflation threatened? Treasury Secretary Mnuchin did not appear panicked for no reason. It was beginning to look a little like late August 2008.

The Fed’s Dangerous Legacy: Low Rates Addiction

As this writer has written elsewhere for some time, financial markets (and the real agents behind them, the wealthy investors and their institutions) have become addicted to low interest rates since 2008. This writer has predicted that the Fed funds rate could not rise above 2.75% without precipitating a major financial markets’ negative response. The Fed has stopped at 2.5% in response to the November-December markets contraction, the worst since 2008 or 1931. Since the Fed halted its rate hikes in January, the same markets have recovered much of their loss—i.e. further evidence of the growing elasticity of stock and other asset prices to Fed interest rate cuts.

The financial crash of 2008 was set in motion, at least in part, by the excessive Fed rate hikes in 2008. Well behind the curve of real developments and events, the Bernanke Fed kept raising rates into the slowing real economy and growing financial instability. The Fed funds rate topped off at 5.25% in 2008—i.e. almost twice as high as the peak in 2018 of 2.5%. Fed rate hikes may not have been the fundamental cause of the 2008-09 crash, but can be accurately considered one of the main precipitating causes. In previous recessions and financial crises, in December 2000 and July 1990, respectively, the Fed Funds rate had peaked at 6.5% and 8%.

The longer term trend clearly means the US real economy (i.e. real asset investment) is becoming less and less responsive to interest rate change, while the financial side of the economy (i.e. financial asset investment) is becoming increasingly sensitive and responsive to rate changes. The question is why is this so? What’s behind the declining ineffectiveness of interest rates in stimulating the real economy and goods and services prices, while the rate policy is becoming more effective in stimulating the financial economy and financial asset prices? A complete answer to that critical question is not possible here, except to say it has to do with the radical structural changes that have been impacting both financial and labor markets that are being driven by increasingly rapid technological change and the very nature of capitalist economy itself.

The Financial Markets, Trump & Powell

Presidents act on behalf of financial interests when called upon. And this is probably more true in the case of Trump, himself a long time financial speculator in commercial property markets. It’s not by accident that the press often reports that Trump sees the stock market as the prime indicator of the health of the economy. Trump likely perceived the stock and financial markets steep correction of last November-December as the possible unraveling of the economy in general. He therefore probably intervened in Fed policy without the further factor of at-large financial investors, officers of investment and commercial banks, hedge fund and private equity CEOs, and others lobbying him to do so. But those sources directly lobbying Trump cannot be disregarded either. The relationship between financial sector interests and Trump is undoubtedly quite tight, given Trump’s own origins and his business investments. It has been reported that Trump often calls private business supporters and contributors for advice in critical situations. And they no doubt call him.

It is also likely that those same financial interests in late 2018 as markets were imploding were not limiting themselves to just lobbying Trump. Their deep connections with Fed district presidents and their committees (on which they typically hold 3 to 6 of the nine committee seats in each district) almost certainly means they were communicating, interceding, and demanding action by the decision makers within the Fed structure itself. Many former Fed governors and district presidents return to the banking industry after a stint at the Fed. Their personal connections with the Fed enable them to informally and indirectly ‘lobby’ with their Fed colleagues.

What these relations between Presidents, the Fed, and financial sector players suggest is that what may appear at one level as presidential or political interference in central bank policy may, at a deeper level, represent private financial interests demanding action by politicians and presidents in particular to ensure the central bank in a crisis shifts its strategic policy direction in order to back-stop and support financial markets. The Fed and Powell may deny that the central bank responds to financial markets, that its mandate is only goods and services price stability and employment, but the reality suggests otherwise. That is especially true of the recent Fed policy shift—where no issues of the real economy demanded Fed policy shift but the financial economy strongly demanded the Fed respond by changing strategic direction. The real economy showed no justification for Powell and the Fed to reverse course with regard to interest rate hikes and policy. But the collapse of US stock markets and other financial asset markets after October 2018 clearly coincides with Trump’s intensifying attacks on the Fed—as well as Powell’s abrupt shift in policy direction in response.

Central Banking Myths & Prospects

It is a myth, and a more contemporary one at that, that central banks always act independently. So too is the corollary, that politicians should not interfere with central banks decision making. Central banks’ strategic decisions are often influenced by elected government officials—and should be. That’s because central bank chairpersons and their committees are not perfectly shielded or uninfluenced by private banking interests. It’s not a question of central bank independence or lack thereof. It’s a question of ‘independence from whom’? It’s a question of central banks functioning on behalf of the public interest—and not in the service of interests of private bankers and finance capitalists or serving politicians acting on their own behalf.

But central banks, whether the Fed or others, have never been structured up to now to serve first and foremost the public interest. Central banks were born out of, and emerged and evolved from, the private banking industry, and their first function was to serve as loan aggregator for governments and the political system. They serve those two masters, in a tug of war depending on the crisis at hand. In the latest iteration of that contest between financial interests and government interests, the Fed has clearly responded to the financial sector (despite its denial it never does so) to stop hiking interest rates in order to relieve pressure on the financial asset markets which were beginning to fracture and break due to Fed rate hikes.

But the longer term trend appears that central banks, the Fed in particular, can serve both masters increasingly less effectively. Central bank interest rate policy actions are growing increasingly ineffective and destabilizing at the same time. In the case of Europe and Japan, central bank responses to the last crisis in 2008-09 (and subsequent double dip recessions) has rendered their potential for response to the next crisis virtually nil. Rates are near zero or negative. QE appears baked into the monetary structure going forward. Balance sheets cannot be recovered—i.e. QT is dead. Europe and Japan (and Bank of England and Swiss Bank, etc.) have shot off their ammunition and the gun is now jammed and cannot be reloaded. They will resort to ever more risky economic and political alternatives come the next crisis.

The US Fed’s is a situation not much better. It has created trillion dollar annual budget deficits for the next decade. The central bank must raise rates to fund an additional $12 trillion in debt coming (on top of the existing $21 trillion today). To do that the Fed must raise interest rates to attract more buyers of its Treasury bonds. But Trump and Powell have stopped raising rates—in response to financial markets’ fragility and inherent instability. And there’s the rub, as they say. The Fed can’t raise rates above 2.75% without precipitating more financial instability. And it must raise rates to finance a $33 trillion US national debt by 2028.

All the talk about global trade war pales in comparison to this great contradiction in monetary-fiscal policy now looming on the near horizon.

Dr. Jack Rasmus
February 8, 2019

Dr. Jack Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, 2017; ‘Alexander Hamilton and the Origins of the Fed’, Lexington Books, March 2019; and ‘Systemic Fragility in the Global Economy’, Clarity Press, 2016. He teaches economics at St.Marys College in California and blogs at jackrasmus.com

posted March 1, 2019
Financial Imperialism–The Case of Venezuela

Invasion of Venezuela by US and its proxies is just around the corner! This past week vice-president Pence flew to Colombia once again—for the fifth time in recent weeks—to provide final instructions to US local forces and proxy allies there for the next step in the US regime change plan.

Evidence that the ‘green light’ for regime change and invasion is now flashing are supportive public statement by former president, Barack Obama, and several high level US Democratic party politicians and candidates, directly attacking the Maduro regime. They are signaling Democrat Party support for invasion and regime change. Events will now accelerate—just in time perhaps to coincide with the release of Mueller Report on Trump.

Behind the scenes it is clear, as it has been for months, that US Neocons are once again back in charge of US foreign policy, driving the US toward yet another war and attempt at regime change of a foreign government.

US Strategy in Brief

The US Neocon-led strategy is increasingly clear: establish a ‘beach-head’ on the Colombian-Venezuelan (and Venezuelan-Brazilian) border under the guise of providing humanitarian aid. Use the aid to get Venezuelans on the border to welcome the US proxy forces to cross over. Set up political and military structures thereafter just inside the Venezuelan borders with Colombia and Brazil, from which to launch further similar efforts deeper into Venezuela. Repeat this province by province, step by step, penetrating Venezuela space until enough local units of the Venezuelan military change sides and convince one or more of the Venezuelan military hierarchy to join them. Establish a dual state and government within and along the border of the Venezuelan state this way. A breakaway State and dual power within the country. Make it appear, by manipulating the media, that the Venezuelan people are rising up against the Maduro government, when in fact it is US proxy forces invading and using opportunist local politicians, military, and others in the ‘conquered’ zones, as the media covers for their invasion.

The main ideological justification being used for the invasion and regime change is that the Maduro government has grossly mismanaged the Venezuelan economy and driven its people into poverty. With Democrats now joining Trump and Republicans in support of invasion, the liberal mainstream US media, as well as the rightwing alternative media, are both pushing the same line, to blunt US opposition to invasion and yet another war before the final military assault is launched. Somehow the democratic elections less than a year ago, which returned the Maduro government to power, did not represent the ‘will of the people’. Explanations how they did not are thin and unconvincing, moreover. Nor is any explanation given how US policies and actions have played the central role in destroying Venezuela’s currency and economy. And the financial measures used to destabilize the economy are especially opaque.

Financial Imperialism: The Case of Venezuela

Venezuela today is a classic case how US imperialism in the 21st century employs financial measures to crush a state and country that dares to break away from the US global economic empire and pursue an independent course outside the US empire’s web of entangling economic and financial relations.

Here’s how US ‘financial imperialism’ has worked, and continues to work, with the intent of assisting regime change in the case of Venezuela.

In a world where US Capitalism is the dominant hegemon the US currency—the dollar—is the centerpiece of the US global economic empire. The dollar serves as the global trading currency as well as the global banking reserves currency. More than 85% of all global trade (export and import) is done in dollars. Certain commodities, like global oil and oil futures contracts, are traded virtually only in dollars. Recently more countries have begun to peg their own currency to the dollar, allowing it to move in tandem with the dollar. Some have even eliminated their currency altogether and now use only the US dollar as their domestic currency. Increasingly as well, more countries are issuing their domestic bonds in dollars (i.e. dollar denominated bonds). And their central banks follow the US central bank, the Federal Reserve’s, policy as it raises or lowers US interest rates that in turn cause the US dollar to rise and fall. They do so even if rising US interest rates mean rising rates in their own economies that precipitate recessions and mass unemployment. These are all examples of the growing financial integration with the US Imperial State and economy.

But even those economies that maintain their own currency are at the mercy of the US dollar. Since the dollar is the global trading and reserves currency, whenever the dollar rises in value due to US monetary policy changes, or US inflationary pressures, or just changes in supply or demand for the dollar, the currencies of other countries fall in value. As the dollar rises in value, other currencies fall. That’s how global exchange rates work in the 21st century global US empire where the dollar is the trading-reserves currency. Other currencies—the British pound, Euro, and even less so the Japanese Yen or China Yuan—are still largely insignificant as reserves or trading currencies. And it appears very unlikely they will soon replace the dollar—one of the key pillars of the US empire.

The US has the power to engineer a collapse in a country’s currency. A collapse in its currency means the price of imported goods rises rapidly, especially those goods it can only be obtained by imports—i.e. medicines, critical food commodities, intermediate business goods necessary for domestic manufacturing, etc. Accelerating import inflation in turn leads to domestic businesses cutting back production due to lack of affordable resources, commodities, or parts. Mass layoffs follow production cutbacks. Rising inflation brought on by currency collapse is thus accompanied by rising unemployment. Wage income and consumption in turn collapse and thereafter the economy in general.

Widespread shortages of key imports, inflation, and domestic production decline and unemployment brought on by the shortages and inflation simultaneously lead to social discontent and loss of support for the government. Opposition groups and parties proclaim these problems are due to the mismanagement of the economy by the government, or corruption by its leaders, or just socialist policies in general. But in fact the economic crisis—i.e. shortages, inflation, production, unemployment—is traceable directly to the root cause of the collapse of the currency engineered by US imperialist policies intent on crashing the economy as a prelude to regime change and economic reintegration to the US global economic empire.

There are many ways the US can, and does, cause a collapse of a country’s currency. One set of measures are designed to cause a severe shortage of dollars in the target country’s economy.

A shortage of dollars drives up the value of the US dollar in the target economy which, in turn, drives down the value of the country’s own currency. The US has been engineering a collapse of Venezuela’s currency, the Bolivar, now for years—first by causing dollars in Venezuela to flow out of the country and, secondly, by measures preventing Venezuela from obtaining dollars from abroad.

US policy over the last several years at least has been to force US companies doing business in Venezuela to repatriate their dollars back to the US or else divert them elsewhere globally among subsidiaries. Or just to leave Venezuela and take their dollars with them. US policy has also been to publicize and promote wealthier Venezuelans with dollars to take them out of the country and invest them in Colombia, where the US has arranged an online investment firm with the assistance of its Colombian government ally. Rich Venezuelans have been encouraged as well to send their money to Miami banks. And to move there in large numbers, which they have, taking their dollars with them or dumping their Bolivars in exchange for dollars. The outflow of dollars from Venezuela has raised the value of dollars that remain in Venezuela on the black market there, thereby helping to depress the value of the Bolivar in Venezuela even further.

These measures pale, however, to US imperial efforts to prevent Venezuela from obtaining dollars in global markets in an effort to try to offset the outflow of dollars from the economy.

For example, the US has taken action to prevent US and global banks from lending dollars to Venezuela, or from participating in underwriting and insuring Venezuelan bond issues which would also raise dollars for Venezuela if allowed. Bank loans and bond funding thus dry up, depriving the government of alternative sources of dollars. More dollar shortage; more Bolivar domestic currency collapse—i.e. more expensive imports, more inflation, more shortages, declining production, rising unemployment….more discontent.

The main effort by which the US is attempting to deprive Venezuela of dollars is to impose sanctions on other countries that try to buy Venezuelan oil. Oil sales are the number one source of the country’s dollar acquisitions, since all oil trade is done in dollars and Venezuela depends on 95% of all its government revenues from selling its oil. The US imposes sanctions on would be buyers and thus cuts off access to dollars, as it simultaneously through other policies works to encourage dollar flight out of Venezuela and cut off bank loans and bond issuance by the country. And if the prior bonds and loans were ‘dollar denominated’, then the lack of dollars to pay the interest and principal coming due leads directly to defaults and in turn to business collapse and even more unemployment.

Venezuela has turned to selling its oil to China and Russia and a few other countries. It has been forced to resort to paying its interest and principal on past loans from these governments with shipments of oil instead of payments in dollars. As the US turns to sanctions as an economic ‘weapon’ to enforce its will on other countries, which it has been doing in recent years, more countries are become aware of the tactic and are taking countermeasures. They are dumping dollars (or reducing their purchases of dollars in world markets) and buying gold. China and Russia are leading this way, while experimenting with non-currency dependent trade.

Another recent move by the US to deny Venezuela dollars and collapse its currency has been to seize the Venezuelan oil distribution company, CITGO in the US. Its remittances back to Venezuela have been in dollars. By seizing CITGO, the US deprives the country of yet another source of dollars, with which Venezuela might otherwise have been able to purchase imports of food, medicines, and other economically critical goods. So Venezuelans in this case are clearly forced to forego these critical imports due to US policy—not due to economic mismanagement by its government. Moreover, adding insult to injury, the dollar funds from CITGO seized by the US are being delivered to the Venezuelan government’s opponents and its hand-picked ally of the US, Guido. The opposition now gets to finance its counter-revolution with the money formerly remitted to Venezuela. The counter-revolution is financed at the expense of critical goods and services that otherwise might have been made available to the Venezuelan people.

Seizure of the CITGO asset is not the only such example of dollar deprivation. Other assets in the form of inventories, investments, cash in US banks, etc. are also being impounded. And not just from the Venezuelan government. Individual Venezuelan companies and individual citizens have been having their assets in the US impounded as well. And the US is increasing its pressure on foreign governments to impound and seize assets as well—of the government, businesses, and citizens.

The impoundment and seizure has recently been extended as well to Venezuelan gold stocks held offshore in other countries, in direct violation of international law. Recently the US company and mega bank, Citigroup, has been forced to withhold Venezuelan gold in violation of its contracts with the country. The Bank of England has also been asked, and is complying, with the US demand to freeze Venezuelan gold deposited in the UK. And countries like Abu Dhabi, where gold is traded globally, have been asked to stop trading in Venezuelan gold. Gold is a substitute money for the US dollar. So preventing gold access to Venezuela is like preventing dollar access as well. With its gold, Venezuela could more easily buy dollars, or trade for goods directly, than with using Bolivars that are falling in value and sellers are less likely to take as payment.

Countries with economies whose currency is seriously declining in value are able to get a loan to stabilize its currency from the International Monetary Fund, the IMF. Recent examples are Argentina, Turkey, South Africa, and even Pakistan. But the IMF is an institution set up by the US in 1944. The US maintains with its close European allies a majority vote on IMF decisions. The IMF does nothing the US does not approve. Its mission is to lend to countries in need of stabilizing their currencies. The IMF, however, as an appendage of the US global empire, has refused to lend Venezuela anything to help stabilize its currency.

This is in contrast, for example, to the record loan of more than $50 billion recently provided to Argentina once that country put in its current business and US-friendly Macri government. (The record IMF loan, by the way, was so that Argentina could pay off debts owed to US and other speculators in the early 2000s. So Argentina saw little of that $50b. What the payoff did enable, however, was for Macri and other Argentinian bankers to go to New York to get new loans from US banks once it repaid the speculators, from which Macri and friends no doubt personally benefited immensely).

As the Venezuelan currency collapses due to US arranged dollar shortages, Venezuela must print even more Bolivars to enable it to purchase what goods from abroad it might still be able to buy. A collapsed currency means the price of imported goods rises proportionately. So more Bolivars are needed to buy the goods that are continually rising in price. Printing more Bolivars adds to the supply of Bolivars in the economy which raises domestic price inflation even further. But the excess printing is in response to the currency collapse which is engineered by the dollar shortage and the falling exchange rate in the first place. The over supply of Bolivars is not due to mismanagement; it is due to the shortage of dollars and the desperate effort by the Venezuelan government to somehow pay for inflating import goods.

The falling price of crude oil in 2017-18 added further pressure on the Bolivar. The collapse of oil prices globally appears unrelated to US policy. But it wasn’t. The oil Venezuela has been able to continue to sell, mostly to China or Russia, declined by 40% in price in 2018. The global oil deflation of 2018 thus generated less oil revenue for the country and thus fewer dollars.

But that too was due indirectly to US policy and economic conditions. The collapsing price of oil in 2018 is directly attributed to US shale oil producers raising their output by more than a million barrels a day, which increased the world oil supply and depressed world oil prices. The US then attempted to manipulate world oil output with Saudi Arabia but that exacerbated the over-production and deflation problem still further. Here’s how: The US attempted to impose sanctions on Iranian oil in 2018. Saudi Arabia believed it would capture the customers that Iran would lose, and therefore it, Saudi Arabia, also raised its output of crude as US shale producers raised theirs. But Iran was able to continue to sell its oil, as US sanctions broke down. The result of the US shale overproduction plus Saudi overproduction was a 40% collapse in world oil prices in 2018 that further deprived Venezuela of much needed government revenue—apart from US sanctions on Venezuela oil sales.

US monetary policy in 2018 further exacerbated the currency crisis in Venezuela—as it did elsewhere in Latin America and emerging markets in general. In 2017-18 the US central bank launched a policy of raising interest rates. Since other world central banks respond to the US central bank, world rates began to rise as well. Rising US interest rates caused a rise in the US dollar, and as the dollar rose in 2017-18 emerging market currencies fell. They fell for Venezuela in part due to this effect, as well as due to other causes mentioned.
Falling currencies precipitate what is called ‘capital flight’ out of the country. Less money capital means less available for investment and thus lower production output and more unemployment. So currency collapse precipitates not only inflation but recession as well. To prevent the capital fight, emerging market economies raise their own domestic interest rates. This led to recession, for example, throughout Latin America in 2017-18. Capital flight out of Venezuela has been significant since 2016, as wealthy Venezuelans sent more of their dollars out of the country to Miami, thus exacerbating dollar shortages in Venezuela and further driving down the value of the Bolivar left behind.

US sanctions on other countries, banks, and companies offshore are designed not only to prevent Venezuela access to dollars and money capital offshore. Sanctions also target real goods trade, like oil and other key commodities. But there’s another means by which the US shuts down the flow of real goods into and from a country, causing shortages of critical goods. It’s the US controlled international payments exchange system, called SWIFT. This is where US banks arrange the exchange and transfer of payments for goods and services by converting from one currency to the other and transferring the funds from one bank to another across countries. The US has been preventing Venezuela from normally using the SWIFT system. So even if another country is willing to buy Venezuela goods, including oil, and exchange Bolivars for its own currency, it is prevented from doing so by the US bank-controlled SWIFT system.

Summing Up

Financial imperialism has been waged against Venezuela for decades, but the attack on Venezuela employing financial measures has recently intensified as the US neocons and imperialists have accelerated their plans to launch a more direct attack by political means, including military, to force regime change in Venezuela. At the center of the on-going, and now intensifying, financial warfare against the country by the US are measures designed to destroy Venezuela’s currency.

Imperialism is often thought of as military conquest and colonialism. That’s 19th century British and European imperialism. But the American Empire in the 21st century does not need colonialism. It has a more efficient system for forcing the integration of other economies and for extracting value and wealth from the rest of the world. The US empire is increasingly knitted together in the 21st century by a deep web of financial relationships that afford it multiple levers of economic power it can pull if and when it desires. And when those economic and financial levers prove insufficient to overthrow domestic forces and governments that remain intent on pursuing a more independent path outside the Empire’s economic and political relations, then the breakaway State is attacked more directly once the economy is sufficiently wrecked. Such is the case of Venezuela today. Financial imperialism has paved the way for more direct political and military action.
*

Dr. Rasmus is author of the recently published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, Clarity Press, 2019. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network in New York, blogs at jackrasmus.com, and tweets at @drjackrasmus. His website is http://www.kyklosproductions.com.

posted February 10, 2019
Youtube Interview: US-China Trade Evolution & February Events

Senior negotiators of the US (Lighthizer) and China (Liu He) met in Washington Jan. 30-31 as the US-China trade war approaches a climax. Discussions were a accompanied by a virtual news blackout. China continued publicly in early early Febuary to offer concessions to the US on market access to China, US corporate and bank majority ownership of China companies, and China resumption of purchases of US farm and other goods. Meanwhile, the US continued to assume a hard line on China technology development, going after China companies and arranging US allies to do the same. The US also began proceedings to extradite from Canada the co-chairperson of the giant China tech company, Huawei. No meeting has been scheduled by the March 1, 2019 deadline between Trump and China president, Xi, and Trump has publicly declared there will be none by March 1. Nevertheless US trade negotiations will be meeting in Beijing the week of February 11-16. Trade ambassador Lighthizer and Treasury Secretary, Steve Mnuchin, reportedly will both represent the US, a development that suggests a deal which Lighthizer opposes but Mnuchin favors. Press reports indicate technology will be the central, unresolved thus far topic of negotiations.

On the eve of last week’s negotiators, I was asked to give an hour interview on TV by the Peninsula Peace and Justice center in Palo Alto, California. Topics focused on China-US trade, NAFTA 2.0, and Trump policies in general. That hour interview can be viewed on Youtube at the following link:

https://youtu.be/xoR2eMIBgPk

Reaffirming my past predictions I continue to predict there will be a deal–but not by March 1–and both sides will agree to extend the discussions until there is an agreement.

posted January 25, 2019
Global Economy on the Brink as Davos Crowd Parties On

At Davos, Switzerland every year the global capitalist elite gather to party…and to prepare for the year ahead. This year more than 1500 private jets will reportedly fly in. Thousands more of their underling staff will travel via business class to handle their personal, and corporate, logistics. Shielded from the media and the pubic, the big capitalists share views in back rooms and listen to experts on finance, government policy, technology, and the economy. The experts are especially probed to identify and explain the next ‘black swan’ or ‘gray rhino’ event about to erupt. Wealthy celebrities are invited to entertain them as well after evening dinner and cocktails. But the real networking goes on privately afterwards, in small groups or one on one, among the big capitalists themselves or in private meetings with heads of state, finance ministers, and central bank chairmen.

Typically each annual meeting has a theme. This year there are several: the slowing global economy, the fracturing of the international trade system, the growing levels of unsustainable debt everywhere, volatile financial asset markets with asset bubbles beginning to deflate, rising political instability and autocratic drift in both the advanced and emerging economies, accelerating income inequality worldwide—to mention just a short list.

On the eve of this year’s World Economic Forum gathering, some of the most powerful, wealthy, and more prescient capitalists have begun to speak out to their capitalist cousins, raising red flags about what they believe is an approaching crisis.

Ray Dalio, the billionaire who found and manages the world’s biggest hedge fund, Bridgewater Associates, warned that he and other investors had squeezed financial markets to such “levels where it is difficult to see where you can squeeze” further. He publicly admitted in a Bloomberg News interview that, in the future profits will be low “for a very very long time”. The era of central banks providing free money, low rates, and excess liquidity have run their course, according to Dalio. He added the global economy is mired in dangerously high levels of debt, comparing it to the 1930s.

Paul Tudor Jones, another big finance capitalist, similarly warned of unsustainable debt levels—created by companies binging on cheap credit since 2009—that “could be systemically threatening”. Not just government debt. But especially corporate debt, where levels in the US alone have doubled to more than $9 trillion since 2009 (most of it high risk ‘junk bond’ and nearly as risky ‘BBB’ investment grade corporate bond debt).

Almost as worrisome, one might add, is the now more than $1 trillion leverage loan market debt in the US (i.e. loan equivalent of junk bonds). US household debt is also now approaching $15 trillion. And US national government debt, at $21 trillion, is about to surge over the next decade to $33 trillion due to the Trump 2018 tax cuts. And that’s not counting trillions more in US state and local government debt; or the tens of trillions of new dollarized debt undertaken by emerging market economies since 2010; or the $5 trillion in non-performing bank loans in Europe and Japan; or the even more private sector debt escalation in China.

Corporate debt levels are not alone the problem, however. Debt can rise so long as financial asset prices and real profits do so—i.e. provide the cash flow available to service the debt. But when profits and asset prices (of stocks, bonds, derivatives, currency exchange rates, commodity futures, etc.) no longer rise, or start to turn down, then debt service (principal & interest) cannot be repaid. Defaults often follow, causing & investor confidence to slide. Real investment, employment, and household incomes thereafter collapse, and the real economy is dragged down in turn. The real decline further exacerbates the collapse of financial asset prices, and precipitates a mutual feedback of financial and real economic collapse.

And financial markets began to deflate in 2018; and it is now becoming increasingly clear that the real side of the global economy is slowing rapidly as well.

In February 2018 the first early warning appeared for financial markets. Stocks plunged in the US, Europe and even China. They temporarily recovered—a ‘dead cat bounce’ as they say before an even deeper decline in the fall. Then oil and commodity futures prices collapsed by 40% or more in late summer-early fall 2018. Stock markets followed again in October-December 2018 by 30-40% in US, China, Europe, and key emerging markets. Key merging market currencies—Argentina, Turkey, Indonesia, Brazil, South Africa—all fell precipitously as well. And housing prices from the UK to Australia to China to New York began to implode as the year ended. In January 2019 stock markets recovered—i.e. a classic, short term, bull market recovery in what is today’s fundamentally long term global bear market.

Dalio’s and Jones’ worries by unsustainable debt and pending crisis have started to become real, in other words.
Becoming real as well is evidence of emerging defaults, a critical phase that typically follows asset markets’ decline and slowing profits. In the US there’s the Sears default, with JCPenney in the wings. And the giant corporation, once the largest in the world, the General Electric Corp., slouching toward default. Its global profits slowing and stock price imploding, GE is now desperately selling off its best assets to raise cash to pay its excess debt. It’s not alone.

Scores of energy companies involved in US shale oil and gas production are teetering on the brink. In Europe, there’s deepening troubles at Deutschebank, and just about all the Italian banks, and UBS in Switzerland, and the Greek banks. In Japan, there’s trillions of dollars in non-performing bank loans as well, which Japan’s central bank continues to cover up. And then there’s China, with more than $5 trillion in bad loans held by local governments, by shadow bankers, and by its state owned enterprises that the China central bank and government keep bailing out by issuing ‘trusted loans’ (i.e. equivalent of junk bonds in US).

Default cracks have begun to appear everywhere in the global economy, in other words, major indicators that the excess debt accumulation and financial bubbles of the past decade cannot be ‘serviced’ (principal-interest paid) and have begun to negatively impact the global economy.

What’s becoming clear is that the next crisis will not emerge from the housing sector with excess debt and price bubbles driven by subprime mortgage loans and related financial derivatives. What’s more likely is that the next crisis will emerge from debt defaults and collapsing real investment by non-financial corporations. Moreover, the tipping point is nearer than most in business or media will admit.

Trump’s 2018 tax cuts simply threw a veil over the real condition of corporate performance in the US this past year. The tax cuts provided a windfall, one time subsidy to corporations’ bottom line. It is estimated that US S&P 500 corporations’ profits were boosted 22% by the Trump windfall tax cuts alone. Since S&P 500 profits for 2018 were roughly 27%, it means actual profits were barely 5%. That’s the real situation going into 2019—a condition that assures US stock markets, junk bond markets, and leveraged loan markets in particular will experience even greater contraction in 2019 than they did in 2018. The bubbles will continue to pop.

In the global economy, it is even more evident that by the end of 2019 it is likely there will be recession in wide sectors of the real global economy amidst further asset markets’ price declines.

In Europe, the growth engine of Germany is showing sure signs of slowing. Manufacturing and industrial production in the closing months of 2018 fell by 1.9%. After a GDP decline in the third quarter 2018, another fourth quarter 2018 German contraction will mean a technical recession. Equal to at least a third of all the Eurozone economy, as goes Germany goes Europe. France and Italy manufacturing are also contracting. Nearly having stagnated at 0.2% in the third quarter, the Europe economy in general may have slipped into recession already. And all that before the negative effects of a UK Brexit or an Italian banks’ implosion or deepening protests in France are further felt.

In emerging market economies, the steady rise of the US dollar in 2018 (driven by rising US central bank interest rates) devastated emerging market economies across the board. Rising dollar values translated into corresponding emerging market currency collapse. That triggered capital flight out of these economies, and their falling stock and bond markets in turn. To stem the outflow, their central banks raised interest rates, which precipitated deep recession in the real economy, while their collapsing currencies generated higher import prices and general inflation in their economies as well. That was the story from Argentina to Brazil to Turkey to South Africa and even to Asia in places.

The US halting of interest rate hikes in 2019 may relieve pressure on emerging market economies somewhat in 2019. But that easing will be more than offset by China’s 2019 economic slowdown now underway. In the second half of 2018 investment, consumer spending, and manufacturing all slowed markedly in China. Officially at 6.6% for 2018, according to China statistics, China’s real economy is no doubt growing less than 6% due to the methods used to estimate growth in China. Its manufacturing began to contract in late 2018, and with it a significant slowdown in private investment and even consumer spending on autos and other durable goods. China’s slowing will mean less demand for emerging market economies’ products and commodities, including oil and industrial metals. A respite for emerging market economies from the US dollar rising will thus be offset by China slowing.

When both financial asset markets and the real economy are together slowing it is a particularly strong ‘red flag’ warning for the economic road ahead. And more contractions in stocks and other financial assets, together with slowing of manufacturing, housing, and GDP in Europe, US, and Japan in 2019, are likely which means trouble ahead in 2019.

Along with all the data increasingly pointing to financial asset deflation gaining a longer term foothold—and with real economy indicators like manufacturing, housing, GDP, exports as well now flashing red—there is also a growing list of political hotspots and potential ‘tail risks’ emerging in the global economy. Some of the ‘black swans’ are identifiable; some yet to be.

In the US, the government shutdown and the prospect of policy deadlock between the parties for two more years could qualify as a source of further economic disruption. In Europe, there are several ‘tail risks’: the Brexit situation coming to a head in April, the challenge to the Eurozone by the new Italian populist government, the chronic and deep street protests continuing in France, and the general rightward social and political drift throughout eastern Europe. In Latin America there’s the extremely repressive policies of Bolsonaro in Brazil and Macri in Argentina, which could end in mass public uprisings at some point. In Asia, there’s corruption and scandals in Malaysia and India. And then there’s the US-trade war with China, which some factions in the US are trying to leverage to launch a new Cold War. Not least, there’s the potential collapse of negotiations between the US and North Korea that could lead to renewed threats of military conflict. All these ‘political instabilities’ , given their number and scope, if left unresolved, or allowed to worsen, will have a further negative effect on business and consumer confidence—now already slowing rapidly—and in turn investment and therefore economic growth.

Ray Dalio’s and Tudor Jones’ warnings on the eve of Davos have been echoed by a growing list of capitalist notables and their government servants and echoes. IMF chairperson, Christine Lagarde, has been repeatedly declaring publicly that global trade and the economy are slowing. Reflecting Europe in particular, where exports are even more critical to the economy, she has especially been warning about a potential severe US-China trade war disrupting the global trading system—and global economy in turn. The IMF has been issuing repeated downward adjustments of its global economic forecasts. So too has the World Bank. As have a growing number of big bank research departments, from Nomura Bank in Japan to UBS bank in Europe. Former US central bank chairs, Janet Yellen and Ben Bernanke, have also jumped in and have been raising red flags about the course of the US and global economies. Former Fed chair, Greenspan, has even declared the US is already on a recession path from which it can’t now extricate itself.

Given all the emerging corroborating data, the red flags and warnings about the current state of the global economy, and the growing global political uncertainties, the Dalios, the Jones, and others among the Davos crowd are especially worried this year.

On the eve of the Forum’s first day on January 23, 2019, a leading discussion topic among the cocktail parties is the buzz about the just leaked private newsletter from billionaire Seth Klarman, who heads one of the world’s biggest funds, the Baupost Group. In his newsletter leaked to the New York Times, and widely circulated among early Davos crowd attendees, Klarman reportedly chides his readers-investors about not paying more attention to the social and political instabilities growing worldwide, about Trump’s direction which is “quite dangerous”, and the US in effect retreating from global leadership, leaving a dangerous vacuum behind. Investors have also become too complacent about global debt and risk levels now rising dangerously, he argues. It could all very well lead to a financial panic, he adds. The US in particular is at an ‘inflection point’. He ominously concludes, “By the time such a crisis hits, it will likely be too late to get our house in order”.

The recent statements by Dalio, Tudor Jones, Klarman, and the others reminds one of the last crisis and crash of 2008. When Charlie Prince, CEO of Citigroup, the biggest bank at the time, was asked after the crisis why he didn’t see it coming and do something to avoid the toxic mortgage-derivatives bomb and protect his investors and customers, Prince replied he did see it coming but could do nothing to stop it. His investors and customers demanded his bank continue—like the other banks were—investing in subprime mortgages, lending to shadow banks, selling risky derivatives and thereby continuing to make money for them, just as the other banks were doing. Charlie’s response why he did nothing to stop it or prepare was, ‘when you come to the dance, you have to dance’.
No doubt the Davos crowd will be partying and dancing over the next several days in their securely gated, posh Switzerland retreat. After all, the last ten years has increased their capital incomes by literally tens of trillions of dollars. And capitalists are driven by a mindless herd mentality once they’ve made money. They believe they can continue doing so forever. They believe the money music will never stop. One can only wonder, if they’ll be dancing later this year to the same song as Charlie’s in 2008.

Jack Rasmus
January 22, 2019

Dr. Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, 2019. Jack hosts the Alternative Visions radio show on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.com. He is a frequent contributor to Global Research.

posted January 20, 2019
Trump’s Deja Vu China Trade War-Part 2

Here’s Part II of my China trade article. Jack

Trump’s Déjà vu China Trade War (Part II)
By
Jack Rasmus
Copyright 2019
Summary Part I
In 2018 China and the US came to the brink of a bona fide trade war and then halted at the precipice. At the G20 meeting in Buenos Aires in late November 2018, Trump and China President, Xi, met offsite. The outcome was an agreement to put off further escalation of tariffs on both sides for another 90 days during which their trade teams would meet to try to seek a resolution. Economies of both countries were showing signs of growing weakness and instability by November. The indicators worsened notably in December. Trump agreed to postpone US announced tariffs on an additional $200 billion of China imports, effective January 1, 2019, and suspend increases on already existing tariffs from 10% to 25%, also scheduled for January 1. China agreed as well to postpone further its scheduled tariffs. In early weeks of January 2019, middle level officials of both China and the US began meeting to discuss details for subsequent higher level negotiations set for Washington on January 30, 2019.

Unlike Trump’s trade ‘war’ with US allies, which has always been ‘phony’ (see Part 1 of this article). Trump never envisioned major changes in US trade relations with US allies, starting with South Korea, then NAFTA trade partners, Mexico and Canada. Tariffs on steel and aluminum were offset by more than 3000 exemptions announced by the Trump administration. Tariffs on European autos, threatened by Trump, were suspended. And trade negotiations with Japan were left unscheduled.

Before the November 2018 US midterm Congressional elections, Trump sought just token adjustments to US-ally trade relations that he then exaggerated and boasted to his US domestic political base, claiming his ‘America First’ economic nationalism policies were delivering results. China-US trade was another matter.

On the surface, the China-US dispute appeared as the US attempting to reduce the trade deficit with China—although that US trade deficit with China had not changed much for the past several years. A second apparent US objective was the US long-standing demand that China open its markets to US business, which meant that China should allow US companies a greater than 50% ownership of their operations in China, especially US banks and financial corporations. But reducing the trade deficit and opening China markets were secondary objectives. The primary US objective, that became increasingly apparent over the course of 2018, was to prevent, or at least slow, China’s ‘2025’ technology development program. That program focused on next generation technologies like AI, cybersecurity and 5G wireless—the technologies of the future that new industries would be built upon. And, equally important, the technologies that would determine military dominance by 2030.

Throughout 2018 three factions within the US trade negotiation team would ‘fight it out’ over which of the three objectives of US-China trade relations would prove primary: reducing the trade deficit (mostly by China buying more US farm products from US agribusiness companies; allowing US corporations, especially banks, to have majority ownership and control of their operations in China; or US forcing China to stop its technology transfer and slow its nextgen technology development and thereby reduce the threat to US military dominance over the 2020s decade. A major faction fight roiled within the US trade team. The main contention was between the banking interests, led by ex-Goldman Sachs senior manager, US Treasury Secretary, Steve Minuchin, and on the other hand the anti-China hawks, reflecting US military industrial complex and Pentagon interests, led by US Trade Ambassador, Robert Lighthizer, and his allies, anti-China advisor to Trump, Peter Navarro, and later, Trump’s national security advisor, John Bolton.

What follows is Part II of the analysis of Trump’s Déjà vu China-US trade ‘war’ from last March 2018 through mid-January 2019.

The Real Trade War: China Technology

Trump’s trade strategy in relation to China has always been to pressure China on technology transfer and slow its nextgen technology development. Reducing the US-China trade deficit and getting China to open its markets to US financial interests have been objectives as well, but of secondary importance.

Early in 2018 China signaled publicly it would buy $100 billion a year more US products and open its markets to US corporate majority 51% or more ownership. It even granted 51% ownership to select global companies while negotiations with the US were underway. But it refused to make concessions on the technology issue. US defense companies, the Pentagon, the US military-industrial complex interests on the one hand, and US banks on the other, are the major players in determining US trade policy.

Throughout 2018 US trade policy is best described as schizophrenic. Was it Trump driving policy? His anti-China neocons and hawk advisors–Lighthizer, Navarro, and later John Bolton, appointed to the post of National Security Advisor to Trump in 2018, who later joined the administration? Was it Treasury Secretary, Steve Mnuchin, who represents US banking and multinational corporate interests on the US trade team? Larry Kudlow, Trump’s interface to his domestic base? And what about Jared Kushner, son-in-law of Trump who has Trump’s closest ear, who has been serving as Trump’s interface to the three major factions on the US trade team? Throughout 2018, the factions contended for Trump’s support, with influence shifting and fluid among the various factions.

Pre-negotiations with China started in early March with Trump’s announcement of the steel-aluminum tariffs. After the tariff announcement, Trump began tweeting the idea that China should reduce its imports to the US by $100 billion. A day after the Office of US Trade Representative (OUST report) was issued by chief Trade Representative, Robert Lighthizer, Trump announced tariffs of $50 billion on China imports recommended by Lighthizer. However, a window of at least 60 days was required before any definition of the $50 billion or actual implementation by the US might occur, giving ample time for unofficial negotiations to occur between the countries’ trade missions. (Technically, the US could even wait for another six months before actually implementing any tariffs). Announcing intent to a dollar amount of tariffs is one thing; providing a list and definition of what goods would be tariffed is another; and setting a date they would take effect is still another.

China immediately sent its main trade negotiator, Liu He, to Washington and assumed a cautious, almost conciliatory approach at first. China responded initially in March with a modest $3 billion in tariffs on US exports. It also made it clear the $3 billion was in response to US steel and aluminum tariffs previously announced by Trump, and not Trump’s $50 billion tariff threat specifically targeting China. But China noted more action could follow, as it forewarned it was considering additional tariffs of 15% to 25% on US products, especially agricultural, in response to Trump’s $50 billion announcement.

China was waiting to see the US details. At the same time in April it signaled it was willing to open China brokerages and insurance companies to US 51% ownership (and possibly even 100% within three years). It also announced it would buy more semiconductor chips from the US instead of Korea or Taiwan. It was all a carefully crafted public response, designed not to escalate trade negotiations with the Trump administration prematurely. A series of token concessions and minimal tariff responses.

Behind the scenes China and US trade representatives continued to negotiate. By the end of March, all that had actually had occurred was Trump’s announcement of $50 billion in tariffs on China imports, but without details, plus China’s $3 billion token response to prior US steel-aluminum tariffs. From there, however, events began to deteriorate.
On April 3, 2018 Trump defined his threat of $50 billion of tariffs—25% on a wide range of 1300 of China’s consumer and industrial imports to the US. It was Lighthizer’s OUST Report’s recommended March list that launched Trump’s trade offensive with China. Influential business groups in the US, like the Business Roundtable, US Chamber of Commerce, and National Association of Manufacturers immediately criticized the move, calling for the US instead to work with its allies to pressure China to reform—not to use tariffs as the trade reform weapon. The anti-China hardline US factor brushed aside the criticism.

China now responded more firmly, promising an equal tariff response, declaring it was not afraid of a trade war with the US. That was an invitation for a Trump tweet and declaration he believed the US would not “lose a trade war” with China and maybe it wasn’t such a bad thing to have one. He suggested that another $100 billion in US tariffs might get China’s attention.
China’s initial $3 billion tariffs, and China’s suggestion of more billions of 15%-25% tariffs, targeted US companies and agricultural production in Trump’s Midwest political base. This may have especially aggravated Trump, disrupting his plans to mobilize that base for domestic political purposes before the November 2018 elections. Trump’s typical approach to negotiating—employed repeatedly during his private business dealings before being elected—is to never let his adversary ‘one up’ him, as they say. He always keeps raising the stakes until the other side stops matching his demands. Then he negotiates back to original positions, controlling the negotiating agenda and maintaining the upper hand in the process.

China initially fell into Trump’s trap, responding to Trump’s $50 billion of tariffs announcement with its own $50 billion tariffs on 128 US imports to China. This time targeting US agricultural products and especially US soybeans, but also cars, oil and chemicals, aircraft and industrial productions—the production of which is also heavily concentrated in the Midwest US. China noted further it was prepared to announce another $100 billion in tariffs as well if Trump followed through with his threat of imposing $100 billion more tariffs. In less than a month, the character of negotiations had shifted.

In response to the ‘tit for tat’ tariff threats, the US stock markets plummeted during the first week of April. Trump advisors, Larry Kudlow and Steve Mnuchin, intervened publicly to dampen the effect of Trump’s remarks on the markets. Kudlow tried to assure investors, “These are just first proposals…I doubt that there will be any concrete actions for several months”. Kudlow said negotiations were continuing. The stock markets recovered again.

But who were investors supposed to believe—Trump or his advisors? They seemed to be talking in different directions. And how long would investors continue to believe the Kudlows and others that matters (and Trump) were under control, and there would be no trade war? China representatives noted that, contrary to Kudlow’s assurances to US markets and investors, there were no ongoing discussions between the two countries.

By the end of the first week of April, US trade objectives and strategy was becoming increasingly murky: US multinational businesses restated what they wanted was more access to China markets. US defense establishment, NSA and the Pentagon, and the Trump administration ‘hawks’—Lighthizer, John Bolton and Peter Navarro—retorted they wanted an end to strategic technology transfer to China—both from US companies doing business in China and from China companies purchasing or partnering with American companies in the US.
It appeared what Trump himself wanted anything was something to exaggerate and brag about to his domestic political base emphasizing nationalist themes—to keep his popular ratings growing, to ensure Republican retention of seats in Congress in the November elections, and to whip up his base.

So what was the real US priority? Whose trade war was it? The neocons and China hawks aligned with the US military-industrial complex? Midwest agribusiness and manufacturing interests? Or US finance capital wanting to escalate its penetration of China markets?

However, by mid-April it was all still talk, with tariffs actions on paper, and not yet implemented. The next step would be defining the announced tariffs in detail. Announcing tariffs was only like waving a gun, to use a metaphor. Defining the tariffs was like loading a gun, putting the ‘safety’ lock on, but not yet pulling the trigger. Tariff implementation dates were when the shoot-out would really begin.

As of mid-April the negotiations by trade representatives continued in the background, while US capitalists in the Business Roundtable and other prime corporate organizations added their input to the public commentary process that was scheduled to continue in the US until May 22.

US Treasury Secretary, Steve Mnuchin, went to Beijing in the weeks prior to May 22. He returned declaring there was an agreement. Mnuchin kicked Peter Navarro, one of the hawks, from the US trade team. The China hawks and military industrial complex immediately responded, with help of their friends in Congress. They went after China’s ZTE corporation doing business in the US, charging it with technology espionage and transfer. The tech faction on the US trade team took over from Mnuchin. Navarro was put back. Any tentative deal was scuttled.

What happened in the subsequent six months from June to November 2018 was a steady escalation of threats, and subsequent actions, by Trump to raise tariffs, while he simultaneously kept saying his relationship with China president Xi was great and he expected a trade deal at some point: His response to China’s $50 billion tariff announcement—the counter to Trump’s $100 billion more tariffs—was to publicly declare the US should consider an additional $100 billion in tariffs. The additional $100 billion were implemented thereafter.

China again responded tit-for-tat, as its Commerce Ministry spokesman, Gao Feng, declared it would not hesitate to put in place ‘detailed countermeasures’ that didn’t ‘exclude any options’. And, in the most ominous comment to date, it was made clear that should Trump impose the additional $100 billion, ‘China would not negotiate’! And as China Foreign Ministry spokesman, Geng Shuang, following up Gao Feng, indicated in an official news briefing, “The United States with one hand wields the threat of sanctions, and at the same time says they are willing to talk. I’m not sure who the United States is putting on this act for”…Under the current circumstances, both sides even more cannot have talks on these issues”.

Trump’s $150 billion in tariffs on China was played to his domestic political base, in the weeks prior to the November midterm US elections, as evidence of his tough policy of US economic nationalism. Trump further announced reaching an agreement with Mexico and Canada replacing the NAFTA free trade deal—exaggerating and spinning the new terms and conditions as major improvements while, in fact, the details were token much like the prior changes to the US-South Korean free trade agreement. No new tariffs were implemented on Mexican goods imports to the US.

Trump tried desperately to get the Chinese to return to the negotiating table during the months immediately preceding the US elections. However, China refused to be ‘played’ like Mexico and Canada for Trump’s election objectives and refused to return.

Trump threatened to raise tariffs on the second $100 billion implemented, from 10% to 25% and threatened another 25% on an additional $200 billion in China imports. Still no China agreement to negotiate.

By the early fall 2018 it was clear that the China hawks—Lighthizer, the military-industrial complex-the Pentagon & Co.—were in control of Trump trade policy. Regardless of China concessions on reducing the trade deficit or granting 51% access to its markets, their primary demand was slowing (or ideally subverting) China technology develop—stopping tech transfer in China and elsewhere in the US, as well as among US allies. The side-lining of Mnuchin over the summer, the restoration of Navarro to the trade team, and the adding of notorious anti-China hawk, John Bolton, all strengthened the tech development faction, led by Lighthizer, on the US trade team. They were in effect in control as the US midterm elections approached.

In the run-up to the US elections it was also clear Trump was focused on his domestic political base, repeatedly tweeting his ultra- economic nationalist rhetoric. Trump’s nationalist rhetoric also contributed to preventing the relaunch of trade negotiations with China. Part of this threatening rhetoric included Trump public statements that he would implement a third round of $200 billion more 25% tariffs by January 1, 2019 on China. In that environment of escalating threats, anti-China hardliners clearly in control of US policy, and pending US elections, it was virtually impossible China would agree to negotiate.

Following the November US elections, a meeting was now possible. The G20 nations gathering in Buenos Aires scheduled for late November presented the opportunity. Intense maneuvering occurred between the anti-China technology hawks and the Mnuchin bankers-multinational corporations factions. Lighthizer released a new report criticizing China tech policy and appeared to have the upper hand and opposed a meeting between Trump and China president, Xi, at a side venue dinner in Buenos Aires. That reflected a new effort and breakthrough by the Mnuchin faction of big US banks, tech, and aerospace corporations. From mid-October through November the US stock markets began a precipitous fall, which would continue through December, and amount to the worst stock correction since 2008 and even 1931. That financial and the real slowing of the US housing, construction, and auto industries likely shifted Trump administration strategy. The momentum of negotiations strategy began to shift from the Ligthizer faction.

Elements of Trump Trade Strategy

Apart from the three main objectives of Trump China trade policy noted—i.e. China purchases of more US goods, opening markets to 51% ownership for banks and other US corporations, and the nextgen tech development issue—there are various additional objectives behind the strategy.

First, the steel-aluminum tariffs that launched the Trump trade offensive in March 2018 were a signal to US competitors that they should prepare to ‘come to the table’ and renegotiate current trade arrangements, since the US now plans to change the rules of the game again—just as Reagan and Nixon did before in the 1970s and 1980s. But once they ‘came to the table’, the changes in rules of the game with regard to trade relations with US allies did not result in a fundamental restructuring of the US-allies trade relations. The South Korean deal (see Part 1 of this article), the following revised NAFTA treaty, the suspension of negotiations on auto and other tariffs with Europe and Japan, plus the thousands of exemptions to steel and other tariffs allowed by the Trump administration to date all reveal that trade renegotiation with US allies is mostly for show. However, the effort throughout 2018 all made for good campaign speech ‘economic nationalist’ hyperbole in an election year.

Trump has been pursuing a ‘dual track’ trade offensive: a ‘softball’ approach to US allies and an increasingly hard line with China. However, by January 2019 it appears the China hardline track may also fall well short of the threats and hyperbole to date. Trump simply does not have the kind of leverage over China negotiations in 2018-19 that Reagan had over Japan in the 1980s and even Nixon had in the early 1970s with Europe.

A second development impacting Trump trade strategy has to do with the inevitable slowing of the US real economy in 2019-20. The floodgates of fiscal policy have been reopened in 2018 with Trump’s $4.5 trillion corporate and investor tax cuts, plus hundreds of billions $ more in defense and war spending hikes. Annual deficits of more than $1 trillion a year for another decade are now baked into the US budget. The deficits in turn have required the Federal Reserve US central bank to raise interest rates to fund those annual trillion dollar and more deficits and debt. It is becoming increasingly clear that the Trump tax cuts have not stimulated real US economic growth very much. Most of the $4.5 trillion business-investor tax cuts are going toward buying back corporate stock ($590 billion forecast 2018 by Goldman Sachs), paying out more dividends ($400 billion plus forecast), and financing record levels of merger & acquisition deals ($1.2 trillion in 2018)..

In short, rising interest rates, ineffective tax cuts not producing projected real investment and growth, and escalating annual deficits and debt will need a major expansion of US trade exports to offset the rate hikes, deficits, and inevitable slowing US economy by late 2019. Trump needs desperately to get an agreement with China, to avert a trade war, and boost trade as the US economy slows.

Third, Trump trade policy comes as global trade has been slowing. Global commodity prices are in retreat once again. 2017’s much hyped ‘synchronized’ global recovery is falling apart—in Europe, Japan and key emerging market economies as well. Another recession is coming, possibly as early as late 2019 and certainly no later than 2020. So US trade policy is shifting, attempting to ensure that US business interests retain their share of what will likely be a slower growing (or even declining) world trade pie. Trump and US business are repositioning before the global cycle next turns down.

US domestic and global economic objectives are not the only forces influencing Trump’s trade policy. There are just as important US political objectives behind it as well.

The 2018 tariff announcements represent Trump’s leap into his 2020 re-election campaign, a return to intense nationalist themes, and a move to mobilize his domestic political base once again around nationalist appeals. Electoral politics are also in play here, in other words. The steel and aluminum tariffs were announced within 48 hours of Trump’s speaking to the ‘America First’ coalition of ultra-conservative and aggressive capitalist interest groups that were meeting in Washington the same week of the steel-aluminum tariff announcements. The ‘American Firsters’ promised to raise $100 million for his re-election campaign; Trump rewarded them within hours of their meeting and financial commitment to his campaign with his latest bombast on trade. Escalating threats and implementing tariffs on China in 2018 also cannot be separated from Trump efforts to influence the outcomes of the 2018 November midterm elections. Trade policy is about Trump re-election strategy as much as anything else—including trade deficits, market access, and tech transfer.

Less obvious perhaps is Trump’s leveraging of trade policy and nationalist themes as a way to agitate and mobilize his base, in preparation to counter the Mueller investigation once it’s concluded. As a possible Mueller indictment of Trump approaches, Trump has been clearly preparing his base. He is also cleaning house within his administration, surrounding himself with like-minded aggressive conservatives, former Neocons, and various sycophants—in anticipation of the ‘street fight’ he’s preparing for with the traditional liberal elite in the US once he (or his Justice Dept. Secretary) creates a political firestorm by firing Mueller.

What’s Next for US-China Trade?

What Trump is doing is what US capitalists periodically have done throughout the post-1945 period: i.e. change rules of the game in order to ensure US corporate interests are once again firmly in the drivers’ seat of the global economy for at least another decade. Nixon did it in 1971-73 targeting European challengers. Reagan did it in 1985 targeting Japan. Now Trump is replaying a similar scenario, targeting China. But China may prove a more difficult adversary for the US in trade negotiations. The US is relatively weaker today than it was in 1971 and 1985; moreover, China is in a far stronger position today relative to the US than were Europe and Japan earlier.

China is not as economically or politically dependent on the US in 2018 as was Japan in 1985. Nor as fragmented and decentralized as was Europe in 1971. Both Japan and Europe were also politically dependent on the US for their military defense at the time. China today is none of the above. Thus the US lacks important levers in negotiations with China it formerly had with Europe and Japan. Not only is China not economically or politically as dependent, but Trump’s initial $150 billion of US tariffs levied on China represents only 2.4% of all China trade with the world. It will therefore take more than US tariffs, even the $400+ billion of Trump’s total threatened tariffs on China, to get China to capitulate on trade as Japan did in 1985—a capitulation that wrecked its economy and led in part to Japan’s 1991 financial implosion as a consequence.

And there’s the matter of North Korea. If the US expects China’s ‘help’ in getting North Korea to the negotiating table and de-nuclearizing the regime, it certainly won’t get it by provoking a trade war with China.

China has notable cards to play in its economic deck. For one thing, it could significantly slow its purchases of US Treasury bonds. That would require the US central bank to raise rates even further to entice other sources to buy the bonds China would have. That will pressure US interest rates to rise even further, and slow the US economy even more so than otherwise. China could also reverse its policy of keeping the value of its currency, the Yuan, high. A downward drift of the Yuan would raise the value of the dollar and thus make US exports less competitive. It could impose more rules on US corporations in China, give import licenses to European or other competitors, hold up mergers and acquisitions worldwide involving US corporations.

Another response by China might be to raise the requirements of technology transfer for US corporations located in China. There’s a long term strategic race between China and the US over who’ll come to dominate the new technologies—especially Artificial Intelligence, 5G wireless, and cyber security tech. China files about the same number of patents as the US every year, with Germany third and the rest of the world well behind. Who files the most AI, 5G and other patents may prove the winner in future global economic power. AI, 5G, cyber security are the technology that will ensure military dominance for years to come. The US sees China as its biggest threat in this sphere. The US wants to prevent China from capturing these critically strategic technologies. Trump China trade policy is thus inseparable from a US policy of launching a new military Cold War with China.

The outcome of the Trump-Xi Buenos Aires meeting in late November 2018 was an agreement by Trump to suspend raising tariffs on the second $100 billion, from current 10% to 25%, and in addition to impose an additional 25% on the remaining $267 billion of China goods—all by January 1, 2019. Instead it was agreed to continue negotiating again for another 90 days, until March 2. In return, China agreed in Buenos Aires to what it had already ‘put on the table’ during 2018: to open its markets to 51% foreign ownership and buy more US farm products.

Mid-level US-China trade delegations met in Beijing and began negotiations once again. By mid-January China clarified and added further concessions: It publicly declared it would purchase a $1 trillion more in US products over the course of the next six years. That’s apparently in addition to the already several hundred billions of dollars annually it purchases in US goods and services. It began buying US soybeans again, conceded to buy for the first time US GMO farm products, and to increase its purchase of US energy. It announced lower tariffs on US car imports, began awarding companies 51% ownership officially and scheduled to pass a new foreign investment law by January 29. It also has reportedly amended its laws to ban enforced tech transfer in China.
Despite China’s major concessions to date, the Lighthizer-Hawks-Military Industrial Complex faction has continued to push its hard line. With friends in Congress, the US has attacked the China corporation, Huawei, in an escalation greater than the prior attack on China’s ZTE corporation. It has even gotten US allies in Europe and Canada to initiate bans on Huawei as well. The US ally, Canada, arrested Huawei’s co-chairperson, while in Canada and is holding her at a common criminal. These has provoked counter-arrests of Canadians in China in return. The Huawei events likely represent attempts by US trade hardliners to scuttle again any potential agreement between the US and China by March 2. The faction fighting within the US trade factions also continues. US Treasury Secretary, Mnuchin, on January 17, 2019 publicly floated the proposal to lift all US tariffs on China as a concession in the negotiations. This has enraged the Lighthizer-Military faction in the US. The outcome is still uncertain. Lighthizer-Navarro still technically lead the US negotiations and will be the lead negotiators with China’s Vice-Premier for trade, Liu He, who is scheduled to come to Washington on January 30 to begin high level discussions. Whether Mnuchin and US big corporations and bankers can prevail with Trump and get a deal, or whether the Lighthizer faction can convince Trump the tech issue concessions by China are not sufficient for a deal, remains to be determined.

Which faction can succeed with influencing Trump will determine the outcome. The role of Jared Kushner, Trump’s son-in-law and interface between the two factions, may play a decisive role as well. It is highly unlikely a deal will be struck January 30 or soon after. The key will be how far China is willing to go with tech concessions. And whether the wording will satisfy the Lighthizer anti-China hawks who want a Cold War with China. Thus US military policy may be the deciding factor in any US-China trade deal. Negotiations will almost certainly continue up to the March 2, 2019 deadline. They may even be extended. Much will depend on the condition of the US and China economies in the coming months (and the US stock markets which Trump absurdly sees as the key indicator of US economic health).

This writer has predicted, and continues to predict, that a trade deal will be reached between the two, given that the US (and China) and global economies will continue over the long run to slow, and a global recession is on the horizon by 2020 and perhaps earlier by late 2019. The anti-China factor, Lighthizer &Co., do not want a trade deal. They want trade as an issue that pushes US and China toward a new Cold War. Whether US bankers and big business can demand the US and Trump accept China’s significant economic concessions will be determinative of the outcome as well. But such an outcome is in no way assured, given Trump’s instability and the fact he has surrounded himself with neocon advisors and sycophant, lightweight cabinet replacements.

Dr. Jack Rasmus
November 19, 2019
Dr. Rasmus is author of the book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression, Clarity Press, August 2017, and the forthcoming ‘The Scourge of Neoliberalism: US Policy from Reagan to Trump’, also by Clarity Press, 2019. He blogs at jackrasmus.com and hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His twitter handle is @drjackrasmus.

posted January 9, 2019
Trump’s Deja Vu China Trade War (Part 1)

Trade War! Trade War! When Trump pre-announced on March 2 his plan to impose tariffs on steel and aluminum imports, the mainstream press immediately began hyping the line that trade war was looming on the horizon. Panicking, investors ran like lemmings over the stock market cliff after the steel tariff announcement; US allies huffed and puffed, promising tit-for-tat tariff responses on US agricultural goods or commercial aircraft; Trump’s traditional elite advisors, like Gary Cohn, former CEO of Goldman Sachs investment bank and head of Trump’s economic council, resigned later that week—no doubt in part due to frustration and disagreement over Trump’s unilaterally announced tariff.

The ‘Stalking Horse’: Steel-Aluminum Tariffs

At week’s end, on March 8, 2018, Trump proposed to implement steel and aluminum tariffs universally, across the board, affecting all importers to the US.: 25% tariffs on steel imports and 10% on Aluminum. The big 5 US steel importers are Canada, Mexico, South Korea, Brazil, and Germany—collectively responsible for $15 billion a year in steel imports. Canada, Russia and the United Arab Emirates are the major aluminum importers. (Worth noting, for 2017 steel imports China is well down the pack, tenth or eleventh on the list, contributing only 2.2% of US steel, importing in the millions of dollars annually—not billion—and mostly semi-finished steel goods used by US manufacturers for fabricating final goods produced in the US.) When announced on March 8, Trump argued there would be no countries exempted from the 25% tariffs on steel and 10% on aluminum.. That quickly changed.

By mid-March, Canada and Mexico were temporarily exempted from the tariffs, even though they were among the top four largest steel importers to the US, with Canada largest and Mexico fourth largest. Thereafter, Brazil (second largest steel importer), Germany, and others steel importers were exempted. And Canada, by far the largest aluminum importer to the US, accounting for 43% of US aluminum imports, was exempted as well.

South Korea, the third largest steel importer last year, was exempted from steel tariffs permanently, as it quickly renegotiated its 2012 free trade deal with the US. Moreover, no other significant tariffs were imposed on South Korea as part of the bilateral treaty revisions. What the US got in the quickly renegotiated US-South Korea free trade deal, was more access for US auto makers into Korea’s auto markets. And quotas on Korean truck imports into the US. Korean auto companies, Kia and Hyundai, had already made significant inroads to the US auto market. US auto makers have become dependent on US truck sales to stay afloat; they didn’t want Korean to challenge them in the truck market as well. Except for these auto agreements, there were no major tariffs or other obstructions to South Korea imports to the US. Not surprising, the South Koreans were ecstatic they got off so easily in the negotiations. Clearly, the US-South Korea deal had nothing to do with Steel or Aluminum. If anything, it was a token adjustment of US-Korea auto trade and little more.

So if the Korean deal was a ‘big nothing’ trade renegotiation, and if virtually all the US major steel and aluminum importers have been exempted worldwide, what’s Trump’s new trade policy aggression all about? US steel and aluminum imports combined make up only $47 billion—a fraction of total US imports of $2.36 trillion in 2017.
Was the steel-aluminum tariffs announcement just another example of Trump bombast, launched via tweets from the second story of the White House at 3am, to be followed by a quick retreat? Was the South Korean agreement a template and a big ‘softball’ for later negotiations with US trade allies—Mexico, Canada, Europe? Was it Trump shooting off his mouth and then retreating following pressure from his advisors and US business interests? Was the tariff announcement a ‘stalking horse’ for something bigger? Perhaps the tariffs were a cover for domestic political objectives—aimed either at agitating and mobilizing Trump’s political base in ‘red state’ America in preparation for midterm US elections in November 2018 or even a Trump decision to fire special investigator counsel Mueller in coming weeks? Playing the ‘economic nationalist’ card and mobilizing his base, by initiating new tariffs and talking of a ‘trade war’, would serve both Trump domestic political objectives.

For polls show Trump’s steel-aluminum tariffs announcement played well in the Midwest, the great plains states and the South; and especially in those steel and mining towns of Michigan, Ohio, West Virginia, Pennsylvania, Minnesota—i.e. those key swing states that gave him the narrow margin of victory in the 2016 elections! Even if he quickly shelved the tariffs, the media hype sent the message Trump wanted to his base: he was doing something about the decades-long loss of steel and mining jobs in those regions since the 1980s. In short, how much of the steel-aluminum tariffs were for domestic political consumption and how much not?

That question applies as well to the subsequent trade actions by the Trump administration. By the end of March, given all the exemptions, it became clear the real target of Trump’s trade offensive was China and not the rest of US allies.

A closer look at Trump administration statements since March 2018 reveals that Trump’s anti-China trade offensive has had less to do with China general imports to the US and more about US next generation technology transfer by US corporations to China. Next gen technologies like Artificial Intelligence (AI), G5 wireless networks, and similar cyber-security and militarily strategic tech now in development.

As Trump’s new chair of his Economic Council, Larry Kudlow, put it in March, “There’s no trade war. All we’re trying to do is protect US technology”. Kudlow added a month later, in early April, “Sometimes you have to use tariffs to bring countries to their senses”. Tariffs are the tactic, not the strategic policy objective. And if trade deficits are not the primiary issue, and tariffs are only the tactic, then what is the strategic objective? It’s technology transfer and domestic politics. Perhaps the US defense sector, in particular the NSA and Trump’s military generals-heavy administration, are playing a greater role in the US-China trade war in the background than is thus far noted by the media. And not enough attention is being given to the role of domestic political events as well.

Put another way, at the level of appearance, the US trade deficit and China imports to the US may be the target for purposes of public opinion. But behind the appearance, it’s more likely that US domestic politics plus US long term military planning are the two more important drivers behind Trump’s emerging trade war. All of Trump’s tariffs and subsequent trade measures are being invoked based on an obscure ‘national security’ clause in US trade legislation. And China is increasingly the target, as tariffs and other measures are suspended and reduced for US trading partners—with the exception of China—as the US pursues a soft trade ‘offensive’ against all its other trading partners. As Trump himself tweeted when the initial steel and aluminum tariffs were announced on March 8, “I have a feeling we’re going to make a deal on Nafta. If we do, there won’t be any tariffs on Canada and there won’t be any on Mexico”.

Even with China, it’s not so much China imports that the US is most concerned about. It’s China’s challenge to US technology development and leadership and the implications of that challenge for US security, defense armament, and US continued dominance in war making capabilities that’s behind even the US-China trade dispute. That technology objective, plus the convenient use of trade in general, and China trade in particular for Trump’s domestic political purposes, are together the real objectives of US trade policy.

The US Plan to Target China

The US focus on China and technology transfer issues as the primary objective was revealed months ago. The US anti-China trade offensive was initiated in 2017 and has been in development for at least a year. The opening of a trade war with China did not begin with some impulsive Trump tweets in March 2018. It has been in the works since at least last August 2017.

In August 2017 Trump formally gave the US Office of Trade (OUST) the task of identifying how China was transferring US technology, “undermining US companies’ control over their technology in China”, as well as seeking to do so by acquiring US companies in the US. On August 18, 2017, the OUST laid out in writing four charges in a formal investigation it was undertaking, accusing China of actions designed to “obtain cutting edge in IP (intellectual property) and generate technology transfer”. All four charges were intensely technology transfer related.

That August 2017 scope of investigation document was then reproduced verbatim on March 22, 2018, with the expected findings and recommendations, in the 58 page 2nd OUST report of March 22, 2018 that publicly launched Trump’s trade offensive against China. China was found ‘guilty’ of aggressively seeking technology transfer at the expense of US corporations, both in China and the US. All four charges of August 2017 were found to have been violated by China.

Based on the OUST report of March 22, 2018, and the report’s recommendations (and its list of 1300 target products),Trump announced plans to impose $50 billion in tariffs on 1300 China general imports, ranging from chemicals to jet parts, industrial equipment, machinery, communication satellites, aircraft parts, medical equipment, trucks, and even helicopters, nuclear equipment, rifles, guns and artillery.. Trump may have appeared in March 2018 to have shifted gears in his trade policy—from a general steel-aluminum tariffs focus to a focus targeting China trade— but China has been the planned primary target.

In other words, China and the specific 1300 tariffs were the target at least from August 2017, and likely in internal planning when Trump first took office in January 2017. Trump just set it all in motion on March 23, 2018. The China trade war was set in motion a year earlier. The prime objective for the US has always been stopping China technology transfer. The OUST list of 1300 tariffs was, and remains, a ‘bargaining chip’ to exchange for what Trump and the US really wants from China: reducing US technology transfer.

A somewhat curious event in the preparation for targeting China occurred only days before the March 23, 2018 OUST report release, when Trump himself tweeted he’d like to see 1$ billion in tariffs on China. How then did the official policy become $50 billion after March 23, 2018? Was Trump initially out of the loop of US elite China trade policy in development? Did the China-US trade war really originate with Trump? Was it being planned by others, with Trump brought on board after seeing the domestic political possibilities for himself? One can only speculate. Nevertheless, on March 23, 2018 the targeting of China-US trade became official Trump policy.

The Phony US Trade War

The Trump administration has been pursuing a ‘dual track’ trade offensive. The soft track targets US allies in Europe, Americas, and select Asian economies; the China hard track is rooted in US military-defense planning. Both serve Trump’s domestic political objectives. The China trade war is real; the trade war with US allies is phony, by which is meant it is only seeks token adjustments to trade relations which Trump intends to hype for domestic political consumption.

That China and technology are the primary objective in Trump’s true trade war does not mean that Trump will not continue to try to renegotiate bilaterally with other US allies to reduce the US’s growing trade deficits worldwide. China-USA total trade in 2017 amounted to $656 billion. But USA-Canada and USA-Mexico total trade was $568 billion and $588 billion, respectively; or $1.16 trillion. That means total NAFTA trade is nearly double total trade of US with China.

Nonetheless, NAFTA trade negotiations, as well as trade renegotiations with South Korea, Europe and Japan have, and will, result in minor adjustments and little reduction in the US overall trade deficit. The South Korea-US deal of 2018 is the template. As in the recent South Korean deal, Trump achieved only token concessions from NAFTA partners—mostly minor changes in auto quotas and agriculture. He then exaggerated and hyped the results to his domestic political base, describing it as some significant big achievement. Like the South Korea deal, however, the NAFTA 2.0 wasn’t.

This ‘dual’ track strategy seems to be working for Trump. Since announcements of tariffs and trade measures beginning in early March, his public opinion approval ratings have risen, according to a consensus of pollsters. And polls taken in his ‘red state’ heartland base show support for his tariff actions, and even if it has meant an initial loss of jobs and business revenues.

Trump’s DejaVu Trade War in Historical Perspective

Periodically, US corporate interests and policy makers launch a major restructuring of US trade relations. This is usually when they deem it necessary to rearrange the rules of the game with trade when US interests are being challenged or when the global economy is weakening and they consider it necessary to protect the US share of a slowing global trade pie.

In 1971 such a restructuring was undertaken by then President Richard Nixon. The US economy had been experiencing a rising rate of inflation in the late 1960s as a result of US excess spending on Vietnam war, the cold war arms race with the USSR, the race to the moon, and expanding social programs associated with the so-called Great Society. Nixon introduced what he called his ‘New Economic Program’ in August 1971.

At the center of Nixon’s NEP was the US abandonment of the 1944 global ‘Bretton Woods’ international monetary system that the US itself had set up at war’s end to ensure its dominance of the new world order in currency, trade flows, and US foreign direct investment worldwide. Under that system the US dollar was pegged to gold at $35 an ounce. Other countries could sell their accumulated dollars in exchange for US gold. Because US inflation was accelerating in the 1960s it was in effect making US goods less competitive. European economies did not want to hold devaluating dollars and were exchanging them for gold. Nixon decided he did not want to sell US gold any longer, even though required under the Bretton Woods systems to do so. So he simply abandoned the 1944 system the US had established. He unilaterally and arbitrarily changed the rules of the game to suit US interests. Immediately the dollar began to devalue, making US businesses more competitive with their European rivals. European currencies rose higher, making them less competitive. To supplement the move, Nixon also imposed tariffs on European imports to the US, while introducing subsidies and tax cuts for US businesses exporting US products. By 1973 the consequences were institutionalized in the so-called Smithsonian Agreement. The US would no longer sell gold. Currency exchange rates would henceforth be stabilized (poorly) by the US and other central banks in Europe buying and selling of currencies to keep them within a range of the dollar. But the 15%-20% dollar devaluation from 1971-73 would remain in place.

The problem of declining US trade competitiveness was the result of US policies. But Nixon’s solution was not to correct US policy errors. Rather it was to make the Europeans correct the problem at their expense by reducing their relative share of global trade. The end of Bretton Woods also meant that central banks would (theoretically) regulate currency exchange rates between countries. In effect this meant that the US central bank, the Federal Reserve, would function as the dominant central bank and the others would have to respond to its initiatives on global interest rate determination. In short, the global trading system was restructured by the US.

A similar development occurred in 1985 under Ronald Reagan. The US experienced double digit inflation in the early 1980s. It then raised domestic interest rates to 18% and began in addition to run $300 billion a year federal budget deficits. This resulted in US businesses raising prices in order to cover the extraordinary rise in rates and costs of borrowing. US products lost their competitiveness to Japanese businesses, which began to import goods to the US at a growing rate. US policies did not bring down rates or inflation significantly by 1985. So the US instead forced Japan to the negotiating table to revise the terms of trade. Japan was forced to inflate its own economy to generate more inflation, to raise the price of their goods and erase their export competitiveness. Once again, a problem caused in the US by US policy was ‘resolved’ by requiring the burden of the resolution to be carried by the trade partner, Japan. The agreement between the US and Japan on trade in 1985 was called the ‘Plaza Accords’. A similar, though less intense, renegotiation with Europe, reached in Paris (Louvre agreements) followed. Once again, when it suited US interests, when challenged by a significant capitalist competitor, the US simply changed the rules of the game.

It is worth also noting that both these trade offensives—Nixon’s and Reagan’s— were launched in the wake of significant expansionary tax cutting and government war spending fiscal policies that produced growing US budget deficits for the US. The subsequent trade offensives were thus designed to expand US exports to supplement domestic US fiscal over-stimulus policies at the time. Nixon’s initiative followed the recession of 1970-71 and his obsession to over-stimulate the US economy by every means to ensure his re-election in 1972. It did, but it simultaneously wrecked the US economy for the remainder of the decade, resulting in domestic stagflation, collapse of real investment, downward pressure on corporate profits and a call from business interests for a fundamental reorientation of US economic policy that would eventually be known as ‘neoliberalism’ and would last until the crisis of 2008-09.

Reagan’s trade offensive followed the recession of 1981-82 and the failure of US policy to address the US’s ballooning budget deficits after 1981 (from tax cuts and spending hikes) and the growing trade deficits as the US dollar rose steadily in the first half of the decade.
The Nixon policy resulted in financial instability in 1973 and failure of several large banks, followed by the worse recession to date in 1973-75 and stagnation for the rest of the decade. Reagan’s policy resulted in even more financial instability in the crash of stock and junk bond markets and housing markets in the latter half of the 1980s, followed by the recession of 1990-91. Europe and Japan fared no better after 1985, with general banking crises in northern Europe and Japan in the early 1990s that were at least in part due to the Plaza and Louvre trade agreements.

A similar pattern is once again emerging under Trump’s trade offensive targeting China. Trump’s current trade offensive follows massive multi-trillion dollar US business-investor tax cutting, which amounted, at minimum, to $4 trillion to businesses, investors, and wealthiest 1% households as result of legislation signed January 2018. Trump’s $4 trillion in tax cuts was quickly followed in March 2018 by a $300 billion two year, 2018-2020, increase in net additional US government spending, mostly defense oriented. By most estimates, trillion dollar a year annual US budget deficits are now on the horizon for another decade.

To pay for the deficits the US central bank, the Federal Reserve, is now having to raise interest rates rapidly and sell record more US Treasury bonds and securities to raise funds to cover the US trillion dollar deficits ahead. However, that central bank policy has had a dampening effect on US economic growth and has led to a significant financial market contraction by year end 2018 that could destabilize growth even further in 2019. The Trump administration is hoping that the fiscal stimulus, supplemented with the benefits of more exports as result of its trade renegotiations, will be able to offset the economic slowdown generated by rising US central bank interest rates.

But this rearranging of fiscal, monetary and trade policies will almost certainly not prove successful—just as similar policy trade offs under Reagan and Nixon ultimately failed as well. The Trump massive business-investor tax cuts have thus far barely ‘trickled’ into the real economy. Most of the tax cuts will be diverted by companies to buying back their stock, paying out dividends to shareholders, used for acquiring competitors (Mergers & Acquisitions), or for paying down corporate debt—just as were US corporate profits diverted and used, from 2009 through 2016 in the US. Trump’s $100 billion a year defense spending will also have less economic stimulus effect—compared to the 1980s and 1970s—since defense spending has become high cost/low job creation in content.

Finally, the trade offensive against China will prove far more difficult for Trump to pull off than Reagan’s trade policies targeting Japan or Nixon’s targeting Europe. The same relationship of forces and relative power simply does not exist for the US today, as it once did in the 1970s and 1980s.

The basis for Trump’s China trade offensive is the 1974 US Trade act, section 301. Invoking it worked against Japan. It forced Japan to reduce its auto exports and build auto plants in the US. It also encouraged Japan to shift from real goods production to financial asset speculation, which led to its crash in 1990-91. But it will prove less effective against China. Some of China’s likely counter-measures and responses have already begun to appear. Among the possibilities are politically targeted tariffs on US exports, devaluing its currency, slowing its purchases of US Treasury bonds, delaying the opening of its financial markets to US banks and investors, launching a nationwide ‘boycott America’ goods program, holding up its approval on global agreements on corporate mergers, and so on.

However, the clearly slowing global economy that became increasingly apparent in the closing months of 2018—including growth both in China and the US—have imposed pressure on both economies to come to a deal in 2019. China’s financial markets have begun contracting as well; its main Shanghai market down nearly 30%. Similarly, the major US markets experienced their worst decline in less than two months, November-December, since 1931. Both real economies, and markets, will slow and decline in 2019, although not without periods of ‘recovery’. Concurrently, Europe’s economy is slowing rapidly, including key economies like Germany, France, and Italy—with a UK Brexit shock also on the horizon. Japan and South Korea, and various emerging market economies also have begun their slide. So economic conditions in 2019 will likely force a China-US trade deal by mid-year 2019.

For what this tentative and likely deal will look like in terms and conditions, Part II of this article follows, addressing the real US-China ‘trade war’—over next generation technology like Artificial Intelligence, 5G wireless, and Cybersecurity. These are not only the next sources of new industries that will drive economic growth for the coming decades, but also the crux of which country dominates militarily in the period ahead. The US and China have been drifting toward a real trade war, are on the brink, but not there yet. That may change in 2019. Should negotiations break down, it will be over technology and not tariffs, trade deficit, or the US demand for more US banker and multinational corporation ‘access’ (read: 51% or more ownership) to China markets. Odds are in favor, however, of a settlement and agreement. Economic conditions are driving both to that conclusion. How the parties structure and publicize any agreement on technology, if they do, will be the key. Most likely, both will agree to generalities and future actions, declare themselves the winner, and move on–with US corporations, bankers, and agribusiness getting their sales and access to China markets. And China buying time to continue its technology policy and development.

Dr. Jack Rasmus
January 9, 2019

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