posted February 9, 2018
The Global Stock Market Implosion–Some Causes & Predictions

(Article 2) US Stocks ‘Dead Cat Bounce’ and Second 1000 point Drop, by Dr. Jack Rasmus, Feb. 8, 2108

Today the US stock market plummeted another 1,000 points. As this writer forewarned after last monday’s 1175 pt. fall, the recovery would be a classic ‘dead cat bounce’. Well, the cat bounced the past two days–just not very high or for very long. And now it’s flopped again. The Question: will it roll over on its back, legs up? Or get up and run around a little more, before flopping again? Make no mistake, the cat is tired and can no longer jump. It may not even be able to get back up on its feet.

Investors’ psychology will now have changed. Now it’s clear, the financial markets’ last weekend collapse was not a ‘one off’ event. This realization will have a big effect going forward. It’s all a different level now. And all the talk by pundits this week trying to pump the market back up, i.e. go ‘buy on the dip’, now look quite stupid and self-serving. Should investors now ‘buy on every dip’ as each dip goes down further and further? It’s a 10% correction in less than a week, well on the way to 20% (and who knows how much more).

In the intervening days since last weekend, reports also began to emerge (somewhat) that the markets were responding to problems with the new derivatives–i.e. Exchange Traded Funds/Products (ETF-Ps)–that were being dumped automatically by what are called ‘quant sellers’ (aka professional investors) in big volumes. This automated selling was responsible for the big movements in price. But all this was quickly hushed up in the mainstream business media.

Last Monday’s collapse was also followed by China currency (Yuan) beginning to fall precipitously. Clearly, China investors are dumping Yuan, buying foreign currencies, and trying to get out in anticipation of more financial instability in China. Capital flight from China is ‘on again’. This could lead to competitive currency devaluations throughout Asia economies. (Shades of 1998’s Currency Crisis!).

And what about other Emerging Market economies? They are extremely fragile and capital flight will almost certain emerge there again, once the US Fed raises rates in March, as it has promised to do. (The Fed also promised to raise rates three more times this year. As I have predicted, however, if the stock markets keep falling, that will not happen, as it will almost certain result in a global credit crunch.) For eight years the Fed has propped up the stock markets with free money; it won’t abandon that fundamental policy at this point. It only backed off temporarily because of fiscal-tax cuts in the trillions taking up its (Fed’s) prior role of subsidizing capital incomes.

And what about Europe (and the even weaker UK) with its $2 trillion in non-performing bank loans? Watch out Italy.

And then there’s the junk bond markets in the US, where some estimates are that nearly a fifth of junk bond borrowing companies are ‘zombies’. They’ve been put on life support by borrowing to repay interest and principal on past debt, laying ever more debt on debt. At some point defaults will appear as the free money from the Fed lowers the liquidity level and the rocks appear in the junk bond market.

The downward momentum in US stock prices will also be fueled in the next stage by the massive buildup in margin buying of US stocks that has been occurring since 2014, and the even more rapid rise in margin buying since Trump took office. Debt balances on margin accounts has risen from an annual average of less than $10 billion a year from 2009 to 2013, to $200 to $300 billion a year the last four years. That’s the greatest margin buying bubble since 1980. Margin buyers will prove desperate stock sellers, driving stock prices even lower in coming weeks, entering yet another new phase.

(Article 1) Stock Markets Implode Worldwide–What’s Next?, by Dr. Jack Rasmus, Feb. 5, 2018

Today, February 5, 2018 the main US stock market, the DOW, fell another 1,175 points, the largest drop in its history. That followed a major decline of 665 points the preceding Friday. The total two day decline amounts to 7.5%. The other major US stock markets, the Nasdaq and S&P 500 also registered significant declines of similar percentages. Markets in Japan and Europe followed suit over the weekend in response to Friday’s US drop; and are expected to fall comparably to the US when they open for Tuesday, February 6. What’s going on? More important still, what will go on—in the next few days and in the weeks to come?

The business press and media trotted out all the experts today. The ‘spin’ and message was “don’t panic” folks. This is to be expected, they say, given the bubble price run-up through 2017, and especially since last November 2017, after which the bubble accelerated still faster. In the month of January alone, the DOW rose nearly 7%. That’s considered a good ‘year’s gain’ in ordinary times. Yet mainstream economists say it hasn’t been a bubble, while they give no definition of what a bubble exactly is—because they don’t know. But certainly a DOW run-up from around 16,000 lows in 2016 to more than 26,000 in little more than a year constitutes as a bubble.

But the media talking heads parading in front of cameras today sing the same song, “don’t panic”. It comes in various keys: “It’s a welcome pullback”, a “constructive sell off”, an “opportunity to buy on the dip” and other such nonsense. But when asked why now the collapse, they have nothing to add.

What it represents, however, is professional institutional investors decided to ‘take their money and run’, leaving the small investors to take the losses. And more are coming. The professionals realize that the central bank, the Fed, is going to raise interest rates 3-4 times this year. That has already begun to send the bond markets into a tailspin. And now stocks are following suit. The stock markets have risen to bubble territory for several reasons:

One is the 9 year massive injection of free money by the Fed and other central banks. More than necessary to invest in real production, so it flows into financial markets in the US and worldwide. Corporate profits since 2010 have nearly tripled, and capital gains taxes have been steadily reduced by trillions of dollars since 2010 as well. Corporations have kept a steady flow of money capital to their shareholders with 7 years of stock buybacks and dividend payouts—averaging a trillion dollars a year for seven years! Profits, dividends, buybacks, capital gains tax cuts resulted in trillions flowing into financial markets. Add to that record levels of margin buying of stocks by small investors (always a sign of bubbles) and that’s the source of the record price appreciation of stock markets. And, of course, let’s not forget the Trump business-investor tax cuts of more than $4 trillion (not $1.5) that are coming on top of it all—that will subsidize profits with an immediate 10%-31% profits boost, on top of the record profits that US corporations had already attained. Massive money capital injections surging into stock and other financial markets. That’s why the bubble.

But what of the bust? Why now—not before or later? It’s because of changes in the markets themselves: the advent of what’s called ‘momentum trading’ by big institutions like quant hedge funds and others; by the shift to passive investing and what’s called index funds; by derivatives like ETFs driving stock prices as well. All the above result in rising prices sucking in more money capital just because prices are rising….which results in still more prices rising.

Until of course the central bank convinces them that the ‘punchbowl of free money’ is being drained. Then the professionals take their money and run, leaving the ‘herd’ of small investors holding the empty bag.

What’s most interesting is that the Fed’s interest rates haven’t even reached 2% and the system has cracked. In 2007, Fed rates had to exceed 5% before the credit crash was set in slow motion. But this writer predicted that would be the case, i.e. that the Fed rates could not rise above 2-2.25% (and the 10 year Treasury bond much above 3%) without precipitating another credit crisis.

But the stock crash of February 2 and 5 is not the beginning nor the end of what’s coming. There may be a further decline in coming days but it will stabilize. There will be a recovery or sorts. But it will be a ‘dead cat bounce’, as is always the case in such events. Some weeks, or even months later, the real contraction will begin. And that will be the real one.

To recall events of 2008, it was the collapse of Countrywide Mortgage and Bear Stearns investment bank in early 2008 that were the warning signs. Recovery temporarily followed, until Fannie Mae and then Lehman Brothers set the real forces in motion. The precipitating events may not even originate in the US but outside. Japan and Emerging Market economy stock markets are especially vulnerable. But financial markets are global and tightly integrated in today’s capitalist system. Contagion is built into the system globally. And investors move their money around worldwide in an instant. They will eventually pull back, wait and see, and the markets temporarily restabilize. Is it an opportunity to scoop up the losses of the smaller herd investors that will have lost trillions this week? That’s what the professional investors, the big institutional investors, the hedge funds, private equity, the big capitalists will now be asking themselves. Or is it the real contraction that will drive the markets down at least 20% in coming days and weeks? They will also ask themselves will the Fed hold to its plan to continue to raise rates? If it does, the they’ll decide the great stock bull run of 2010-18 and its bubble is over and they’ll move to the sidelines for the foreseeable future, not temporarily. They’ll take their trillions of dollars and run. And when they do, the real contraction will begin….and the road to the next recession.

In the meantime, watch the dead cat as it bounces. How high. And when it lands will it flop over dead or get up and run again?

Dr. Rasmus is author of the 2017 book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and Systemic Fragility in the Global Economy, Clarity Press, 2016

posted February 3, 2018
US Central Bank (Federal Reserve) Under Yellen

It’s been three and a half years since Janet Yellen assumed the role as chair of the Federal Reserve bank. What has the Yellen bank tried to achieve over this period? And has it in fact achieved what it said it would?

Bernanke-Yellen Indulge the Children: The Taper Tantrum

One of the first tasks of the Yellen Bank, which began in early 2014 with Yellen assuming the chair of the Fed that February, was how to respond to the Taper Tantrum that arose in the preceding spring 2013 when Bernanke was still at the helm of the Fed. Should the Yellen bank embrace the Bernanke bank’s response as it was? Slow it? Abandon it? Or accelerate it?

‘Taper’ refers to the reduction in stages of the Fed’s rate of massive money liquidity injections of 2009-12 created by the QEs and ZIRP programs. ‘Tantrum’ refers to the negative reaction by offshore emerging markets, US and global investors who had committed heavily to those markets, as well as US multinational corporations (MNCs) that had shifted investment and production to the EMEs.

The Fed gave the first indication it might taper in May 2013. This was officially confirmed by Bernanke’s press conference in June 2013, when the Fed noted it planned to start ‘tapering’ its QE3 bond buying program later that year. QE tapering also strongly implied that once QE3 had been ‘fully tapered’ it was likely the Fed would next begin raising interest rates from the excessively low 0.1% federal funds rate that had been in effect from the summer of 2009.

Even though the inflation level in 2013 was projected to rise to only half the 2% official Fed target, in his press conference Bernanke nevertheless forecast that prices would rise to 2% by early 2015 due to accelerating US GDP and growth driving prices higher. According to Bernanke, US GDP would rise 2.6% in 2013 and accelerate to an extraordinary 3.6% in 2015. The faster real growth and rising price level were cited as justification for beginning the ‘taper’. The forecasts for both price level and GDP growth would of course prove grossly inaccurate. The price level in 2013 would rise to only 1.4% and even lower to 0.6% in 2015. GDP forecasts would prove even worse, with 1.7% growth (not 2.6%) for 2013 and 2.6% (not 3.6%) for 2015. But such failed forecasting was hardly new for the Bernanke Fed.

The prospect of a tapering of the QE3 $85 billion a month in liquidity injection, followed by a possible further reversal of the Fed’s zero rate program (ZIRP), set off a mini-panic among global investors, especially those betting on offshore emerging markets and by US MNCs, as well as by EME governments and domestic producers. But it was investors and MNCs that raised the loudest cacophony of protest and alarm.

Since a large part of the Fed’s massive liquidity injections from QE and ZIRP after 2008 had flowed out of the US and into the EMEs, contributing significantly to financing the global commodity boom and China’s economic growth surge of 2009-12, US and global investors betting on offshore markets and MNCs located in the EMEs potentially had a lot to lose from a ‘taper’. The Fed’s QE and ZIRP programs had a lesser impact on the US economy due to the outflow. As a Forbes business source admitted in 2014, “The data show a very strong correlation between the level of gross inflows to emerging markets since 2009 and the size of the Fed’s balance sheet. A simple regression for the 2011-13 period suggests that for every billion dollars of QE, flows to major emerging market economies like the BRIC countries rose by about $1.4 billion.” Rising Fed rates thus threatened continued money capital outflow to the EMEs, with potential major negative consequences for both financial and real investment profits for investors and MNCs..

The beginning of the end of ‘free money’ would raise the credit costs of investing in EME markets and thus reduce profitability. For US MNCs directly producing in the EMEs, their costs of imported resources and other inputs needed for production in their EME facilities would also rise while their prices received for exporting their finished products simultaneously declined due to EME currency decline. MNCs planning to repatriate their EME profits back to the US parent company would also experience a paper profit decline due just to the exchange rate effect. Converting profits in foreign currency to the rising dollar would result in less dollar-denominated profit. Declining EME currency exchange rates were thus decidedly bad for MNC profits. For US and global investors who had invested heavily into EMEs financial markets’ expansion in 2009-12, profitability would be reduced further as the rise in US rates inevitably translated into a rising US dollar and declining value of currencies of those EME economies; their profits too would be reduced for those planning to ‘repatriate’ earnings back to their US accounts. And for those US and global financial speculators who had invested heavily in EME financial markets and planned no ‘repatriation’, collapsing EME currencies nonetheless would register a corresponding collapse of the value of their financial investments in the EME stock and bond markets. Rising rates in the US might also provoke a retreat of stock and bond prices in US financial markets, offsetting the prior QE-liquidity escalation effect on US financial asset prices. In short, a good deal of money might be lost for broad sectors of US investors and producers as a consequence of a Fed ‘taper’ of QE followed by a rate hike.

EME domestic producers and investors would of course also experience profits compression due to rising import inflation, exports revenue decline, domestic stock, bond and foreign currency exchange market losses, etc. Their EME governments would have to deal with growing problems of capital flight and slowing economies resulting in unemployment, declining government tax revenues, and rising government deficits. Ultimately, in the worst case scenario, they would be unable to borrow from advanced economy bankers and investors to cover their rising deficits, or borrow at ever rising costs. The potential for government debt defaults might eventually become more serious in turn.

But it was US investors and MNCs, who together represented a powerful interest group that reacted negatively most strongly to Bernanke’s proposal to slow liquidity and thus raise rates. While EME governments and their domestic producers raised complaints to Washington in the wake of Bernanke’s announcement, louder still were the complaints by US multinational corporations (MNCs) that had moved operations and production to the EMEs, beginning with Reagan policies promoting offshoring of manufacturing and the expanding of US foreign direct investment (FDI) abroad under Clinton, Bush and Obama’s free trade policies.

It is incorrect therefore to describe the taper tantrum as purely a response by EME governments and producers. The Fed no doubt cared less about the losses that might be incurred by EME producers and their governments than about the political pressures that US MNCs and investors might exert on the Fed, through their friends and lobbyists in Congress and the US government. Complaints were already beginning to rise about Fed policies and calls for ‘reforms’ of the Fed itself during Bernanke’s term.

The mini-panic over just the potential of a liquidity reversal by the Fed resulted in Bernanke quickly backtracking on his trial proposal to begin reducing liquidity and raising rates. The taper proved mostly Fed talk and no action. The Fed continued its buying of both mortgage securities and US Treasuries under the QE3 program through Bernanke’s term, including after June 2013. The bond buying would continue unabated under Yellen after February 2014 until the end of that year. QE3 would not be suspended until December 2014. And it would be another full year before the Yellen Fed would even begin to test raising the federal funds rate, with a minimal 0.25% rate hike in December.

The decision by the Bernanke and Yellen banks to indulge investors and MNCs by not ending liquidity injections via QE for another 18 months after June 2013 is illustrated by the following Fed purchases of Treasuries and mortgage securities during that period:

Fed QE3 Purchases After Taper Announcement

Type of Security June 2013 February 2014 December 2014

Mortgages $1.3 trillion $1.5 trillion $1.7 trillion
US Treasuries $1.9 $2.2 $2.4

The EME taper tantrum by investors, MNCs, and EME governments and producers continued nonetheless throughout the remainder 2013, until it became clear the Fed was not going to discontinue QE or raise rates under Bernanke. Long-term US bond rates, an indicator of the tantrum, rose in 2013—and EME currency declines, capital flight, and financial markets stress continued. Once Yellen was made Fed chair, within weeks it was clear even to EME investors that their fears over the taper were unfounded. By spring 2014 EME currencies again began to rise; money capital flight reversed and began flowing back into the EMEs once again—all but reversing previous trends of 2013.

The taper tantrum was thus a tempest in a teacup. Neither the Bernanke nor the Yellen Fed ever had any real intention of quickly reducing the massive US central bank liquidity injections in 2013 or 2014. Nor any intent to soon begin raising Fed rates. Their real intent was to boost US stock and bond market prices ever further. That meant continuing to inject liquidity by increasing the money supply. Even when the QE bond buying program was halted in December 2014, Bernanke/Yellen planned to keep interest rates otherwise near zero for an extended period. It was no longer necessary to have both QE and ZIRP to do so. Traditional Fed bond buying tools were sufficient after 2014 to ensure US interest rates remained near zero and free money kept flowing to banks and investors—i.e. to keep prices rising in financial asset markets while ensuring an undervalued US dollar aided US exports.

The primary Fed strategy under both Bernanke and Yellen has been, and continues to be, to keep interest rates artificially low by a steady increase in liquidity to banks and investors. Low rates would subsidize US exports by ensuring an undervalued dollar, while simultaneously providing ‘free money’ for investors to pump up stock and bond markets. The Fed assumed that some of the surging stock and bond prices would result in a spillover effect into real investment in the US. That was how economic recovery was primarily to occur. And it was acceptable that for every four dollars going into financial asset investment and capital gains, perhaps one dollar would result in real investment expansion. At least some liquidity would maybe find its way into creating real goods and services; that was the Fed logic.

That logic summarizes the essence of 21st century capitalist central bank monetary policy: flood the financial markets with massive excess liquidity in the expectation that some of the escalation in stock and bond prices will overflow into real investment; simultaneously, the excess liquidity will also reduce currency exchange rates, thereby subsidizing export costs, and boosting real growth by expanding exports and real GDP as well. The problem with this ‘monetary primacy’ strategy, however, is that most of the boost in financial asset values results in corporations issuing bonds to fund their stock buybacks and shareholder dividend payouts. Or it results in diversion of liquidity by investors that borrow to invest in financial asset markets easily accessible worldwide. Or it ends up as cash hoarding of the excess liquidity on institutions’ and investors’ balance sheets. Very little spills over to real investment. Nor does it boost exports in a global economy characterized by slowing global trade overall. The excess liquidity flows into multiple forms of debt and non-productive financial asset investment or accumulates on the sidelines.

These actual developments mean central banks and monetary policy have become the new locus for a 21st century form of competitive devaluations. While in the 1930s nations engaged in competitive devaluations, amidst a slowing global economy, in a futile effort to obtain a temporary export cost advantage over their competitors as a means to grow their real economies, today it is central banks that drive the competitive currency devaluations process via QE, ZIRP, and massive liquidity injections.

Add to this futile money supply-driven export strategy the financialization of the global economy, and the central bank liquidity injections result in slowing real asset investment. Just as central bank money policies fail to boost exports due to competitive devaluations, so too do central bank-provided free money flows. Financial institutions increasingly divert the liquidity from real investment into their global network of shadow banks, their proliferating financial asset markets, and their ever-growing financial securities products.

The 21st century capitalist economy is reflected in a similar financialization of government and the capitalist State, which ensure the implementation and administration of the strategy. Bankers and investors prevent government from introducing alternative fiscal policies in order to ensure they enrich themselves first and foremost through a central bank monetary strategy for economic recovery. Making central bank monetary policy primary is far more profitable to their interests than a ‘fiscal government spending’ strategy. The latter results in a ‘bottoms up’ stimulation of the real economy and real investment first, with subsequent boosting of financial asset prices and markets as an after-effect and consequence of real economic growth.

The Yellen bank thus represents a continuation of the Bernanke Fed in terms of liquidity injection and excess money supply generation. QE may have been suspended under Yellen, but the schedule for such had already been intended under Bernanke. Moreover, the nearly $4.5 trillion of QE-related liquidity still sits on Yellen Fed balance sheets as of mid-year 2017—more than 8 years after the Fed embarked on its QE experiment.

QE is therefore just a tool to inject especially excessive liquidity quickly into the economy, accompanied by other radical Fed measures post 2008. The suspension of QE in December 2014 did not mean that the policy of excess money ended. Money supply and liquidity injections still continued to flow into the US economy at above historical averages under the Yellen regime—i.e. continuing again the trend set under Bernanke. The injections simply continued using traditional central bank monetary policy tools. And as under Bernanke, the Yellen official justification for the continued excessive expansion of the money supply remains the need to attain a price level of 2%.

But the Fed’s 2% price target is a fiction. The official objective of Fed excess money and liquidity injection was, and remains, to boost financial asset markets and hope for a spillover effect; to keep the dollar low to subsidize US exports; and to hope somehow to generate a real investment spillover effect and exports surge that will raise GDP growth. But if it doesn’t, then at least investors, bankers and MNCs will have recovered nicely nonetheless.

The Fiction of Price & Other Targets

The Bernanke/ Yellen Fed has repeatedly failed to attain its 2% official price target. Secondary targets—both official and unofficial– have been suggested in recent years as an alternative, leaving it increasingly unclear what targets the Yellen Fed has been actually trying to achieve. Is it really a 2% price level? Is it to reduce the official unemployment rate to 4.5%? Is it to get wages growing again in order to boost household consumption? Is it to ensure that financial system instability does not erupt again like, or even worse than, it did in 2008-09?

Price Stability Targeting

The $3.2 trillion QE under Bernanke (plus more from traditional monetary policy tools) clearly failed to achieve the Fed’s official 2% price target. But the Yellen Fed has not done any better as it added another roughly $1.0 trillion to the Fed’s balance sheet.

2% Fed Price Target Attainment.
Bernanke v. Yellen Fed
Bernanke Fed (60 mos.) Yellen Fed (36 mos.)
1/09 12/13 Avg%chg/yr 12/13 12/16 Avg%chg/yr

PCE Price Index 1.00 108.2 1.6% 108.2 111.6 1.0%

CPI Price Index 0.98 1.07 1.8% 1.07 1.11 1.2%

GDP Deflator 99.9 107.6 1.5% 107.6 112.8 1.6%

If one compares and contrasts the Bernanke and Yellen Fed in terms of the 2% price target, it is clear that neither Fed came close to the target. This was especially true of the Fed’s preferred price indicator, the Personal Consumption Expenditures Index (PCE). But also true for the Consumer Price Index (CPI), and even the broader price indicator for all the goods and services in the real economy, the GDP Deflator index. As of April 2017, over the three and a third years of the Yellen Fed, the PCE still averaged only 1.2%.

Despite some evidence of the PCE beginning to rise faster in early 2017, the PCE index for April 2016 to April 2017 was still only 1.5%–still well below the 2% target. If the price index were really the key target for deciding on Fed rate hikes in 2017 and beyond, that target was certainly not achieved. The fact that the Fed began raising rates after December 2016 nonetheless, thus confirms price targets have little to do with Fed decisions to raise rates or not. They are a fiction to justify and obfuscate other real reasons.

Unemployment Rate Targeting

As the 2% price level slipped from view, the Bernanke Fed indicated its policies would continue unchanged until the unemployment rate had declined to what was called the Non-Accelerating Inflation Rate of Unemployment (NAIRU). NAIRU was a fictional assumed rate of unemployment at which an equally fictional price level was assumed to stabilize at 2%. NAIRU was also a constantly moving variable and target, depending on who defined it, assumed to be somewhere around 4.4% to 4.9%. Another problem with it is that the 4.4-4.9% measure was based on what was called the U-3 unemployment rate. And the U-3 ignored 50 million or more jobless—the underemployed part time and temp workers, plus what was called the ‘missing labor force’, plus the number of grossly underestimated ‘discouraged’ workers who gave up looking for a job (but were no less unemployed). It also overlooked the collapse of the labor force participation rate, which had declined by 4% of the labor force in the past decade. At 157 million, that meant 6 to 6.3 million have dropped out of the labor force altogether and, given the way the US calculates unemployment rates, were never counted as unemployed for purposes of determining the U-3. Adding in these ‘actual jobless’ categories raises the U-3 official rate to around 10%. And even that figure fails to account accurately for joblessness in the ‘underground economy’, and among urban youth, undocumented workers, workers on permanent disability, and itinerant labor. The real unemployment rate today is thus around 12-13%. The Fed’s informal shift to targeting a U-3 unemployment rate should therefore be considered as just as fictional a ‘political placeholder indicator’ as the 2% price level target. Neither could nor would be attained.

So the Yellen Fed’s performance in price targeting was no improvement over Bernanke’s. It was therefore not surprising that the Yellen Fed continued to search for some alternative indicator of ‘success’ for its policies after 2013, like the U-3 unemployment rate, or even flirted with the idea of wage growth as proof of Fed monetary policy success. It suggested perhaps wage growth was an alternative and better measurement than the unemployment rate, since it took an extended period even for the U-3 to recede to 4.5%.

Wage Growth Targeting

The Yellen Fed left the measure of wage growth vague quantitatively, however, since it was never offered as an official alternative target and the U-3 unemployment rate target of 4.7% was eventually achieved in 2016. But a look at various indicators of real wage growth reveal a general stagnation or worse, whether under Bernanke or the Yellen Fed.

Instead of acknowledging failure to achieve the 2% price level target, both Fed’s publicly diverted attention to alternative ‘targets’ to prove their QE-ZIRP, and excessive liquidity programs in general, were ‘successful’. But it wasn’t any of the targets—however defined—that were the key. It was the liquidity itself that was the objective. It was all about providing virtually free money to the banks and investors, and the boosting of the financial markets—stocks, bonds, etc.—that was the true target of Fed monetary policy and strategy. And the Yellen Fed was no different than the Bernanke in that regard. Formal targets were secondary and fictional; liquidity injections were primary and what Fed monetary policy was really all about—i.e. boosting financial markets to record levels and only secondarily, keeping the US dollar depressed in the false expectation that somehow it might stimulate real investment and growth a little even though it exacerbated capital gains income and accelerated income inequality trends.

The Money Supply Function

Comparing money supply management and liquidity between the two Feds shows that the Yellen Fed was moderately more aggressively injecting liquidity when measured by the M2 money supply, although less so when the M1 is considered. Comparing Bernanke’s full eight-year term to Yellen’s three and a third years to date, shows the following comparisons in money supply and liquidity..

M1 & M2 Money Supply
Bernanke v. Yellen Fed($ Trillions)

Bernanke Fed Yellen Fed

12/05 12/13 $chg/yr. %chg/yr. Tot%chg 2/13 04/07 $chg/yr. %chg/yr. Tot%chg
M2 $6.6 $10.6 $.5 7.6% 60% $10.6 $13.5 $.87 8.3% 27%
M1 $1.4 $2.7 $.16 11.6% 93% $2.7 $3.4 $.21 7.9% 26%

Even with the ending of QE3 under Bernanke in late 2013, the money supply and liquidity continued to grow under Yellen’s Fed. M2 has actually grown faster at an annual rate under the Yellen Fed. What that suggests is that Yellen’s central bank has perhaps made greater use of traditional Fed tools like open market operations to inject liquidity and ensure that short term rates remained near zero (ZIRP) even after QE was terminated. In this sense, the Yellen bank represents something of a partial shift in terms of monetary tools. The QEs may have been wound down as Bernanke left office, but the Bernanke policy of ZIRP was carried forward by Yellen’s bank just as aggressively by other means.

From the beginning of 2006 to the present, both the M2 and M1 money supply have more than doubled under the Bernanke/Yellen Fed! The US banking system was effectively bailed out in 2010—quite some time ago. But the QEs and ZIRP and liquidity have just kept coming. If the Fed’s liquidity policy has been as aggressive as it has in order to bail out the banks, why then did the bailout continue for the next seven years?

It is therefore incorrect to describe Fed policies as a bank bailout after 2010. It is more correct to identify Fed policy since 2010 as an unprecedented historical subsidization of the financial system by the State, implemented via the institutional vehicle of the central bank.

Financial Subsidization as New Primary Function?

Central bank financial subsidization policy raises the question as to whether the primary function of the central bank in the 21st century is more than just lender of last resort, or money supply management, or bank supervision, as has been the case in the past before 2008. Certainly those primary functions continue. But a new primary function has demonstrably been added: the subsidization of finance capital rates of return and profitability—regardless of whether the financial system itself is in need of bailout or not. Globalization has intensified inter-capitalist competition and that competition compresses prices and profits. So the State, in the form of the institution of the central bank, now plays an even more direct role in ensuring prices for financial assets are not depressed (or prevented from rising) by inter-capitalist global competition; and that global competition is more than offset by central banks becoming a primary source of demand for private sector financial assets. Excess liquidity drives demand for assets, which drives the price of assets and in turn subsidizes price-determined profitability of financial institutions in particular but also of non-financial corporations that take on the characteristics of financial institutions increasingly over time as well.

Long after banks were provided sufficient liquidity, and those in technical default (Citigroup, Bank of America, etc.) were made solvent once again, the Yellen Fed has continued the Bernanke policy of massive and steady liquidity injection. Whether the tools are QE or open market operations, modern central bank monetary policy is now about providing virtually free money (i.e. near zero and below rates). Targets are mere justifications providing an appearance of policy while the provision of money and liquidity is its essence. Tools are just means to the end. And while the ‘ends’ still include the traditional primary functions of money supply and liquidity provision, lender of last resort and banking system supervision—there may now be a new function: financial system subsidization.

The ideological justification of QE, ZIRP and free money for banks and investors has been that the financial asset markets need subsidization (they don’t use that term however) in order to escalate their values in order, in turn, to allow some of the vast increase in capital incomes to ‘trickle down’ to perhaps boost real investment and economic growth as a consequence. They suggest there may be a kind of ‘leakage’ from the financial markets that may still get into creating real things that require hiring real people, that produce real incomes for consumption and therefore real (GDP) economic growth. But this purported financial trickle down hardly qualifies as a ‘trickle’; it’s more like a ‘drip drip’. It’s not coincidental that the ‘drip’ results in slowing real investment and therefore productivity and in turn wage growth. This negative counter-effect to central bank monetary policy boosting financial investment and financial markets now more than offsets the financial trickle-drip of monetary policy. The net effect is the long term stagnation of the real economy.

The Fed’s function of money supply management may be performing well for financial markets but increasingly less so for the rest of the real economy. That was true under Bernanke, and that truth has continued under Yellen’s Fed as well. Central bank performance of the money supply function is in decline. The Fed is losing control of the money supply and credit—not just as a result of accelerating changes in global financialization, technology, or proliferation of new forms of credit creation beyond its influence. It is losing control also by choice, as it continually pumps more and more liquidity into the global system that causes that loss of control.

The Yellen Fed’s 5 Challenges

The Yellen Fed (and its successor) face five great challenges. Those are: 1) how to raise interest rates, should the economy expand in 2017-18, without provoking undue opposition by investors and corporations now addicted to low rates; 2) how to begin selling off its $4.5 trillion balance sheet without spiking rates, slowing the US economy, and sending EMEs into a tailspin; 3) how to conduct bank supervision as Congress dismantles the 2010 Dodd-Frank Banking Regulation Act; 4) how to ensure a ‘monetary policy first’ regime continues despite a re-emergence of fiscal policy in the form of infrastructure spending; and 5) how to develop new tools for lender of last resort purposes in anticipation of the next financial crisis.

1. Suspending ZIRP and Raising Rates

A major challenge confronting, and characterizing, the Yellen bank has been whether, how much, and how fast to raise US interest rates.

The Fed’s key short term interest rate, the Federal Funds Rate, was reduced from 5.25% in 2006 to virtually zero at 0.12% by June 2009. In fact, it was effectively lower since the Fed even subsidized this by paying banks 0.25% to keep their reserves (now growing to excess) with the Fed. So it was slightly negative in fact.

The Bernanke Fed kept the rate at around 0.1% until Bernanke left office in January 2014. When the taper tantrum erupted in the summer 2013 and Bernanke sharply retreated on QE tapering, he calmed the markets by promising not to raise rates until 2015 even if QE was eventually slowly reduced. And that promise Bernanke, and his successor Yellen, effectively kept. That meant the Fed ensured seven years of essentially zero rates and therefore free money to bankers and investors from early 2009 through 2015. During those seven years, while bankers got free money more than 50 million US retiree households, dependent on bank savings account interest, CDs, and other similar fixed income accounts, realized virtually nothing in interest income. Over the period more than $1 trillion was lost. In effect, it was a transfer of trillions from retiree households to bankers, and accounts for a good deal of the accelerating income inequality trend since 2009. While average income retired households lost the $trillion, bankers and investors invested and made $trillions more—so income inequality was exacerbated by two inverse conditions: lost income for retired, mostly wage and salary former workers, and escalating profits and capital incomes for bankers, shareholders, and investors.

The Fed’s Minneapolis district president, Narayana Kocherlakota, who often disagreed with Bernanke and Yellen’s policy of continuing low rates, upon leaving the Fed in December 2015 remarked that the near zero (ZIRP) Fed rate policy was planned to be that way from the beginning—i.e. to have a long period of zero rates regardless of publicly announced targets. The Fed from the beginning planned to engineer a slow recovery after November 2009. It was no accident of economic conditions. As the outgoing Fed president, Kocherlakota, put it,

“We were systematically led to make choices that were designed to keep both employment and prices needlessly low for years”…the Fed “was aiming for a slow recovery in both prices and employment”.

Kocherlakota’s comments represent a ‘smoking gun’, from a Fed insider who was in on all the major deliberations on Fed interest rate policy. Neither price nor employment targets were apparently important. Rates would be kept near zero no matter what, and for an indefinite period. But if not to achieve price and employment targets, then for what reason? The only other objective had to be to pour money into financial asset markets, equities, bonds, and other securities for an open-ended period, regardless of how slow and halting the real recovery that produced and whatever the negative economic consequences for jobs, wages, tax revenues and deficits, accelerating income inequality, and all the rest.

The first hint of possible interest rate hikes emerged in August-September 2015. But the Yellen Fed postponed action due, as it noted, to increasingly unstable global economic conditions. Global oil and commodity prices were plummeting. China’s stock markets had just imploded and the potential contagion effects globally were uncertain. Greece had just barely avoided a default with unknown effects on global bond markets. And concerns were growing that US government and corporate bond markets were facing a possible liquidity crisis. Corporate bond issues in the US had doubled since 2008 to $4.5 trillion, but banks were holding only $50 billion to handle bond transactions, down from $300 billion in 2008. The fear was if Fed rate hikes pushed up bond rates as well, investors might not be able to sell their bonds. That could lead to a bond price crash. At least that was the logic bandied about in Fed circles at the time. So the Yellen Fed put off raising rates in September 2015.

The first Fed rate hike in a decade finally came in December 2015, albeit a very timid 0.25% increase. But even that minimal hike precipitated a big drop in US stock prices. The DOW, NASDAQ and S&P500 all contracted in a matter of weeks in January-February 2016 by -7.5%, -14%, and -12%, respectively, in expectation of possible additional Fed rate hikes in 2016. The extreme sensitivity of stock price swings to even minor shifts in interest rates and liquidity injections thus further confirms the tight relationship between Fed rates and liquidity policies and financial markets. After eight years of free money, financial markets had become dependent upon—if not indeed addicted to—Fed liquidity availability in the form of QE and zero rates.

But the Yellen Fed would not follow up the December 2015 rate hikes with further increases throughout 2016, even though in December it was projected to have four more rate hikes in 2016. China once again appeared unstable in early 2016. Europe and Japan were expanding their portfolio of bonds at negative interest rates and their QE programs, putting downward pressure on interest rates everywhere. The dollar was rising. For the first time ever global trade was growing more slowly than global GDP. Global oil prices slipped below $30 a barrel in January. The US economy in the first quarter of 2016 slumped to a 0.8% low. And on the horizon loomed the unknown consequences of the UK Brexit event on global markets. Not least, by the summer of 2016 the US was in the final legs of its national election cycle. With the growing anti-Fed sentiment rising in the US at the time—both from the right and the left—the Fed did not dare to change any policy just before the US national elections—especially as the US economy, in the months immediately preceding the election, was again growing weaker. Consumption was slowing. Producer prices were declining. Business spending was again faltering. Bank loans had declined for the first time in six years. Manufacturing had begun to contract. Fed rate hikes in the first half of 2016 were no longer on the agenda.

In testimony before Congress in February 2016 Yellen indicated the Fed had instead now adopted an outlook of ‘watchful waiting’. That signaled to stock markets that near zero rates and free money would continue mostly likely for the remainder of the year. Having retreated by -7.5% to 14% in the preceding six weeks, stock markets again took off. The Dow, Nasdaq and S&P 500 surged, respectively, by 14%, 23% and 19% for the rest of 2016.

What the Yellen Fed reveals with this timing of the first rate hike, before and after, of December 2015 is that the US central bank has become the ‘central bank of central banks’ in the global economy. Today, its decisions have as much to do with global economic conditions as they do with the US economy. It takes into consideration the effects of its actions on US capitalist institutions offshore as well as on. It co-operates with the other major central banks in Europe and Asia, which becomes a key factor in its ultimate rate decisions. Its mandate may be the US economy, and Fed chairs often declare they don’t care about the consequences of their decisions on other economies, but that’s simply not true. At times the Fed is more concerned about the impact of decisions on offshore markets, US MNCs’ profits, and US political allies’ currencies than it is concerned about the needs of the US economy itself. The two considerations often also contradict.

In short, the Fed looks ‘outward’ not just ‘inward’ on the needs of the US economy and the effect of rate decisions it makes on the US economy. The hesitations and decisions of the Fed as it considered raising interest rates in the months preceding December 2015, and subsequent decision not to raise rates again for the entire next year until December 2016, is testimony to the fact the Fed considers itself the ‘central bank of central banks’ in the capitalist global economy.

Although the Yellen bank would not act to raise rates in the months immediately preceding the 2016 election, pressures continued to mount at the time in favor of a second rate hike. Regardless of who might have won the 2016 presidential contest, the Fed was therefore poised to raise rates immediately thereafter. And it quickly did. The Fed Funds Rate had already risen to 0.24% due to the first rate hike in December 2015. In a second decision in December 2016 the Fed raised it further to 0.54%. Subsequent hikes in early 2017 pushed the short term rate to 0.90% as of May 2017.

While the Fed in early 2017 had signaled the possibility of three more rate hikes in 2017, followed by still further hikes in 2018, as the US economy enters the summer of 2017 it is highly unlikely that many further increases will actually occur. That is because both the US and global economy by late spring 2017 began to appear not as robust as business and media circles had thought, or as the majority on the Fed’s FOMC had apparently assumed as well.

Much of the boost to business investment and the stock markets that occurred after the November 2016 US election was the consequence of expectations by business of major fiscal stimulus and business-investor tax cuts coming quickly from the new Trump administration—the so-called ‘Trump Trade’ (stocks and financial assets) and the related ‘Trump Bump’ (real GDP economy). But it was a post-election real bounce built upon euphoria and expectations. It was the release of business and investor ‘animal spirits’ based more on wishful thinking than real data. Moreover, significant soft spots still permeated the US economy and were once again beginning to emerge in 2017. The global business press began to note that “more investors and analysts are questioning whether an expected rise in the US interest rate is warranted in the face of subdued inflation and signs of weaker growth.”

By late spring it increasingly appeared the ‘Trump Effect’ was beginning to fade, as more political analysts predicted the fiscal stimulus would be delayed until 2018, and that whatever stimulus did occur would produce less in real net terms than assumed by business, investors, and the Trump administration. Furthermore, the contribution of China’s mini-economic resurgence in early 2017, which has provided much of the impetus behind modest growth in Japan and Europe, had by late spring 2017 also begun to show signs of weakening. Chinese manufacturing data showed contraction once again and its government’s 2017 crackdown on speculation in housing and stock markets was once again likely to produce more slowdown later in the year.

In short, a fading of the Trump effect and China growth slowing again might very well make the Fed pause before raising rates further after June 2017. The combined Trump Fade/China slowdown is further buttressed by a third force likely to constrain the Fed from following through with more rate hikes after June 2017 or in 2018: the rapidly deteriorating US trade deficit, now at -$760 billion a year and growing. It is highly unlikely, therefore, that the Fed would risk two more rate hikes in 2017, let alone three more in 2018. That would accelerate the US dollar’s rise and push the US trade deficit toward $1 trillion a year. There are further unknowns with the pending US debt ceiling extension. While the Yellen leadership is almost certainly coming to an end in February 2018, as Yellen is replaced by Trump, the Fed will likely hold on further rate hikes unless the US and global economies reverse direction and grow rapidly in late 2017.

Addendum: Revisiting Greenspan’s ‘Conundrum’

A corollary of sorts to the Fed’s short term (federal funds) rate policies is what is the effect of such policies on longer term bond yields (i.e. rates)? Neither the Fed nor any central bank for that matter are able to directly influence the direction or magnitude of long-term bond rates much, if at all. And it appears that ability, as minimal as it has ever been, is now growing even less so in the global financialized economy. That brings the discussion back to the question of the so-called ‘conundrum’ of short- vs. long- term rates raised by Greenspan. What then can be concluded about the ‘conundrum’ under the Yellen Fed?

Given that the Yellen Fed continued unchanged for three years the Bernanke Fed’s policy of keeping short term rates near zero, and only in the last six months of its term did the Yellen Fed begin to raise rates consistently, what can be said of the ‘conundrum’ under the Yellen Fed? Have longer term bond rates followed the rise in short term federal funds rate in turn. The conundrum certainly was in effect under Yellen. Bond rates rose modestly after the November 2016 elections as the Fed reduced the federal funds rate starting December 2016. But after the Fed’s March 2017 hike, long-term rates began to decline once again as short-term rates were raised. In other words, no correlation between long and short and the ‘condundrum’ returned.

Is then the conundrum a fiction of Greenspan’s imagination—i.e. a concocted excuse to justify his failure at Fed rate management? An ideological construct created to provide cover for Greenspan’s failed policies? Or does it take significant and rapid shifts in Fed generated short term rates to even begin moving longer term rates? Perhaps there is a correlation but it has grown increasingly weak as the global economy has financialized. Perhaps central banks, most notably the Fed, have nearly totally lost all ability to influence long-term rates by short-term rate changes in an increasingly globalized and financialized world economy. Whichever is the case, so much for Greenspan’s conundrum—i.e. another of the various ideological constructs created by central bankers to justify and obfuscate the real objectives of their monetary policies. ‘Condundrum’ is thus a conceptual creation belonging in the same box as central bank independence, price targeting, and ‘dual mandates’ to address unemployment.

2. Selling Off the $4.5 Trillion Balance Sheet

From 2008 through May 2017, QE and other Fed liquidity programs raised the Fed’s balance sheet from $800 or so billion to $4.5 trillion. The QE programs ended in October 2014. Since then payments on bonds to the Fed could have reduced the Fed’s balance sheet. However, the Fed simply reinvested those payments again and kept the balance sheet at the $4.5 trillion level. In other words, it kept re-injecting the liquidity back into the economy—in yet another form indicating its commitment to keep providing excess liquidity to bankers and investors.

Throughout the Yellen Fed discussions and debates have continued about whether the Fed should truly ‘sell off’ its $4.5 trillion and stop re-injecting. That would mean taking $4.5 trillion out of the economy instead of putting it in. It would sharply reduce the money supply and liquidity. It has a great potential to have a major effect raising interest rates across the board, with all the consequent repercussions—a surge in the US dollar, reducing US exports competitiveness and GDP; provoking a ‘tantrum’ in EMEs far more intense than in 2013, with EME currency collapse, capital flight, and recessions precipitated in many of their economies. It would almost certainly also cause global commodity prices to further decline, especially oil, and slow global trade even more.

Finally, no one knows for sure how sensitive the US economy may be, in the post-2008 world, to rapid or large hikes in interest rates. Over the past 8-plus years, the US economy has become addicted to low rates, dependent on having continual and greater injections. Weaning it off the addiction all at once, by a sharp rise in rates due to a sell-off of the Fed’s $4.5 trillion, may precipitate a major instability event. The US economy may, on the other hand, have become interest-rate insensitive to further continuation of zero rates, or even forays into negative rates(as in Europe and Japan) as a result of the 8 year long exposure to ZIRP.. In contrast, that same addiction may mean the economy is now also highly interest rate sensitive to hikes in interest rates. As economists like to express it, it may have become interest-rate inelastic to reductions in rates but interest-rate highly elastic to hikes in rates. But it is not likely that Fed policymakers, or mainstream economists, are thinking this way. Their ‘models’ suggest it doesn’t matter if the rates are lowered or raised, the elasticities are the same going up or going down. But little is the same in the post-2008 economy.

In an interview in late 2014 Bernanke was queried what he thought about shrinking (selling off) the Fed’s balance sheet. (A sell-off is a de facto interest rate increase). He replied he thought that interest rates should be raised by traditional means first, before considering shrinking the balance sheet. But it is quite possible that in today’s global economy, long-term US bond rates can’t be raised much above 3% before they start to cause a serious slowing in the real economy. Or short-term rates by more than 1.5%. So should rates be raised by traditional means to push Treasuries to 3% and then shrink the balance sheet, which would raise rates still further? Or should the rate increase effect from selling off be part of a combined approach to attain the 3%? It is likely the Fed can’t have it both ways: it must either raise rates by selling off its balance sheet in lieu of traditional operations, or retain its balance sheet and raise rates by traditional monetary operations. The maximum level of bond rates in today’s US economy, at around 3% to 3.5%, can’t sustain the effect of a double rate hike by traditional means followed by a balance sheet sell-off. It would result in too much instability.

However, Bernanke believes if the sell-off is ‘passive and predictable’ it would not destabilize. And he refers to normalization first of short term, federal funds rates. But any such policy will have a corresponding psychological effect on long-term bond rates as well, which can’t sustain any increase beyond 3.5% before the economy seriously contracts.

How should the balance sheet be shrunk? Here are some options. The Fed could have auctions to sell the $4.5 trillion in Treasuries and mortgage securities it holds, just as it held auctions to buy many of them back in 2009. Or it could withdraw the liquidity through the Fed’s participation in the Repo market where banks use Treasury bonds as collateral to borrow and loan money to each other short term; the Fed could administer what it calls ‘reverse repos’ and withdraw liquidity from the economy through repo market operations. As a third option, it might discontinue its practice of re-investing the bonds as they are paid off and mature and let the balance sheet naturally ‘run off’. Or, as others have suggested, the Fed should adopt a policy of maintaining the $4.5 trillion on its books. Or even add to it by buying student debt. Or corporate bonds, as in Japan and Europe.

Talk of selling off the balance sheet became more prominent in 2017, as the Fed began to raise short term rates more frequently. Think tanks, like the Brookings Institute, began to hold conferences. Fed district presidents began to call in March 2017 for a formal discussion and consideration of the subject, which Fed minutes show was raised and discussed at its May 2017 FOMC meeting. Concern was increasingly expressed that sell-off would not only raise rates but raise the dollar’s value as well, with negative effects on exports and on manufacturing production, given both were already showing signs of slowing. Advocates for sell-off respond that keeping the balance sheet at current $4.5 trillion levels by re-investing would mean rising interest payments by the Fed to banks and investors as interest rates rose.

But with Yellen more likely than not to be replaced in February 2018 by Trump, the Fed will focus predominantly on traditional approaches and tools to try to raise rates. However, if the US economy falters, as the euphoria over the yet to be realized Trump fiscal stimulus fades, or is inordinately delayed, then even Fed short-term rates may not increase much after June 2017. Yet another unknown factor is the outcome of the US budget and need to raise the US government debt ceiling. All these events and developments make it highly unlikely the Fed will commence with any sell-off until well into 2018.

Notwithstanding all the possible negative economic consequences of disposing of the $4.5 trillion, this past spring 2017 the Fed reached an internal consensus of to begin doing so. That consensus maintained that an extremely slow and pre-announced reduction of the balance sheet would not disrupt rates significantly. But as others have noted, “such an assessment is complacent and dangerously incomplete”. Selling off the $4.5 trillion would mean lost interest payments to the US Treasury amounting to more than $1 trillion, according to Treasury estimates. That’s $1 trillion less for US spending, with all it implies for US fiscal policy in general as the Trump administration cuts taxes by $trillions more and raises defense spending. In other words, sell-off may result in a further long-term slowing of US GDP and the real economy.

At its mid-June 2017 meeting the Fed announced a blueprint outline of that consensus and the Fed’s long-term plan for selling off $4.5 trillion. In her press conference of June 14, 2017 Yellen announced the Fed would stop reinvesting the bonds as they matured at a rate of $6 billion a month for US Treasuries and $4 billion a month for mortgage bonds. That’s $10 billion a month. However, no set date to start the sell-off was announced. Just sometime in the future. At that rate of sell-off, it would take the Fed 37.5 years to dispose of its balance sheet. This token reduction of Fed debt from the last crisis means it is largely for public consumption and to head off critics who now argue the Fed is a profit-making institution (again), making interest off of securities that otherwise private banks might be earning. Another explanation for the token debt reduction, however, is that the Fed doesn’t intend to reduce its balance sheet all that much. In reality, in the end it will retain most of it.

3. Bank Supervision amid Financial Deregulation

Banking supervision in the US has always been fragmented, with the central bank assuming just part of that general responsibility. It is likely this fragmentation has been purposely created. Sharing the responsibility of bank supervision with the Fed have been the Office of the Comptroller of the Currency, OCC, with origins back to mid-19th century. The OCC was the original agency tasked with bank supervision for at least a half century before the Fed was created. Its record of effectiveness includes allowing four major financial crashes after the Civil War (and consequent depressions) up to the creation of the Fed. Another important bank regulatory agency is the Federal Deposit Insurance Corporation, FDIC, created in the 1930s in the depths of the Great Depression, which is responsible for smaller regional and community banks. The Office of Thrift Supervision (OTS) is another; it failed miserably to prevent the Savings & Loan crash in the 1980s and was the official regulator of AIG, the big insurance company and derivatives speculator at the heart of the 2008 banking crash. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are also part of the bank supervision structure, responsible for brokerages and stock and commodity markets. There’s a parallel credit union regulatory agency. Fifty States also have their own regulatory agencies for state-chartered banks, creating a yet further byzantine regulatory structure.

The overlapping and conflicting bank regulatory centers makes it difficult to coordinate regulation and simultaneously easy for banks to whipsaw and play agencies against each other. In other words, the fragmentation is purposeful and has been intentionally created. The complexity and overlap favors the banks and not the public, allowing private financial institutions to deflect, minimize, and delay regulatory efforts to check and reform risky bank practices after periodic financial crises erupt. The delays provide time to allow public demands and legislative action for stronger bank supervision to dissipate.

The US Dodd-Frank Act is a good example of the ‘delay and dissipate’ history of US bank supervision and regulatory reform. Passed in 2010 with great fanfare by the Obama administration it had built into its legislation a four-year delay period for developing specific details. During that four years Bank lobbyists had numerous opportunities to defang the Act, which they cleverly did, after four years leaving the initially weak Act a shell of what was intended. “Year in and year out, the financial sector spends more on lobbying than any other industry. During 2009-10, the interests most concerned about financial regulatory reform—banks, insurance companies, mortgage banks and brokers, securities and investment firms, credit and finance companies, and credit unions—spent considerably more than $750 million on lobbying the government. Together those industries retained more than 2,700 individual lobbyists”.

To provide a complete assessment of bank supervision in the US in the post-1945 period is beyond the scope of this book. The intent is to assess the Fed’s role in bank supervision under the Yellen Fed since the 2010 Dodd-Frank Banking Supervision Act finally took effect in 2014.

The Dodd-Frank Act attempted to expand bank supervision in five specific ways by establishing: a systemic risk assessment process and regulation of the biggest (8 too big to fail banks and 3 insurance companies) overseen by a new 9-member council of regulators chaired by the Treasury; an authority to wind down banks that fail; a consolidation of existing bank regulators; new regulations for some shadow banks previously outside the regulatory framework (i.e. hedge funds, mortgage companies, etc.); and a new Consumer Financial Protection Bureau (CFPB) to protect households from financial institutions’ predatory practices.

As of late 2016, a full two years into the Yellen Fed term, the issue of how much capital the too big to fail banks needed to keep in the event of another crisis had still not been resolved. The big 8 banks’ equity to total assets (i.e. liquid funds to use to offset losses to prevent bankruptcy in another crisis) was still only 6.6%. Incoming president of the Minneapolis Fed district, Neel Kashkari, declared the banks would need 23.5% of equity to assets to be safe. Banks that failed that requirement and were considered a risk to the financial system would thereafter need to maintain a 38% level. If they couldn’t, they should then be broken up. Kashkari subsequently further proposed that excess debt (leverage) held by financial institutions should be taxed. Like his previous suggestion, that too fell on deaf ears within the Fed. The point is that, after three years of the Yellen term, the question of ‘too big to fail’ was still fundamentally unresolved.

In its initial drafts the Act did not envision expanding the bank supervision authority of the Fed. In fact, full supervision of banks and other financial institutions with less than $50 billion in assets was transferred to the FDIC. The Fed was thus stripped of authority to supervise the roughly 8000 or so remaining state-chartered banks. However, it retained authority over the largest 44 banks and bank holding companies.

Nor was a consolidation of the various US regulatory agencies accomplished by the Act. Only the OTS was consolidated, within the OCC. A new Federal Insurance Office (FIO) was created under the supervision of the Treasury. And the SEC was given authority to regulate over the counter derivatives and credit rating agencies like Moody’s, Inc. and hedge funds were required to register with the SEC. Thus the problem of fragmented institutional bank supervision across multiple overlapping agencies continued and in ways actually expanded, with 225 new rules across 11 different regulatory and banking supervisory institutions.

The 9-member regulatory committee, the Financial Stability Oversight Council (FSOC) also gave the Fed authority, upon a 2/3 FSOC vote, to oversee non-bank financial institutions that were deemed potentially risky to system stability. This brought a small part of the shadow bank sector under its supervisory authority as well, in particular hedge funds and private equity firms.

While the Fed gave up bank supervisory authority in some areas, it assumed new authority in others. It now supervised national thrift savings institutions, assuming some of the authority of the former OTS and was given rule-making authority related to proprietary (derivatives) trading by banks (Volcker rule). The 2010 Act created a consumer protection agency, the Consumer Finances Protection Bureau (CFPB), which was put under the Federal Reserve. Initially the CFPB was to be an entirely independent agency, with its own financing. Its director would act independent of the Fed’s Board of Governors. Its single director could be removed by the President not at will, but only if proven negligent. Consumer matters related to credit cards, mortgage and auto loans, payday and other loans were subject to CFPB rules and actions. The CFPB was funded by the Fed, not Congress. Decisions by the CFPB that were initially intended to be independent of the Fed were eventually, however, made subject to veto by a special committee of the other traditional bank regulators, which included the Fed. On paper it appeared as if the CFPB’s regulatory successes since its implementation in 2011 were the product of the Fed. But its aggressive retrieval of funds on behalf of consumers—$12 billion for 29 million—was in spite of the Fed, which kept itself at arm’s length from the operations of the CFPB.

A contrast between the Fed and the CFPB as supervisors was revealed in the event involving Wells Fargo Bank in September 2016. CFPB investigations reported the bank was charging 2 million customers fees for fake credit card and other accounts, and it issued them without customers’ knowledge or permission. It appeared as if it were déjà vu of big bank misbehavior during the 2008 subprime mortgage fiasco. Wells Fargo is one of the 8 too big to fail banks supervised by the Fed, which meets with the bank’s CEO at least four times a year. Where was the Fed, many asked? “The core of the case against Wells Fargo has been well-known since a remarkable investigative report by the Los Angeles Times in 2013, and hints of the troubles were already apparent in a Wall Street Journal article in 2011.” When asked why the Fed did not know of such practices, Yellen replied the Fed was not responsible for regulating this side of Wells’ operations. If it failed to identify subprime-like practices at one of its largest 8 banks it supervised, what else might the Fed be overlooking?

Another development suggesting the Fed was dragging its feet on bank supervision involved what was called ‘merchant banking’. This is where financial institutions in effect act like private equity shadow banks by buying up non-bank operating companies. If non-bank companies owned by commercial banks with household deposits went bankrupt, the potential was greater for crashing the banking side as well. The Fed was tasked with establishing rules to prevent this back in 2012. But it only issued a study of the potential problem four and a half years later.

But perhaps the most visible indicator of actual Fed bank supervision is the periodic ‘stress tests’ of the big banks that the Fed has conducted since early 2009. The test itself is somewhat a misnomer. What the Fed does is release scenarios, hypothetical situations, of recession or extreme unemployment or collapse of housing prices which it gives to the banks. They then predict to the Fed how they would perform under such conditions, indicating if they believe they have enough capital to weather the crisis. Not surprising, they report they can survive. The Fed then decides whether it believes them or not. If it does, it allows the banks to pay dividends and give themselves bonuses. Only on rare occasions has the Fed decided it didn’t agree with the bank, as it did with Citigroup. In other words, the scenarios are typically set up to enable nearly all the banks to pass the test. Until 2016 the banks subject to the stress test included those with assets above $50 billion and should have no more than $10 billion foreign exposure. Under Yellen’s Fed these rules have been significantly liberalized, however. The cutoff now is $250 billion in assets and the foreign exposure rule has been discontinued. As a result, 21 big banks, like Deutschebank and others foreign banks (who do business in the US and are therefore subject to the tests if they qualify by size) are now exempt from the stress testing.

Apparently new district Minneapolis Fed president, Neel Kashkari’s, warning noted above that banks need to increase their capital buffer to survive the next crisis from current 6.6% to 23.5% has not been adopted as part of the stress testing.

Instead of increasing Fed and other regulatory institutions’ bank supervision authority, what remains of the Dodd-Frank Act of 2010 and regulation is about to be reduced even further. In 2017 the US House of Representatives introduced The Financial Choice Act of 2017, which virtually dismantles the CFPB, puts FSOC activity on hold, reduces regulation of big insurance companies like AIG, exempts many financial institutions from vestiges of bank supervision by the Fed and other agencies, and eliminates many penalties for high risk behavior.

If the Fed’s bank supervisory track record since 2010 has been dismal, what might it be under a Trump regime pushing for yet more banking deregulation? The 2017 scenario seems and feels very much like the Bush-Paulson initiatives of 2006-07: deregulate everywhere.

4. Monetary Policy First vs. Infrastructure Spending

Yet another major challenge on the horizon for the Yellen Fed is how the Fed will respond to a new fiscal spending stimulus, should it occur. The Trump administration continually declares it plans a $1 trillion infrastructure spending program. The form that spending takes is yet to be determined. It most likely will not look like direct government spending on roads, bridges, ports, power grid, and other similar infrastructure projects. It will more likely appear as some kind of Private-Public investment program, where commercial property speculators and builders will strike deals with local governments. The speculators-builders will get government real estate in the urban areas at fire sale prices, and will build new structures that local governments will lease back. The Private partner gets a leasing income stream and tax concessions, plus high value land and property that appreciates rapidly. The beneficiary big time is the real estate developer. This model is already being piloted.

The key question is whether the Fed will support and en

posted February 3, 2018
Trump’s 1st State of the Union Speech–Long on Theater; Short on Policy

“Presidents’ State of the Union speeches used to report on accomplishments of the past year and proposals for new programs and policy changes for the next. Just as the country we once knew, those days are long gone.

In the 21st century the format is mostly theatrical: The president offers a short sentence about how wonderful America is, cuts his sentence short, and waits for applause. The Congress rises and claps longer than the spoken sentence that brought them to their feet. This goes on every 15 seconds. Sometimes less. Up and down, up and down. Turn off the volume, and it’s similar to canned laughter in a TV situation comedy—with the visual effect of bouncing butts replacing the canned laughter. Except it’s all more tragic than it is comedic.

A stranger viewing for the first time must conclude that something anatomically must be wrong with their backsides. Up-down, up-down. But when the incessant pattern of ‘short phrase, rise and clap too long, sit down’ threatens to become too repetitive, a new theatrical effect is introduced. Now it’s the president introducing staged character actors in the gallery above the floor, each introduction providing an appeal to the tv audience’s emotions. In the Trump speech tonight, there were no fewer than twelve such ‘gallery scenes’ to break up the mesmerizing stop-rise-clap-sit down nonsense.

First there was ‘Ashley the helicopter lady’, then ‘Dolberg the firefighter’, Congressman Scalise, whose only claim to fame was he got himself shot (definitely not on the level of the other ‘heroes’), followed. And how about the 12 year old ‘Preston the flag boy’, with whom Trump said he had a great conversation before the speech. (I’m sure it was of comparable intellect).
But clever by far was the next gallery event, the four parents whose kids were killed by MS13 gang members in Long Island, NY. All four were black, apparently to blunt the racist appeal by Trump injected into the scene, suggesting that all immigrants were gang members who came here as a result of ‘chained migration’ family policy. I guess MS13 gangsters never killed whites.
Not surprisingly, the next gallery scene was the ICE agent, a guy named Martinez who heroically smashed the MS13 gangsters. Of course, he too was Hispanic.

Both theatrical scenes dealing with ‘immigrant gangsters arriving by chained migration’ provided Trump a nice segway into describing his ‘4 pillars’ immigration bill, the only policy proposal he actually spelled out in his nearly hour and a half speech.

For a pathway to citizenship that would take 12 years for ‘Dreamer’ kids, Trump would have his $30 billion plus border wall, a new immigration policy based on ‘merit’ (welcome Norwegians), as well as an end to family ‘chained migration policy’ (which somehow would also protect the nuclear family, according to Trump). The message: white folks’ nuclear families good; immigrant folks’ (especially Latino) extended families bad, was the suggested logic. What it all added up to? If Democrats agreed to his pillars 2-4 right now, maybe there would be citizenship for Dreamers sometime by 2030! What a deal. But who knows, maybe the Democrats will take it, given that they retreated from their prior ‘line in the sand’ of pass DACA and dreamers or they’ll shut down the government.

The next theater event was no less interesting than the immigration scenes in the Trump play that was the presidential State of the Union address last night. In typical Trumpian worship of the police and military, Trump (the draft dodger) introduced an Albuquerque policeman in the gallery who had talked a pregnant woman on drugs from committing suicide. Seems the woman was desperate about bringing a kid into the world she’d be unable to afford to raise. The solution by the policeman was to offer to adopt her baby if she didn’t kill herself. It worked. The kid and mother were saved, and the policeman adopted the child. The policeman’s wife accompanied him in the gallery—with an infant in her arms of course. Not sure whose it was but no matter. Now that was double theater, a scene within a scene. Shakespeare would have been proud.

That impressive bit of theater, perhaps the high point of all the ‘gallery effects’ of the evening, was the intro to Trump’s solution to the Opioid crisis in America, where 60,000 a year now die from overdoses. In his speech, Trump’s solution to the opioid crisis was ‘let’s get tougher on drug dealers’. He failed to mention, of course, that the drug dealers in question most responsible for launching the opioid crisis were the prescription drug companies themselves who pushed their products like Fetanyl and Percoset on doctors a decade ago, telling them the drugs weren’t addictive.

As for the even larger prescription drug problem in American—i.e. the runaway cost of drugs that is killing unknown thousands of Americans who can’t afford them because of price gouging—Trump merely said “prices will come down substantially…just watch!” That solution echoed his press conference of several weeks ago when he publicly addressed the opioid crisis…but offered no solution specifics how. Watching Trump solve the opioid crisis will be slower than watching grass grow…in winter!

Trump’s speech was not all theater. Much of it was factual—except the facts were mostly misrepresentations and outright lies.

Like unemployment is at a record low. But not when part time, temp, contract and gig work is added to full time. More than 13 million are still officially jobless. The rate is still close to 10%. And that doesn’t count the 5-10 million workers who have dropped out of the labor force altogether since 2008, leading to record lows in labor force participate rates and employment to population ratios. That rate and ratio hasn’t changed under Trump.

Another lie was that wages are finally starting to rise. Whose wages? If you want to count average wages and salaries of the 30 million managers, supervisors, and self-employed, maybe so. But according to US Labor department data, real average hourly earnings for all non-farm workers in the US in 2017 rose by a whopping 4 cents!

Trump cited again his Treasury Secretary, Mnuchin’s, ridiculous figure that the average family income household would realize $4,000 a year in tax cuts. But no economist I know believes that absurd claim.

Perhaps the biggest facts manipulation occurred with Trump’s references to his recent tax cuts. He cited a list of so-called middle class tax cuts, leaving out wealthy individual tax cuts measures. Typical was his claim of doubling the standard deduction, worth $800 billion in tax cuts for the working poor below $24k a year in income. But he failed to mention the additional $2.1 trillion hikes on the middle class. (Or the $2 trillion in corresponding cuts for wealthiest households.) Independent studies show the middle class may get some tax cuts initially, but those end by the seventh year, and then rise rapidly thereafter by year ten. In contrast, the corporate, business, and wealthy household cuts keep going—beyond the tenth year.

What Trump conveniently left out in his speech regarding taxes also qualifies as lie by omission. He noted the corporate tax rate was reduced from 35% to 21% and the non-corporate business income deductions were increased by 20%. That was $1.5 trillion and $310 billion, respectively. Or that the Obamacare mandate repeal saved businesses another $300 billion. And multinational corporations would reap the lion’s share of $1 trillion in tax cuts, at minimum. And all that still doesn’t account for accelerated depreciation under the Act. Or abolition of the corporate Alternative Minimum Tax. Or continuation of the infamous corporate loopholes, like carried interest, corporate offshore ‘inversions’, or gimmicks that corporate tax lawyers joke about—like the ‘dutch sandwich’ and ‘double Irish’.

Then there were the Trump jokes. I don’t mean anything actually funny. Nonsense statements like “beautiful clean coal” (the oxymoron statement of the year). Or that US companies offshore are “roaring coming back to where the action is”. And car companies are bringing jobs back (while laying off in thousands). “Americans (white) are dreamers too”. Or the phony infrastructure program that’s coming, where companies will be subsidized by the federal government in ‘public-private partnership’ deals. And his unexplained reference to ‘prison reform’ (really?). Perfunctory references to trade, job training, another non-starter.

Hidden between the lines were other serious references, however. Like his ominous threat to “remove government employees” who ‘fail the American people’ or ‘undermine American trust’, which sounded like a warning from Trump to the bureaucracy not to cross him or else. Or his slap at National Football League players for not saluting the flag. Or plans to expand Guantanamo and the US nuclear arsenal. Or reaffirmation of the definition of ‘enemy combatants’ (which may include US citizens). Trump re-established the fact of his threat to civil liberties.

On the foreign policy front it was mostly threats as well, new and old: To withhold UN funding. Renewed support for new sanctions against Cuba and Venezuela. But North Korea was left for last. Here the return to theater was among the most dramatic. The last ‘gallery scene’ involved a legless defector from North Korea, Seong Ho, brought all the way from So. Korea just for the speech. This was theater with props; applause was sustained as Mr. Ho raised and shook his crutches above his head after Trump’s introduction.

Trump then rode the emotional wave to conclusion with his closing theme that the American people themselves are what’s great about America. Too bad he doesn’t mean all Americans.

So far as Trump speeches go, it was a ‘safe speech’, a teleprompter speech. But typically Trump. Lots of false facts. Emphasis on dividing the country. Long on Theater and emotional appeals to ‘enemies within and without’. And short on policy specifics. But after all, apart from tax cuts and deregulation for corporations and the rich, and a failed Obamacare repeal, not much was achieved in 2017 for him to talk about. And so far as new ideas for 2018 are concerned, there’s ‘no there there’ as well. ”

Jack Rasmus is author of the just published book, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017

posted January 25, 2018
Trump, Shadow Bankers & The Federal Reserve

Trump & the Fed: US Shadow Bankers About to Deepen Control of US Economy

January 24, 2018 by jackrasmus | Edit

What’s sometime referred to as ‘shadow bankers’ have been running the economy and drafting US domestic economic policy since Trump took office. ‘Shadow’ banks include such financial institutions as investment banks, private equity firms, hedge funds, insurance companies, finance companies, asset management companies, etc. They are outside the traditional commercial banking system (e.g. Chase, Bank of America, Wells, etc.) and virtually unregulated. Shadow banks globally now also control more investible liquid assets than do the world’s commercial banks.

It was the shadow banks–investment banks like Lehman, Bear Stearns, insurance giant AIG, GE credit and others that precipitated the 2008 financial crisis that then froze up the entire credit system and led to the 2008-09 collapse of the real, non-financial economy. None of the CEOs of the shadow bank system went to jail for their roles in the collapse. And now they are back–not only reaping record profits and asserting even greater influence over the US and global economy; but have penetrated the political institutions of control in the US and other advanced economies even more than they did pre-2008.

Shadow Bankers On the Inside

In the US, shadow bankers from Goldman Sachs, the giant investment bank, took over the drafting of US economic policy when Trump took office. (Trump himself, a commercial property speculator, is part of this shadow banker segment of the US capitalist elite). Running the US Treasury is ex-Goldman Sacher, Steve Mnuchin. On the ‘inside’ of the Trump administration is Gary Cohn, chair of Trump’s key advisory, ‘Economic Council’. Together the two are the original drafters (which was done in secret) of the recent Trump Tax cuts that will yield a $5 trillion windfall for US businesses, especially multinationals. (More on this in my forthcoming article, to be posted here subsequently).

Mnuchin is leading the charge for the Trump deregulation offensive, especially financial deregulation. Mnuchin recently took the offensive as well with public statements indicating it was US policy that US dollar exchange rates remain at record low levels. Why? To ensure US multinational corporations’ offshore profits are maximized when they convert their profits in local currencies back to the dollar, before they repatriate those profits back to the US at the new lower Trump tax rates (12% instead of 35% repatriation tax rate) and, even more lucratively, when they pay no taxes on offshore profits virtually at all starting 2019.

Goldman Sachs and the shadow banker crowd’s economic influence extends beyond the US Treasury and Economic Council. The New York Federal Reserve’s district president, Dudley, is also a former Goldman Sach employee. He announced he’ll be resigning this year. The New York Fed is the key district of the Fed responsible for US Treasury securities buying and selling. Watch for another Goldman Sacher to replace him, or some other former high level senior exec from private equity or hedge fund industry.(For my analysis of the rising global shadow banking sector and its destabilizing role, check out my 2016 book, ‘Systemic Fragility in the Global Economy‘, Clarity Press, and specifically chapter 12, ‘Structural Change in Global Financial Markets’).

Shadow Bankers Will Run the Fed

Trump and fellow shadow bankers are about to further solidify their control of US economic policy at the Fed as well. The Fed’s chair will soon be Jerome Powell. But several Fed governor positions have been vacant for some time, as is the vice-chair of the Fed. Watch for appointees from the shadow banks here as well.

Fed governors are officially supposed to serve 14 year terms. (They, along with Fed district presidents constitute the important FOMC, Federal Open Market Committee, that make day to day decisions at the Fed on matters of short term interest rate changes and such). But the Fed governors in recent decades never remain the 14 years. In fact, recently they remain around 3-4 years, if that. They leave early to take senior positions in the banking and shadow banking world. It’s a ‘revolving door’ problem.

Bankers get appointed to Fed governor and Fed district president positions, make decisions beneficial to their former banker buddies, and then leave early to return to their banker roots, with highly remunerative positions once again (often ‘do-nothing’ sinecures). As former governors they also go on the speech circuit, speaking at banker and business conferences, for which they’re paid handsomely, in the tens of thousands of dollars for a 20 minute speech. (Former Fed chairpersons, like Ben Bernanke and soon Janet Yellen get even more generous handouts, paid in the several hundreds of thousands of dollars a speech. They also get nice book contracts as they leave, with prepayments in the millions of dollars upfront, with guaranteed book purchases by corporations, and the best promotional efforts by publishers).

Trump’s appointment, and recent approval by the US House and Senate, of Jerome Powell to head the Fed is only the beginning. The vice-chair and several open Fed governor positions will enable Trump and Mnuchin to stack the deck at the Fed with their appointees. That will solidify Trump’s, and the shadow banker community’s, control of the Fed and ensure its policy direction will reflect Trump’s economic objectives of boosting business incomes, especially multinational corporations.

Central Bank Independence–But from Whom?

Mainstream economists write incessantly about the need to ensure ‘central bank independence’ (Fed) from elected government representatives. But they miss the more fundamental fact that it is the bankers themselves (especially now shadow bankers) that ultimately control the Fed. While mainstream economists talk about independence from government representatives, they ignore the deeper control (often through those representatives) of the Fed, and all central banks, by the bankers themselves.

Are Mnuchin, Cohn, Dudley and others really government ‘representatives’? Or are they shadow bankers first and foremos, who have managed to capture key positions in the government apparatus? Do the ‘revolving door’ former Fed governors act independently? Or do they decide with a keen eye on a lucrative offer from the private banks after a few years in office during which they ‘prove’ their value to the bankers? Do the Fed chairs and vice-chairs make decisions solely in the public interest at all times? Or are they perhaps too aware of the opportunity to become quick multimillionaires themselves once they leave office, recompensed nicely in various ways once they leave? And why is it that at the 12 Fed districts, the district president selection committee of 9 district board directors are almost always ‘stacked’ by 5-6 former regional bankers or banker business friendly former CEOs?

In my just published book, ‘Central Bankers at the End of Their Ropes’, Clarity Press, August 2017, I examine this ‘myth of central bank independence’ in detail, and show how central banks, including the Fed, from their very origins have always been dependent (not independent) on the private banks rather than from elected government representatives. Central banks emerged from the private banks and have always been an appendage of sorts of that private banking system. This fact is supported today more than ever by the fact that Fed and central banks’ policy since 2000, and especially since 2008, has been to ensure the subsidization of financial institutions’ profitability. It’s no longer just serving as ‘lender of last resort’ to bail out the private banks periodically when they get in trouble (which chronically occurs). Now it is permanent subsidization of the private banking system.

A Constitutional Amendment to Democratize the Fed

In the book I also propose in the addendum a constitutional amendment and enabling legislation that will sever the relationship of the central bank, the Fed, from the banking industry (and its government representatives) for good. (see the reviews and information re. the book,’Central Bankers at the End of Their Ropes‘ on this blog, my website, kyklosproductions.com, and at Amazon books. See the book’s addendum for the amendment and enabling legislation).

The trend in banker control of the Fed–and thus US economic policy–is about to deepen as Trump fills the open governor, chair, and vice-chair positions at the Fed in coming months. This will begin immediately after Jerome Powell assumes the chair position from Janet Yellen in early February 2018.

Economic Consequences of a Trump Fed

The shadow bankers, who gave us the last financial crash in 2007-09, will then be in total control–at the Treasury, in the White House, at the New York Fed, and in a majority of the Fed governorships. They will support Treasury Secretary Mnuchin’s policies–keep US rates at levels to ensure that the US dollar’s exchange rate is low versus other key world currencies. That will ensure that US multinational corporations’ profits offshore are not threatened, as they bring back those profits in 2018 at lower tax rates, and then can bring back profits thereafter without paying taxes on offshore profits at all for the next nine years.

The next financial crisis and crash is coming. It is not more than two years away, and could come sooner. The Fed will be totally unprepared and unable to lower interest rates much in response. It will then re-introduce its massive free money injections into the banking system, as it did with ‘QE’ for seven years starting with 2009. The Fed and other central banks provided ‘free money’ in the amount of at least $25 trillion to bail out the private banks over the last 9 years. How much more will they give them next time? And will it be enough to stabilize the US and world financial system? And will the Fed and US government then legitimize and legalize the private banks’ taking the savings of average depositors and converting those savings to worthless bank stocks? UK and US government preparations are already underway for that last draconian measure. For even today, when one deposits one’s money in a bank, that money legally becomes ‘owned’ by the bank.

Trump’s imminent appointments of Fed chairs, vice-chairs, and governors may prove historically to be the first step in the total capture of the US central bank by the shadow banker element in the US economy–by the Goldman Sachers, the private equity firms, the hedge fund vultures, and the commercial real estate speculator that is Trump itself.

We now have government by the bankers unlike ever before in the US. And their policies will inevitably lead to another financial crisis. Only this next time, the rest of US will be even less prepared and able to endure–given the decade of stagnant wages, new record in household debt, collapsing savings rates, greater reliance on part time/temp/gig employment, decline of pensions, loss of social benefits and safety net, higher cost of healthcare, and all the rest of the economic decline that is afflicting more than 100 million households in the US today.

Meanwhile, Trump will soon go to Davos, Switzerland, to party with the rest of the World Economic Forum’s multimillionaire-billionaire class. They will celebrate and pat themselves on the back about how well they’ve done for themselves in 2017: record profits, record stock markets’ price appreciation, record dividend payouts to wealthy shareholders, new tax laws that mean they can keep more of those profits and capital gains, continuing austerity for the rest, further destruction of unions (called ‘labor market reform’), decline and co-optation of remaining social democratic parties, etc. At Davos Trump will bask his ego and give an ‘American First’ speech, largely for public consumption to his base in the US. ‘America First’ means Trump, and his more aggressive wing of US capital, are signalling they plan to squeeze the rest of the world’s capitalists for a US larger share. So they’ll have to take even more out of their workers with austerity, wage compression, social benefits reduction, and even more ‘labor market reform’.

The Davos crowd may think they are sitting on their mountain in Switzerland, but they are really partying on the Titanic, as they steam on oblivious to what’s coming, unable to foresee the approaching economic icebergs below the surface. And as their mainstream economists, asleep on the bridge, almost in unison declare ‘steam on’, all is well and getting better.

Dr. Jack Rasmus is author of the recently published, ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression‘, August 2017, and ‘Systemic Fragility in the Global Economy‘, 2016, both by Clarity Press.

posted January 10, 2018
A Theory of System Fragility: Part 2 (from Chapter 19 of ‘Systemic Fragility in the Global Economy’, Clarity Press, 2016

Excess Liquidity at the Root of Debt Accumulation

Systemic fragility is rooted first and foremost in the historically unprecedented explosion of liquidity on a global scale that has occurred since the 1970s. That liquidity has taken two basic forms: First, money provided by central banks to the private banking sector—i.e. ‘money liquidity’ as it will be called. Second, a corresponding explosion of forms of ‘inside credit’ by banks and shadow banks that allow these unregulated financial institutions to expand credit independent of, and beyond, the money credit provided by central banks—i.e. referred hereafter as ‘(inside) credit liquidity’ or just ‘credit liquidity’.

Centuries ago, when gold and other metals were the primary form of money, the problem was the actual and potential production of goods was greater than the availability of money (as gold, etc.) to finance the production and enable the circulation of those goods. Today, however, in the 21st century, the growing problem is the opposite: money and credit are being created far more easily and rapidly and in greater volume than is necessary to finance the production and circulation of real goods and services. Just as the development and expansion of currency and bank bills of credit forms of paper liquidity eventually rendered gold and metal forms of money less important in terms of total money creation, so too will new forms of money liquidity creation eventually surpass older forms of money creation now provided by institutions of central banks and the commercial banking system. Liquidity expansion will accelerate even faster.

Excess liquidity has therefore been a major and growing problem within the global capitalist economy and this will continue and grow as a problem in the foreseeable future. The problem, however, is not liquidity per se or even its excess; the problem is the transformation of that excess liquidity into debt, and the consequences of that debt for fragility and financial instability.

Money Liquidity

As earlier chapters noted, the collapse of the Bretton Woods system gave central banks the green light to embark upon generating their own particular form of excess ‘money liquidity’ creation. The decision by US and other advanced economy economic and political elites in the late 1970s and early 1980s to eliminate controls on global money capital flows enabled the liquidity explosion, engineered by the central banks, to disseminate globally. With the collapse of Bretton Woods in 1971-73, central banks were now responsible for ‘regulating’ and stabilizing currency exchange rate fluctuations in order to facilitate world trade and capital flows. That required injections of liquidity periodically to maintain stability for the world’s various currencies within an acceptable range of fluctuation against the US dollar and a few other key currencies. That currency stabilization task used to be done by the gold standard, and then the dollar-gold standard that was Bretton Woods system from 1944 to 1973. But all that changed with the 1971-73 collapse of the Bretton Woods system. Thereafter, currencies were free to fluctuate widely and volatilely, unless central banks intervened to maintain relative stability, which they began to do in the late 1970s.

The growing frequency of recessions and financial instability events in the 1980s and 1990s continued to destabilize economies, currencies, and banking systems, and in turn threaten world trade and economic growth for the many countries highly dependent on trade. That called for more liquidity injections to check the periodic recessions and financial instability events. So growth and severe disruptions to growth both called for and received more central bank liquidity injections, in addition to that needed for currency stabilization.

There was another factor. In response to the crisis of the 1970s, the US capitalist elite in the early 1980s decided to focus on expanding US capital more globally instead of focusing primarily on internal growth. This also called for the provision of more money capital, as US businesses accelerated their global expansion in that decade. With the collapse of the Soviet Union the opportunities for still more global expansion arose in the 1990s. More liquidity was necessary. With the integration of China into the global economy in the early 2000s, even more liquidity was necessary. With new digital technology and networking in the 1990, new industries and products appeared, requiring still more liquidity. Expanding free trade beginning in Europe and the US in the late 1980s, which accelerated throughout the 1990s and has done so ever since, demanded still more liquidity.

In short, the end of Bretton Woods, the globalization of money capital flows, the expansion of capitalist trade and economy both externally and internally, the growing frequency and magnitude of financial instability events and recessions, etc.,—i.e. all called for more money, more liquidity. And the central banks and private banking system provided it for more than a quarter century from the mid-1970s into the 21st century. Massive amounts more would be needed, however, to bail out the financial system when the general global financial crash occurred in 2007-09.

Central banks have been pumping increasing amounts of money liquidity into the economy through commercial banks since the 1970s and the collapse of the Bretton Woods system. However, central banks do not actually create money. They indirectly enable private banks to do so, by providing private banks excess reserves on hand that the banks can then lend, which does increase money liquidity in the economy when lending occurs.

But this too has been changing, resulting in even more liquidity injection into the system, as central banks’ recent revolutionary policy innovations like ‘quantitative easing’(QE) have been introduced since 2008. QE represents central bank direct money creation, not just the indirect liquidity injections through the commercial banking system. With QE, central banks print money (electronically) and use it to purchase back financial assets from private investors. The assets purchased are then registered on central banks’ balance sheets as debt (in effect transferring the debt from private banks and investors to the central banks’ balance sheets), and the printed money used to buy the assets from investors is injected into the economy, adding to the general liquidity.

As previously noted, since 2008 more than $9 trillion in QE liquidity has been injected into the global economy and more is likely to follow soon from Japan and the Eurozone. In addition, indirect central bank policies (name a few in brackets?) over the past quarter century have injected tens of trillions more, of which only a small proportion has been retracted. Traditional central bank policies since 2008, which have reduced bank interest rates to virtually zero in the advanced economies for seven years now, have injected an additional ten to fifteen trillion dollars as well.

While central banks have been responsible for the growth of both indirect and direct (QE) liquidity expansion, other new forms of money and credit were, and are, being created as well. For example, ‘digital currencies’ like bitcoins and other forms of digital money that are proliferating within the private economy. These forms are created neither by central banks, private commercial banks, or shadow banks. The new money forms remain outside the control of central banks and even the commercial banking system. Changes in technology under capitalism will almost certainly enable the expansion of additional new forms of money liquidity in years to come in increasing volume. All foregoing examples represent the creation of excess money liquidity that is likely to escalate from all the above sources. Central banks today have little control over the parallel trend of expanding non-money forms of inside credit liquidity. And credit liquidity generation is where the shadow banking system in particular has been playing a major role.

Inside Credit Liquidity

While shadow banks also extend credit in the form of money to their wealthy investor clients, the unregulated shadow banking sector also extends credit to investors where no money is involved, thus enabling their investor clients to purchase more financial assets and securities. This ‘credit liquidity’ is based simply on the price and value of previously purchased products. If the price of previous purchased securities rises, so does its value as collateral, on the basis of which further credit is extended to investors. No money in the traditional sense is necessary or provided. The credit is based on exchange values of existing securities, not on new money loaned to purchase more securities.

While credit liquidity may not expand in this way as frequently where real assets are concerned, it works especially well with financial securities and other financial assets. Credit is extended, and more financial assets are purchased, simply based on the rising price and market value of previously purchased securities. Margin buying of stocks is one such example of inside credit creation. Many forms of derivatives securities are purchased in this way. Corporations also obtain credit based on the value of their retained assets. And banks are extended credit in the form of ‘repurchase agreements’, or repos, for the short term based on the value of banks’ assets put up as collateral. It all works, until the value of the assets used as collateral for the additional credit begins to collapse. Then the inside credit extended has to be paid with real money. In the meantime, however, in periods of economic expansion and thus rising financial asset prices, technology and financial innovation continues to expand forms of (inside) credit liquidity which finances investment—especially in financial securities.

From Excess Liquidity to Excess Debt

Whether commercial, shadow, or deep shadow, banks provide credit to other businesses. By far the largest segment of debt growth in the US economy since 1980 has been business debt. According to the Bank of International Settlements, the fastest growing debt sector by far since 2008 globally has been the business sector—not government or households. This is in part due to the fact that business is able to ‘leverage’ investments with debt more easily and to a greater extent than households or government units. By leverage here is meant the ability to obtain credit from financial institutions and reinvest it, matching it with only a small fraction of their own money capital. For example, borrowing $9 of money and adding only $1 of their own capital, for a $10 total investment.

Leveraging is also more conducive to financial asset investing than physical or real asset investing. Since financial asset prices tend to rise more rapidly and higher compared to prices of goods and services, credit is more available for further purchases of financial assets. For example, an initial stock offering price per share may average $20-$30 on initial offering, but if successful may rise into the hundreds of dollars per share within a year. That is not how goods prices behave. A successful real product when introduced, like a smartphone for example, will almost never rise in price, but instead begin to decline within a year. That means the market value of financial assets may rise as rapidly as the price of the asset rises. That market value increase in turn enables more leveraging of debt in order to purchase more of the financial asset.

Excess liquidity not only translates into more debt for financial investing. It also means more credit is available for household consumption based on borrowing. The availability of cheap credit to households plays a role in wage income growth slowdown. Employers can afford not to raise wages as frequently, or not at all, since wage income households address their income shortfalls by accessing credit to offset the lack of wage growth. Standards of living are defended not by demanding higher wages, or organizing into unions to get wage increases, or demanding minimum wage increases. Debt instead is the vehicle for maintaining living standards that previously were supported by wage gains that reflected annual productivity.

The excess liquidity also contributes to rising total government debt, both federal and local, as well as agency and central bank. The excess liquidity means interest rates have been kept low. That provides an incentive for government to issue more debt. In the US, for example, that means at the state and local government level more issuance of municipal bond debt. At the agency level, the lower rates are reflected in more mortgage debt that is guaranteed and purchased by federal housing agencies like Fannie Mae and others. And by buying up mortgage bonds by means of its QE policies, the central bank in effect transfers private sector bad debt to its own central bank balance sheet.

The lion’s share of government debt occurs at the federal or national level, however. The US federal debt has now exceeded $18 trillion, most of which has been accumulated since 2000. Federal government debt accumulates in several ways. Deficit spending increases and tax cutting raises debt. That spending increase may be attributed either to social programs or defense spending. In the US example once again, defense spending has accelerated as the US has conducted wars in the 21st century for which it has not only not raised taxes, for the first time in its history, but actually cut them.. Estimates of the cost of wars thus far since 2000 for the US range from $3 to $7 trillion. And the 21st century wars are continuous, without end. Tax cuts amounted to nearly $4 trillion under George W. Bush, more than $2 trillion more under Obama’s first term, 2009-12, and another $4 trillion over the following decade, 2012-2022, as part of the ‘fiscal cliff’ legislation of January 2013.

On the social spending side, government spending on healthcare related programs has also soared, as the health insurance, private hospital chains, pharmaceutical companies, and health services sector has concentrated, established deep financing from Wall St. for acquisitions. This has raised prices at double digit annual levels for years since the mid-1990s. The consequence has been escalating costs in Medicare, Medicaid, and most recently the Affordable Care Act (Obamacare) programs. The passage in 2005 of Part D, the prescription drugs program, alone has added more than $500 billion to the US deficit and debt in the last decade, in part due to skyrocketing drug prices and also as a consequence of the US government refusing to pass a tax to pay for it, preferring to fund it totally out of deficits.

Government deficits and debt accumulation has also been due to cyclical causes, and not just the secular trends just noted. The growing frequency of financially induced real contractions of the economy has led to government bailout costs. While the federal reserve has been the source for bank bailouts that have raised its share of total government debt to approximately $4 trillion, parallel bailouts of non-bank companies impacted by the financial crashes since the 1980s has also raised government non-bank debt. This source of debt especially escalated after 2008.

All this increase in government debt could not have been possible, however, without the development of what is termed the ‘twin deficits’ solution, which has been described in more detail in chapter 15. Briefly once again, the ‘twin deficits’ is the neoliberal solution created in the 1980s in which the US allowed a trade deficit to develop so long as trading partners (Europe, Japan, petrodollar economies, and then China after 2000) agreed to recycle the dollars they accumulated from the trade deficit back to the US by buying US Treasury bonds in the trillions of dollars. That recycling allowed the US in turn to run a budget deficit of ever growing dimensions—resulting in the $18 trillion plus debt.

Much of the total government debt—both central bank, national government, and even local government—represents the transfer by various means of private sector debt onto government agency balance sheets. Thus, as private debt—primarily bank, corporate, and investor—has risen since the 1970s for reasons explained, government debt has followed. Without the State having thus absorbed the private debt, and continuing to do so, the financial instability and crashes to date would have been significantly more frequent and more serious. Action by the State has thus kept the global capitalist system afloat, and ensured the patient remains on ‘life support’ even as its condition continues to fundamentally deteriorate.

So in a host of ways, the excessive liquidity creation leads to more debt creation at all levels—i.e. financial institutional, households, and government debt in various forms. And excessive debt creation is an important component of fragility at all levels—business financial fragility, household consumption fragility, and government balance sheet fragility. Debt is just the mirrored reflection of excess liquidity, and together excessive debt/ liquidity drive the system toward systemic fragility and instability. The vehicle is escalating the trend toward financial asset investing, and its corresponding negative influence on real asset investment.
Debt and the Shift to Financial Asset Investing

Financial Asset v. Real Asset

Financial asset prices are far more volatile to the upside than goods prices, especially in a boom phase of a business cycle. With financial assets, ‘demand creates its own demand’, one might say, driving up prices while supply factors play a lesser role in dampening price swings. The more the price of the financial asset rises, the more buyers will enter the market to make further purchases of the financial asset, thereby driving its price still higher. Conversely, since the ‘cost of goods’ for making financial asset products is extremely small, rising supply costs do not discourage or lower the demand for the asset.

The opposite behavior occurs with goods prices, where demand plays a less volatile role and supply a more dampening role. Should the price rise, fewer buyers will purchase the product, unlike financial securities where rising prices attracts more buyers. That’s because goods themselves are not as highly liquid as financial securities. Goods cannot as easily or quickly be resold and, if they are, are almost never resold at a higher price but instead at a lower one. In other words, there is no profit from price appreciation with goods prices whereas for financial assets profits are mostly determined by price appreciation. That means there is significant potential for profit from price appreciation for financial assets, which is another feature attracting buyers.

There is also more profit potential related to production costs, since there is virtually no ‘cost of goods’ involved in producing financial securities—little raw materials required, no intermediate goods, very little in the way of labor costs, no transport costs since nothing is physically delivered to the buyer, no inventory carrying costs, and so on. Financial assets are electronic or paper entries created originally with a small team of ‘financial engineering’ experts. This lack of production and therefore supply costs makes financial assets more profitable to produce.

There is a third factor that also makes financial asset prices more profitable. Because they are sold online, by phone, or by some other communications media, a large and costly sales force is not needed. Distribution costs are negligible. Moreover, the potential market reach—i.e. what is called the addressable market in business jargon—is the worldwide network of financial investors who are generally ‘savvy’ enough to seek out the sellers, rather than having sellers ‘go to the buyers’. At most, minimal advertising costs are involved for the sellers of financial assets and securities.

In the simplest terms, then, financial assets have an advantage over the production of real goods—whether autos, clothing, food, machinery, or whatever—in all three categories of profit origination: price appreciation, cost minimization, and volume sales potential. They are simply more profitable—providing that prices are rising. In a contraction phase, the potential losses from falling financial asset prices are correspondingly greater compared to goods prices. But while the contraction may be steep in the short run, financial asset prices typically recover the losses much faster than goods prices in the recovery phase.

Another reason that financial assets are more attractive than real assets is that financial assets are traded (bought and sold) in highly liquid markets. That means an investment may be made and then quickly withdrawn (sold) if the asset price is not rising sufficiently or begins to fall. This is not possible with real investment and real goods. The real asset or company invested in must produce the good, and then sell it, over a longer cycle and time period. If costs rise and market prices fall in the meantime, the investor cannot withdraw to reduce losses as quickly. There is thus greater risk in real asset investing and goods production and sales. On the other hand, with financial assets, losses can be minimized faster as well as profit opportunities taken advantage of more quickly.

The ability of investors to purchase financial securities by leveraging purchase with debt, the various ways financial assets are potentially more profitable, plus the greater flexibility in quickly moving investment around as new opportunities emerge, all together provide a significant incentive for investors to direct their money capital and available credit toward investment in financial assets.

Conversely, investing in real assets means less profitability potential, given that price appreciation is negligible and that costs of production tend to rise significantly over the boom phase of the cycle. It means an additional costly distribution channel where the seller of goods must ‘go to or seek out’ the buyer. And it means less flexibility to move one’s money capital around, to minimize losses and maximize gains. Why then would not the professional investor—i.e. the new finance capital elite—who cares only for short term, maximized capital gains not redirect his money capital from real asset into financial asset investing? He is not interested in building a company, becoming the biggest, gaining market share, acquiring and thus eliminating competitors. He is interested in short term, price appreciating capital gains. And for that financial asset investing is by far more attractive.

In short, because financial asset investing is typically more debt leveragable, because it is potentially more profitable in the shorter run, and because it is more liquid, flexible, and therefore less uncertain—investors can and do move in and out financial markets more easily and quickly. They take price appreciated capital gains profits in a short period, and then move on to other short term, liquid, financial asset market opportunities. Or, if prices fail to appreciate, move just as quickly out of the liquid markets and minimize losses. Within a given year, for example, an investor may move a given amount of money capital from stock investing in Asia, to shale gas junk bond debt in the US, to derivatives in the UK, to speculating in Euros and Swiss francs, and so on. Money capital is not tied up long term as in the case of real asset investment, nor with as great uncertainty of outcomes.

(Financial Asset Investing Shift)

To sum up: the greater opportunity to leverage with debt, the greater relatively profitability, the shorter investment cycle and therefore the less uncertainty that is associated with investing in highly liquid markets—all provide investors a much greater relative incentive to invest in financial assets and securities instead of real assets. Given all these advantages, it is not surprising that a relative shift toward financial asset investing has been taking place for decades now. The relative profitability potential is simply greater. And in a world economy in which professional investors have grown in number and now control an unprecedented volume of investible money capital, that shift to financial assets investing is not surprising. Keynes’ warning eighty years ago about the rise of the professional investor who prefers financial assets and securities, compared to the enterprise owner-investor who prefers real asset investing, has become the rule, not the exception.

The shift to financial assets does not mean that real asset investment disappears. Some of the explosion in excess liquidity and debt is directed to real asset investment and the production of real goods. And periodically major opportunities for real investment arise internally with the coming of new technologies like the internet, wireless communications, social networking, etc. Other external opportunities for real asset investing also emerge from time to time: the opening up of investment in Russia and east Europe in the 1990s; the significant real investment opportunities in China and emerging market commodities production that arose after 2000; or the North American shale gas and oil boom after 2008. But the time frame for profit generation from real asset investment is typically relatively short. Real asset investment becomes saturated after a few years, or after a half decade or so at most. Overproduction occurs. Costs rise and price increases are difficult to sustain. Competition provides more supply and dilutes demand. Sales peak and then decline. The boom is relatively short and the downside that follows is generally protracted.

In contrast, with financial asset investment the boom may extend and prices continue to rise over the longer term. So long as prices rise steadily and don’t over-accelerate, financial asset investing grows. There is no ‘overproduction’. As for the downside, while it may be deep on occasion, it is relatively short term. In 2008-09, for example, financial assets like stocks and bonds contracted sharply but then ‘snapped back’ quickly and attained new record levels in just months following the crisis. In contrast, prices and sales of real assets like homes and other goods contracted less initially, but have yet to attain prior levels of price and sales volumes six years after the recession ended. Prices for equities, bonds, and other financial securities have risen steadily since 2009, whereas prices for goods have been disinflating and even deflating throughout the advanced economies—and now in China and emerging markets—since 2009.

Despite the growing importance of financial compared to real asset investing, mainstream economic theory still does not recognize or give appropriate weight to this financial asset investing shift. Investment is measured in real terms, based on real data obtained from national income accounts. There’s little place for financial variables in their General Equilibrium Models. How financial variables impact and determine the trajectory of the real economy is not explained in sufficient detail. At the same time, Marxist economists also continue to dismiss financial assets, referring to them as merely ‘fictitious’ capital and considering their role even more irrelevant.
Both mainstream and Marxist make little distinction between financial asset investing and real asset investing, or how they mutually determine each other. Investment is investment, as indicated in the Gross or Net Private Domestic Investment category of the National Income Accounts. If GDP is a measure of the performance of the real economy, financial investment variables have no effect on GDP level outcomes. It is the real side that drives the economy, and financial instability in turn.

The view from both the mainstream and Marxist analysis is that other non-financial forces are responsible for the slowing of real asset investment. And because of that slowing, investors are turning more toward financial asset investing. The real side is what is driving the ‘financialization’ of the economy (which is usually defined narrowly, and incorrectly, as a rising share of total profits going to banking and finance). Mainstreamers argue what is causing the slowdown of real investment is slowing productivity, excessive benefits compensation, too high federal taxation, and other costs. Marxists argue it is the falling rate of profit due to a rising ratio of fixed to variable capital, workers resisting employer exploitation, or growing capitalist competition that is responsible.

Neither acknowledge that the shift to financial investing may be due to the easier and higher profits from such investing—an outcome of the financial sector restructuring that has occurred the past four decades. Neither accept the notion that perhaps the higher and more certain profitability from financial investing is what is driving available money and credit more toward the financial side of the global economy, reducing money and credit that otherwise would have gone to real asset investment.

While it is apparent that money and credit is flowing increasingly into financial assets and financial securities investing, their argument is that the decline in real investment is causing the rise in financial. But the observable correlation—with real investment slowing and financial investment accelerating—may have an alternative causal explanation. It may be that financial asset investing is ‘crowding out’ real asset investing simply because the former is more profitable than the latter. It may not be only an excess of liquidity that is driving financial investment; it may be that the financial side is not simply getting the excess available liquidity and debt left over after real investment occurs. It may be the greater attractiveness of financial investing is diverting money and credit from real investment to financial investment. It may be real investment is slowing—not because of slowing productivity, or rising compensation costs, or too high government taxes, but because financial side and financial investing is just more attractive and potentially profitable in 21st century global capitalism.

As a final comment on the financial investing shift, it should be noted that as the shift grows over a longer period following a crash of financial assets, financial investing tends to assume more of a speculative character. By ‘speculative’ here is meant investing in highly price volatile financial asset classes and for an even shorter term duration than average for financial asset investing in general. Speculative investing focuses on quick ‘in and out’ purchases of assets in highly liquid markets, in expectation of a fast price appreciation (or depreciation) and consequent capital gain profit. It may also employ a greater amount of debt leverage in the investing. Speculative investing appears as chasing ‘yield’—i.e. seeking higher returns than average by investing in more risky asset classes like corporate junk bond and leveraged loan debt, distressed sovereign debt, more ‘naked’ short selling of stocks where bets are placed on stock price declines and no actual purchases are made, or on the most unstable currencies in expectation of currency exchange swings.

Speculative investing not only tends to rely relatively more on debt leverage but is more likely to be incurred via inside credit. A good example in 2015 has been the growing reliance on margin buying of stocks in the China equity bubble of 2014-15. That was followed by shadow bank investors then taking advantage of the significant stock financial asset deflation by engaging in short selling of Chinese equities. In the case of margin buying, the heavy debt inflow drove up China equity prices faster and higher than could be sustained for long, while the short selling had the effect of driving those same asset prices down faster than otherwise would have occurred.
In summary, couched within the shift to financial asset investing is the more unstable element of financial speculation. This tendency toward the more speculative forms of financial asset investing is generally an indication of growing financial fragility within financial asset markets in general. However, in the Chinese example, neither the uncontrolled margin buying nor the subsequent short selling of equities could have been possible without the extraordinary run-up in liquidity and debt in China since 2008 that made the shift to financial asset investing possible, leading to the escalation of financial fragility within China to dangerous levels.

posted January 1, 2018
(3rd) Review of Dr. Jack Rasmus’s book, ‘Central Bankers at the End of Their Ropes’, by Dr. Larry Souza

“INTRODUCTION

If you talk to some monetary, fiscal, macroeconomic, and financial institutional and capital market economists, some would argue that Central Banks are at the end of their rope; have lost their credibility and risk losing their independence.

Dr. Jack Rasmus book, “Central Bankers at the End of Their Rope? Monetary Policy and the Coming Depression” is the latest in a growing literature building the case against the U.S. Federal Reserve (the Central Bank of Central Banks), European Central Bank, Japanese Central Bank, The Bank of England, People’s Bank of China, etc.; their unorthodox monetary policy response to the financial crisis; policy response to asset price bubbles, financial (market) crisis (crashes), and recessions since 1995; lack of macro-prudential supervision and oversight; and consistent policy mistakes based on their lack of understanding of how the world and economy works, dating back as far as 1929 (See supporting Literature in the Appendix).

In Dr. Rasmus book, he looks at:

1. Problems and Contradictions of Central Banking
2. A Brief History of Central Banking
3. The U.S. Federal Reserve Bank: Origins and Toxic Legacies
4. Greenspan’s Bank: The Typhon Monster Released
5. Bernanke’s Bank: Greenspan’s Put (Option) on Steroids
6. The Bank of Japan: Harbinger of Things That Came
7. The European Central Bank under German Hegemony
8. The Bank of England’s Last Hurrah: From QE to BREXIT
9. The People’s Bank of China Chases Its Shadows
10. Yellen’s Bank: From Taper Tantrums to Trump Trade
11. Why Central Banks Fail
12. Revolutionizing Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment

Dr. Rasmus builds a methodical case against historical and current central bank ideologies and orthodoxy; and makes prudent and wise recommendations for structural and institutional macroeconomic, monetary policy and political change.
The conclusion, is not too late to address the systemic and systematic risks to central banking, regulation and supervision, financial institutions and capital markets, and the real economy and labor markets.

However, considering the real economic realities of the current political, party and policy environment, along with the Wall Streets control over monetary (Federal Reserve), fiscal (Treasury) and regulatory (Comptroller/SEC/FDIC/etc.) policy in Washington, that a political solution could actually be accomplished. Dr. Rasmus is correct in his recommendations and his analysis.

We are all at the end of our rope, and thank you Dr. Jack Rasmus from bringing another critical analysis of the current and future state of global central banking, and for proposing bold policy recommendations to avert another severe financial crisis, great recession and depression.

REVIEW

Rapid technological, demographic, economic, cultural, sociological and political change has changed the way central banks analyze, manage and respond to business cycle peaks, troughs (recessions), financial crisis, and macro-prudential bank supervision; and central bank policy responses have failed consistently over time, due to limitations of their data, models, ideology, epistemology, bureaucracy, and politics.

But one modern response to these limitations has been consistent over time, inject or try to inject massive amounts (trillions of U.S. Dollars, Yen, Euros, Pounds, Yuan, Peso, Rubble, etc.) of liquidity (credit) to back-stop and set a support under asset prices. Since these asset price bubbles and asset price collapse (financial/currency crisis) have become more frequent since 1995 (Peso Crisis, Thai Baht, Russian Default, Y2K/911, Housing Bubble, Financial Crisis, etc.), global central bankers do not have the intellect, culture, knowledge, data, models, tools, resources, balance sheet, etc. to deal with crisis going forward.
Dr. Rasmus recommends limiting the independence (ad hoc decision making) of central banks by instituting a (rules based) Constitutional Amendment defining new functions for the central bank, new monetary targets and tools to modernize and drive global central banks into the 21st century.

Chapter: Problems and Contradictions of Central Banking

Globalization, technologicalization and deregulation/integration has accelerated capital flows and accumulation, and concentration to targeted and non-targeted markets across the world. This process continues at a rapid pace, and depending on the recipient, can be economically, financially and politically (institutionally) destabilizing, destructive and deconstructive. It is not a matter if this will happen, but when, again! Which country? Industry? Company? Demographic? will be affected, disrupted, destroyed, and wrecked.

In response to these economic and financial disruptions, central banks have responded consistently by injecting massive amounts of liquidity into the system, with no limitations due to their misunderstanding of how the economic and financial system really works, and has become, through the use of unorthodox monetary policy tools and targets, in the face of total deregulation and free flow of capital (shadow banking and derivatives trading), is at this point, where they cannot control or manage the system. We are in unchartered territory.
Only to bail it out the private banking system — other strategic affiliated institutions, corporations, businesses and brokerages — again and again, by printing massive amounts of fiat currency (seigniorage), to buy (defective/defaulted) securities product (derivatives), accumulate more sovereign-corporate-personal debt, with even more crowding out effects, has had no real eventual long-term impacts on real economic growth, wages, and productivity; and social welfare or standards of living. Only asset prices bubbles and a massive redistribution and concentration of wealth.

It is estimated, between the U.S Federal Reserve Bank, Bank of England, and European Central Bank, $15 trillion direct liquidity injections, loans, guarantees, tax reductions, direct subsidies, etc. have been used. If you add in China and Japan, the total gets to as high as $25 trillion, and if you add in other emerging country (Asian, Latin America, and Middle-East) central banks, the total gets as high $40 trillion.

This is only the present value (cost basis), if you project the total cost (interest and principal payments) out over a 30-to-40 year period, the estimate total cost is as high as $80-to-$100 trillion. Thereby, making the global financial and economic system eventually insolvent and bankrupt, and central banking ineffective and perpetually in a liquidity trap, as the velocity of money has collapsed. There is not money going into real long-term (capital budgets) assets, only short-term financial assets.

This is the contradiction of Central Banking: liquidity-debt-insolvency nexus, the moral (immoral) hazard of perpetual bail-outs, growing concentration of wealth at the extremes, growing perception that Negative/Zero Interest Rate Policy (N/ZIRP) can fix under-investment in capital (human/physical) and deflationary (disinflationary) trends, and that bank regulation-supervision is bad for the economy, financial services (institutions) industry, and for institutional and retail investors (savers) in the long run.

Chapter: A Brief History of Central Banking

A Brief History of Central Banking, walks us through the origins of central banking, from the Bank of England (1694) as the lender of last resort for private banks, and its monopoly position in issuing government bank notes and currency (1844/1870s), and bailing out the banking system due to crashes and development of new types of currencies (paper, gold, notes, etc.).

An uncontrolled growth in the money supply in the U.S. led to financial speculation in gold and bonds (1830), and depression (1837-43). No central bank was established, not even after banking crashes (1870/1890s/1907-08), but only by 1914 as the U.S. entered WWI, and needed to decouple its currency from gold, raise tax revenues, and be able to monetize its sovereign debt through the use of a fractional reserve banking system, did the government then decide that they needed a central bank.

The role of the central banks were to maintain monopoly control over the production of money, act a lender of last resort and fund raising agents, provide a clearing-payment services system between banks, and supervise bank behavior.
The goal, was price stability, supply of money growth targets, full employment, interest rate and currency exchange rate determination. They were to do this though the use of tools (rules): reserve requirements, discount rates, and Open Market Operations (OMO); and now, Quantitative Easing (QE)/Tightening (QT) and special auctions and re-purchase agreements.

The U.S. Federal Reserve Bank(s) was also given this monopoly position, along with tools and independence. This has led to some toxic legacies (credibility issues).

Chapter: The U.S. Federal Reserve Bank: Origins and Toxic Legacies

The U.S. Federal Reserve Bank system was originated from a consortium of private banks looking to centralize the Federal Reserve System: JP Morgan, Kuhn, Loeb, Chase, Bankers Trust, First National, etc. Particularly after financial instability (illiquidity/capital/reserves), bank crashes (lack of supervision) – 1890s/1907, and the rise of the U.S. as a global economic power.

Congress passed the Federal Reserve Act on December 13th 1913: twelve district banks and national board located in Washington D.C. The real power resided in the member banks that owned their respective districts. They could issue their own currency and notes, exchange for gold and foreign currency, invest in agricultural and industrial loans, and received dividends from earnings.

After the Great Depression and bank reform acts (1933/1935), the Federal Reserve Board of Governors and the Open Market Committee became the two powerful institutions within the Federal Reserve System.

However, the Fed experienced two decades of failure (1913-1933) due to lack of supervision, stock market and loan speculation, asset price bubbles/crashes, depressions, bank closures and bailouts, excessive extension of liquidity (margin), protection of government finance and wealthy investors, hyperinflation (deflation/disinflation), false targets (gold peg/production/employment), inaction and incompetence (discount rate/open market operations), institutional narcissism and egotism, power and elitism, bureaucratic control, etc.

Bank acts were put in place by Roosevelt, and other regulation and operations were put in place through the 1970s and 1980s: Glass-Stegall, 1935 Bank Act, Reg U, tax reform, policy, Treasury-Fed Accord, Operation Twist, Bretton Woods, Humphrey-Hawkins/Resolution 133, fighting hyperinflation-stagflation-recessions, Reg D, Plaza Accords, state and shadow bank regulatory efforts, international banking (currency/note) issues, liquidity escalations, and eventually the Greenspan typhon.

From 1913 to 1933, the two decades of failure after the Federal Reserve was created; it continued into the 1940s-1950s, 1960s-1970s, 1980s-1990s, 1990s-2000s, it continued and continues to this day, and looks like it will continue into the future.

Chapter: Greenspan’s Bank: The Typhon Monster Released

Greenspan, influenced by Ian Rand — liberal-post-modern philosophy – set in motion an un-orthodoxy in Federal Reserve, Monetary Policy, and Macro/Political Economic rationalization, a stark contrast to the Volker era. Greenspan believed in markets, and lase fair-free hand economic ideology (deregulation); and did not believe in limits to the Market and Technology-Labor Productivity, limits to the Federal Reserve’s power to dictate markets and the economy, and limits — in the end – to the ability to inject massive amounts of liquidity into the financial system to drive (support) asset price bubbles. This believe, or lack of, lead to multiple crisis and bailouts of the system.

The continual mismanagement, ideological mistakes, and lack of understanding of how the real world works, was witnessed again under Bernanke, now Yellen, and who knows who is next.

Chapter: Bernanke’s Bank: Greenspan’s Put on Steroids

Bernanke was minted from the same Greenspan mold, a true believer that excessive liquidity injections cold solve massive capital market and economic failures with little cost. It was the financial crisis and the coordinated efforts between the Federal Reserve and the Treasury (and other hidden interests), that was the test case in the Federal Reserve ability to manage severe man-made financial-economic crisis. The result, a new nationalization-corporatist-financial oligopoly industrial model, leveraged through Zero Interest Rate Policy (ZIRP)/Negative Real Interest Rate Policy (NRIRP), Quantitative Easing (QE), and Credit Enhancements/Liquidity Injections.

However, the outcomes from these efforts were disastrous:

1. Political Populism (Political-Economic Institutional Deconstruction/Destruction)
2. Massive Capital-Labor Substitution (Productivity Lag)
3. Massive Concentrations of Wealth (Inter-Generational Wealth Transfer)
4. Flat-Declining Real Wages (Social Welfare/Standards of Living/Poverty)
5. Unfunded Pension Liabilities (Crisis)
6. Recession(s) Twice as Deep/Twice as Long (Structural)
7. Rising Un-Funded Pension Liabilities
8. Collapse in Labor Participation Rates (High Under-Employment)
9. Collapse in Velocity of Money (Currency Turnover)
10. Rise of Shadow (Unregulated) Banking System (Disintermediation)
11. Massive Use-Trading of Un-Collateralized (Over-The-Counter/OTC) Derivative Trading
Excessive Use of Financial Engineering to Support Asset Prices
12. Global Economic-Political Instability (Global Cyber-Cold War)
13. Global Hyper-Inflation/Banking Crisis/Credit Defaults (Sovereign)
14. Massive Over-Leveraging of Government, Corporate and Personal Balance Sheets
15. Over Accommodative Monetary/Fiscal Policy (Negative Nominal/Real Interest Rates/Change Accounting Rules/Low Effective Tax Rates)
16. Global Tax Evasion (Avoidance)
17. Ballooning of the Federal Reserve Balance Sheet (Bonds/Reserves)
• Ballooning of the Federal Budget Deficit and Debt ($500-800 Billion Per Year/+$20 Trillion)
• Continuous Belief in Supply Side Economics (Trickle Down Theory/Deregulation)
• Continuous Belief in Monetary System/Real Economy Aggregates (Inflation/Interest)
• Continuous Bail-Outs of Financial/Economic System (Insolvency/Bankruptcy)
• Etc. Etc. Etc.

All of these beliefs, techniques and tools have been used by other Global Central Governments and Banks (BOJ/ECB/BOE/PBOC), with similar, disastrous, and disappointing outcomes. A focus is on saving the financial institutional system in the short-run, using extreme and un-orthodox monetary policies (tools), with a lack of concern or understanding of long-run economic, social, cultural, and political consequences and outcomes.

A perfect example, are policy responses of the Bank of Japan (BOJ).

Chapter: The Bank of Japan (BOJ): Harbinger of Things That Came

Over the last 17 years (1990 – 2017) the BOJ has implemented an aggressive form of unorthodox monetary policy (Negative – Nominal/Real — Interest Rate Policy/Quantitative Easing): printing massive amounts of money, buying massive amounts of sovereign-corporate (infrastructure) bonds, driving bonds yields negative, and driving domestic investors/savers and financial institutions literally crazy.

With no real effect on the Real Business Cycle (RBC), resulting in perpetual recessions and disinflation/deflation. These unorthodox monetary policies (mistakes/failures) have had the effect of causing asset price bubbles/busts (banking crisis), negative effects on standards of living, and negative effects on financial (dis)intermediation and fiscal policy (mistakes).

The BOJ has responded to these failures by introducing more accommodative (QE) policies, along with over accommodative fiscal policies (sovereign debt levels at historical levels) with no real positive effects. Fiscal policy mistakes (tax increases in a recession), have only exacerbated economic outcomes.

Japan will be the ultimate experiment in monetary-fiscal policy mistakes, as they will have to resort to even more extreme measures to try to get themselves out of their existential structural crisis. The ultimate fiscal-monetary response could be, with unintended political-economic-cultural consequences, associate with a massive and coordinated debt forgiveness, by both fiscal/monetary authorities.
At some point they will not have the tax revenues to service the sovereign debt payments, and will theoretically fall into default, and will ask for forgiveness, not from bond holders, but from the BOJ, that owns the majority of the debt.

Monkey see, monkey do. The BOJ has set the (bad) model for other central banks to follow, not only the U.S., but also the European Central Bank (ECB).

Chapter: The European Central Bank (ECB) under German Hegemony

Years after the financial crisis, the ECB finally started the process of cleaning up its banking system, and started and aggressive process of Quantitative Easing (QE), introduction of other unorthodox policies (Refinance Options/Covered Bond Purchase/Securities Markets, etc.), and drove nominal interest rates as far out as 10 year maturities, negative; with a limited effect of driving down the value of the Euro to stimulate exports, economic growth, and hit inflation and unemployment targets.

The actual ECB structure (dominated by Germany – Bundesbank) was a major impediment its ability to respond to the crisis: fiscal austerity, inability to devalue the Euro, fear of hyper-inflationary trends, and misspecification of monetary policy targets: inflation, productivity, employment, wages, and exchange rates.
Poor performance (contagion), bank crisis (runs on banks), social unrest (populism), massive debt issuance, and deflation (liquidity trap/collapse of money velocity) was the costly (stagnation) result of these policy mistakes. This — along with their lack and hesitant response to bank runs in Spain-Greece-other EU countries — has had a negative impact on the central bank’s independence and credibility, in regards to their ability to respond to future financial and economic crisis.

When the ECB was dealing with the aftermath of the financial crisis, the Bank of England (BOE) across the pond, was trying to immunize itself from the global crisis and its aftermath, only to vote itself into another existential crisis of national identity (BREXIT from the European Union), with long-term economic consequences, testing the limitation of the BOE.

Chapter: The Bank of England’s (BOE) Last Hurrah: From QE to BREXIT

The Bank of England (BOE) was founded in 1694, the first central bank, and in 1844 under the Bank Charter Act, was given independent monopoly control over bank notes and currency, money supply, bank supervision, lending of last resort, and fiscal government bond-placement agency. By the 1990s, monetarism took hold and the main target was inflation (price stability), and the Monetary Policy Committee was established to conduct open market operations, set interest rates, and reserve requirements.

Globalization, and having London as the center of money center global trading — currency, credit and interest rate derivatives and floating rate Euro notes and bonds – created excessive liquidity/credit and asset price bubbles, particularly in the U.S. commercial property markets from 2004-2007, eventually led and met with an asset price (housing/mortgage/RMBS/CMBS/equity) bubble and banking collapse (insolvency/QE, nationalization, etc.), similar to the other industrialized economies.

The total cost of these QE (negative real and nominal interest rates) programs, in addition to other credit facility programs, is well over a trillion pounds, with no real ability to achieve their inflation, Gross Domestic Product (GDP), or employment/labor participation targets. The global push toward deregulation (giving Wall Street back its ability to lever up and take down the system, again) and BREXIT, is certainly making the BOE’s job of conducting monetary policy problematic, leading to policy ineffectiveness (failure), lack of credibility and jeopardizing its independence.

These events, have contributed to the significant devaluation of the pound; yes, making U.K. exports cheaper, stimulating export growth as a contribution to GDP; but has caused political-populous parliamentary uncertainty and economic stagnation (high deficits/debt levels); and import price inflation, pushing down consumer purchasing power, standards of living and social welfare in the short and long run.

The big worry, not only for the BOE, but also for the Fed, ECB, BOJ, etc., is the coordinated unwinding of the bank balance sheets (sovereign and MBS bond portfolios), one mistake, could shift and invert global yield curves, pop asset price bubbles in stocks, bonds and real estate, and send us all into a global recession-depression.

Similar policy responses to the global economic-banking crisis, is also being witnessed in Asia. Yes, we already talked about the BOJ being the first mover in applications of unorthodox monetary and fiscal policy, with no real outcomes on wages, growth or inflation, other than fiscal debt levels and continued stagnation, the other, is the People’s Bank of China (PBOC).

The real difference between the PBC and the rest of the global central banks, is total lack of transparency (opaque) into the balance sheets of the government, financial institutions, government (State-Owned Enterprises – SOEs) owned corporations, public and private Multinational Corporations (MNC), and state and local finance.

Chapter: The People’s Bank of China (PBOC) Chases Its Shadows

The modern era of the PBOC started in the early 1980s – as a fiscal agent (under Ministry of Finance), public-private bank, clearing foreign currency exchange transactions, etc. in coordination with the China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China.

Opening up the economy to massive (speculative) extension of credit and Foreign Direct Investment (FDI), under a neo-liberal model, resulted in speculative asset price (real estate, equity and debt) bubbles and busts (defaults) in the 1980s and 1990s, resulting in government intervention and deflation.
The Asian Contagion of the late 1990s required massive bank and corporate bailouts (recapitalizations). The 2000s, have seen a modernization of the PBOC as a central banking institution through banking reforms, conversion of SOEs to private-public firms (privatization toward a more Japanese Keiretsu system), push for more export oriented policies (higher-value commodities-services), and large government sponsored infrastructure projects (commercial-residential-dams-roads-power plants, etc.),

Prior to the Financial Crisis (FC), the PBOJ was moving to a modern rules-tools oriented application of monetary policy: interest rate and price targeting, constant growth in the money supply, and use of open market operations. Low borrowing costs spurred massive amounts of lending and borrowing (money supply growth) by both fiscal institutions, government and state-private owned enterprises, leading to asset price bubbles.

Which also lead to over-capacity, miss-allocation of resources, inflation, environmental degradation, political-economic corruption, currency manipulation (peg), etc. Since the China economy was still at this time decoupled from the Western global financial system, it was able to avoid most of the damage caused before the Financial Crisis.

But after the Financial Crisis, the PBOC had to accelerate the move toward liberal monetary finance, driving interest rates extremely low (real interest rates negative) to keep government and corporate (personal) borrowing costs low, to stimulate the economy/consumption/investment, to keep it from falling into a severe recession (depression/deflation), and had to deal with Non-Performing bank Loan (NPL) portfolios to avert a banking crisis. Rapid growth helped to mask these problems, but these were only land mines, waiting to be found and dealt with at a future date.

Banks and asset management companies had to be bailed out, dissolved, liquidated, etc. Trillions and trillions monetary liquidity and fiscal stimulus had to be injected to the economy, targeted toward housing, infrastructure and manufacturing, causing asset prices again to inflate. By 2014, only to deflate again by 2016. These injections of fiscal and monetary stimulus exacerbated asset price volatility (real estate/equities/bonds).

The next financial crisis in China will come from the excessive extension of credit from both fiscal and monetary authorities, and will come from government and corporate bond market defaults, as the system is severely over-leveraged. China is using more and more debt to fix bad debt problems, and the simulative multiplier-accelerator effect on the economy is deteriorating (decelerating) quickly.

Global central banks have been coordinating their monetary policy efforts over the past 10 years, and the U.S. Federal Reserve Bank has become the de facto Central Bank of Central Banks (CBCB). Based on new disclosures, we have found out that the U.S. Federal Reserve conducted global QE by buying other foreign sovereign debt during the financial crisis, and provided credit-liquidity facilities to global banks.

Chapter: Yellen’s Bank: From Taper Tantrums to Trump Trade

There was Paul Volker, then there was Alan Greenspan, then Ben Bernanke, now Janet Yellen, and who knows who is next (Jerome Powell). All of these Fed presidents dealt with extraordinary conditions (some self-inflicted), wars, financial crisis, recessions, asset price bubbles/bursts, etc.

It was not till Alan Greenspan, that the Federal Reserve decided excessive accommodation and liquidity was the solution to all crisis, and asset price bubbles were not a concern if they were real, and not a monetary illusion. However, he now admits that he was wrong in the way he understood how the world really works, which means he made policy errors and mistakes.
Bernanke was a protégé of Greenspan, and responded to the Financial Crisis with the largest monetary response (QE Infinity) in modern monetary history combined; and Yellen, continued his legacy of over accommodation, to escort us into one of the biggest debt-asset price bubbles in modern Fed history.

And if history is any indicator of the future, once the Fed(s) decide to conduct a coordinated unwind of their balance sheets, the popping of asset price bubbles will be like balloons at New Year’s Eve party in Time’s Square, only everyone will walk away from the party with the worst hangover of their life, and no one will be able to sober up fast enough to drive to the next party.

In the end, the Fed accumulated over $4.5 trillion in bank reserves/balance sheet (bonds), made up mostly of mortgage backed securities and U.S. government Treasury notes and bonds, the average size of the balance sheet prior to the financial crisis was $500-to-$800 billion. This is the largest subsidization, and theoretically (and really) the largest nationalization (Fed implemented) process, of the financial system and the economy in modern post-WWI history.

This could also be considered Fascist Finance (FF), as it involves the largest global money center banks, multinational corporations, and governments in the world — now a Global Corporatist System — operating under unorthodox monetary policy, outside pluralistic-democratic institutional oversight. As we can now see, again, the systematic dismantling, deconstruction and destruction of financial institutional governmental regulatory oversight, is in place.

Since these were mainly reserves creation, and an addition to the monetary base, and not really the money supply, the policy effects (QE/(Zero-Negative Real Interest Rate policy) have been mute.

The Fed has not been able to hit its inflation or GDP targets for the past 10 years (well below potential), there is secular and cyclical productivity declines, extremely low labor participation rates (high under employment rates), real wages are stagnant and still declining, and we are in a disinflationary/deflationary secular trend.

The cause is a collapse in the velocity of money, driven by alternative forms of money creation and flows across the globe (cryptic-digital currencies-shadow banking, etc.); the lack of fiscal labor market policy to lower under-employment and raise labor market participation rates; and other social, cultural, political and economic disruptions. Making it now impossible to conduct monetary policy.
The real risk going forward will be from a series of financial deregulation, coming from the Trump Administration and the Republican controlled House and Senate; along with a coordinated effort to unwind (Quantitative Tightening – QT) the Feds (and other global central banks) balance sheet, and a race toward interest rate normalization, sucking liquidity out of the system, only to lead to a stock, bond and real estate bubble burst.

With the Fiscal Debt totaling over $20 trillion, the Feds Balance Sheet totaling $4.5 trillion, the potential for continued -perpetual war (defense spending) and entitlement expenditures, and political and policy uncertainty (next Federal Reserve President) there is little room for monetary and fiscal solutions to fight the next financial and economic crisis. Leading to the conclusion of continued stagnation, crisis, recession, wars and depression.

It is now obvious why Central Banks fail.

Chapter: Why Central Banks Fail

After reading Dr. Jack Rasmus book, “Central Bankers at the End of Their Rope?” and if you read his book, “Systematic Fragility in the Global Economy,” along with other books and interviews surrounding this literature, it has been clear, and it is now crystal clear, why central banks fail, they:

• Are a creature of the global capitalist system;
• Support, promote and protect financial institutions and companies;
• Use myopic (static) intellectual and epistemological frames (models) to analyze economic data, markets, and institutions to develop and implement monetary policy;
• Are influenced by political (executive/legislative) parties and lobby when making and communicating policy;
• Are expected to support (moral hazard) and coordinate national fiscal policies (debt) and priorities (compromising their independence and credibility);
• And be the lender, portfolio manager, and market maker of last resort to mitigate capital market (economic) failures;

Their failures emanate from the fact that they are given (have been given over) the monopoly power and authority (independence) to control the money supply, clearing system, exchange rates, interest rates, supervision, etc. However, we are finding out, that they are not as in control as we think, and are not looking out for our best interest.

There is a mythology surrounding the Fed, and illusion of omnipotence, and control, this is evident when measured by its balance sheet, lack of understanding how the world really works, and inability to hit monetary and real economic targets: inflation, labor participation rates, real wage growth, and higher broad based social welfare and standards of living.

We are finding that our Keynesian (Keynes) and Monetarist (Fisher/Friedman) economic ideologies are not correct, and are not working, deregulation and printing of massive amounts of money to bail out and subsidize inefficient and corrupt financial institutions (lobby), after every man-made and self-inflicted crisis, is not working, and we are at the end of our rope.

We now, cannot keep doing this, we are out of money. However, with Crypto-currencies, and other unproven systems of monetary accounting, could set the stage for monetary collapse, if this experiment turns out wrong.

The solution to the existential crisis in global central banking is not a technological solution, but a democratic-pluralistic political solution. Based on moral philosophy and ethical outcomes.

Chapter: Revolutionizing Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment

What is needed is a revolution in central bank thinking.

There are many excuses for monetary (central bank) failures:

• Too much discretion (money supply growth/credit expansion/asset price bubbles), and not enough adherence to monetary policy rules (money growth targets);
• Conflicting fiscal (expenditures/spending) vs. monetary (inflation/interest rate) policy;
• Asymmetric information (capital) flows (bottleneck) through banking system (adverse selection/moral hazard/principal agent problem);
• Wrong monetary targets (inflation); dual mandates (production/employment/inflation/wage trade-off);
• Global savings glut (uncontrollable off shore capital inflow);
• Need for new monetary tools (open market operations/QE/QT/discount rates/reserve requirements, etc.);
• Executive/legislative intrusion in monetary policy functioning;
• Etc.
However, the real reason why central banks fail are:
• Mismanagement of money supply (credit) growth and allowing banks, and other near- bank institutions, to access Federal Reserve credit/liquidity facilities;
• Fragmented, failed and non-existent systemic and macro-micro prudential systemic bank supervision (Dodd-Frank);
• Inability to achieve (real-nominal wage) inflation (labor participation) rates;
• Failure to address, mitigate and/or control run-away asset (real estate/equity/bond/commodity) price inflation (bubbles/bust);
• Deterioration, decomposition, and failure in the elasticity of (zero-negative) interest rates (liquidity trap/technology) to stimulate real economic growth (employment/wages);
• Re-direction of investment capital away from higher yielding real (long-term) capital investments to lower yielding-speculative monetary (short-term) financial investments (derivatives/floating-rate notes);
• Ineffectiveness of traditional monetary policy tools (federal funds rate/discount window/reserve requirements), and reliance on non-traditional un-orthodox (QE/credit-liquidity facilities) monetary policy tools with unintended negative consequences (deflation/asset price bubbles);
• Myopic political-economic monetary policy ideologies and errors in epistemological thinking (Taylor Rules/Philips Curve/Zero-Negative Interest Rate Policy/unlimited balance sheet expansion).
• Etc.

What is needed is a revolution in central bank thinking.

Chapter: CONCLUSIONS

A revolution is needed, in main-stream ideological thought, in regards to Global Central Banking. A revolution in accepted institutional norms and beliefs of how central banking actually works. There needs to be a dialectical shift from the established and accepted thesis of central banking authority. If there is not, there will be a revolution against central banks, and a battle will occur to wrestle authority, control and independence from central banks. And this battle will no doubt be destructive and deconstructive, leading to economic and financial crisis, and eventually lead to some anti-thesis (executive or legislative branch control) over the central bank(s) for the next 30-to-60 years.

Currently, the Federal Reserve is

• Controlled by private sector banker interests,
• Control of the Federal Reserve Bank of New York (Open Market Operations),
• Private sector banker selected leadership of Federal Open Market Committee,
• Private sector bank access to insider information on monetary policy,
• Iron-Triangles between Fed staff and private banking sector and lobby,
• Circularity between Fed private sector banks,
• Influence of private sector bank lobby in Fed Chair selection,
• Record campaign finance contributions to congressional committee members,
• Revolving door between the Fed, bank supervisors, Treasury, and banks,
• Etc.

Regulatory and legislative proposals have been brought, only to be blocked and abandoned, due to pressure from Wall Street lobby. And those policies that have been enacted (Dodd-Frank), the bank lobby has systematically reversed and repealed oversight other the years, or implemented bank friendly legislation. This legislation, and lack of supervisory regulatory oversight, has been passed through (and ignored by) executive and congressional initiatives, and the public administrative bureaucracy.

The solution, is the democratization of the central bank, bringing it into pluralistic (public) oversight, with a focus on real, not financial, economic outcomes.

Chapter: Proposed Constitutional Amendment

The solution, a proposed constitutional amendment to require the democratic election of the national Fed governors by U.S. citizens, serving six years; and the Treasury secretary shall decide monetary policy in the public interest; and be proactive in achieving stability for labor, households, businesses, local governments, and financial institutions and industry, etc.

Dr. Rasmus, recommends a constitutional amendment enabling legislation through five sections, and 20 articles:

SECTION #1: Democratic Restructuring

Article #1: Replace 12 Fed districts with four, presidents elected at large.
Article #2: FOMC replaced by National Fed Council (NFC), members limited to six-year terms, and 10 year limit on returning to private banking sector.
Article #3: Fed districts to not be corporation, and issue stock, pay dividends, retain no profits. Taxes to be levied on Fed transactions to pay for operating costs.
Article #4: No additions to Fed districts by legislative or executive orders, or appointments.

SECTION #2: Decision Making Authority

Article #5: NFC and Treasury Secretary to determine monetary policy (tools).
Article #6: QE to be used to invest in real assets.
Article #7: NFC purchase of private sector stocks and bonds, and derivatives, prohibited.
Article #8: No Fed bank supervision, a new consolidated banking institution created.

SECTION III: Banking Supervision

Article #9: Same as Article #8.
Article #10: Separate supervisory departments by banking and financial services industry segments.
Article #11: Separate legislation by depository from non-depository institutions.
Article #12: Supervision includes all markets and companies in derivative industry.
Article #13: Conduct regular stress tests on banks and non-banks.
SECTION IV: Mandates and Targets
Article #14: Replace current Fed targets with those targeting real wage growth.
Article #15: Expand authority of NFC to lend directly to businesses and households.
SECTION V: Expand Lender of Last Resort Authority
Article #16: Expanded to include non-banks businesses, local-state governments, etc.
Article #17: Non-bailout of Non-U.S. domiciled banks and financial institutions.
Article #18: Create a Public Investment Bank (PIB) as lender of last resort to provide liquidity to households and non-banks.
Article #19: Create a National Public Bank (NPB) for direct lending to households and non-banks.
Article #20: Bain-ins thresholds and limits protect depository diluted from bail-outs.

FINAL COMMENTS

In the post-World War II (WWII) era the economy and financial markets and institutions have gone through nine cycles. Over time the amplitude and volatility of these cycles have narrowed as our cultural, social, political and economic institutions developed. However, the most recent business, financial institution and credit cycle experienced a significant drop – and volatility — in aggregate demand and asset prices, not seen since 1949, a point in history when our central banking and financial institutions were developing.

The reality is we have witnessed the systematic deconstruction of pluralistic, democratic and capitalistic institutions — through the political process — by private interest in society and economy, creating perverse redistribution of wealth and resources, to the point of massive social and cultural, and economic and capital market failures.

It is believed by most neo-post Keynesian economists, that the current economic, institutional, and capital market failures could have been avoided through centrist political, monetary and fiscal policies, and that the recent financial crisis could have been averted through the separation of investment and commercial banking activities, and enforcement of public and private property rights through effective enforcement.

The long-term goal of effective formulation and administration of public, monetary and fiscal policies is efficient allocation of capital and resources, higher risk-adjusted returns, social and economic stability, and high and rising standards of living and social welfare.

Dr. Jack Rasmus’s book, Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression, enables us to understand historical and recent economic and capital market crisis, and how to recognize and understand the development, administration and deconstruction of financial institutions and markets.

Institutions were built on pluralistic political and capitalistic economic ideologies, and when these ideologies are confronted, come under attack by private interests, policy outcomes are distorted or destroyed.

The process of pluralistic, democratic and capitalistic institutional construction and development has taken 80 years; however, it took 30 years, and particularly the last ten years, to deconstruct these institutions to the point of systematic failure.

The process associated with institutional destruction, deconstruction and distortion, manifests in the extreme redistribution of political power, social benefits and economic wealth, and can reach the point where redistributions become so extreme, they cause systematic social, economic and market failure.

These failures are reflected in increased volatility in social and economic indicators, capital market pricing and investment risk, and resulting reductions risk-adjusted returns, inefficient allocation investment capital and resources, and falling employment and real income growth rates, standards of living and overall social welfare.”

Dr. Larry Souza
European Financial Review
December 15, 2017

posted January 1, 2018
(3rd) Review of Dr. Jack Rasmus’s book, ‘Central Bankers at the End of Their Ropes’, by Dr. Larry Souza

Here’s Dr. Souza’s extended 6,000 word long review, which provides the best review of my ‘Central Bankers at the End of Their Ropes’ book to date:

“INTRODUCTION

If you talk to some monetary, fiscal, macroeconomic, and financial institutional and capital market economists, some would argue that Central Banks are at the end of their rope; have lost their credibility and risk losing their independence.

Dr. Jack Rasmus book, “Central Bankers at the End of Their Rope? Monetary Policy and the Coming Depression” is the latest in a growing literature building the case against the U.S. Federal Reserve (the Central Bank of Central Banks), European Central Bank, Japanese Central Bank, The Bank of England, People’s Bank of China, etc.; their unorthodox monetary policy response to the financial crisis; policy response to asset price bubbles, financial (market) crisis (crashes), and recessions since 1995; lack of macro-prudential supervision and oversight; and consistent policy mistakes based on their lack of understanding of how the world and economy works, dating back as far as 1929 (See supporting Literature in the Appendix).

In Dr. Rasmus book, he looks at:

1. Problems and Contradictions of Central Banking
2. A Brief History of Central Banking
3. The U.S. Federal Reserve Bank: Origins and Toxic Legacies
4. Greenspan’s Bank: The Typhon Monster Released
5. Bernanke’s Bank: Greenspan’s Put (Option) on Steroids
6. The Bank of Japan: Harbinger of Things That Came
7. The European Central Bank under German Hegemony
8. The Bank of England’s Last Hurrah: From QE to BREXIT
9. The People’s Bank of China Chases Its Shadows
10. Yellen’s Bank: From Taper Tantrums to Trump Trade
11. Why Central Banks Fail
12. Revolutionizing Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment

Dr. Rasmus builds a methodical case against historical and current central bank ideologies and orthodoxy; and makes prudent and wise recommendations for structural and institutional macroeconomic, monetary policy and political change.
The conclusion, is not too late to address the systemic and systematic risks to central banking, regulation and supervision, financial institutions and capital markets, and the real economy and labor markets.

However, considering the real economic realities of the current political, party and policy environment, along with the Wall Streets control over monetary (Federal Reserve), fiscal (Treasury) and regulatory (Comptroller/SEC/FDIC/etc.) policy in Washington, that a political solution could actually be accomplished. Dr. Rasmus is correct in his recommendations and his analysis.

We are all at the end of our rope, and thank you Dr. Jack Rasmus from bringing another critical analysis of the current and future state of global central banking, and for proposing bold policy recommendations to avert another severe financial crisis, great recession and depression.

REVIEW

Rapid technological, demographic, economic, cultural, sociological and political change has changed the way central banks analyze, manage and respond to business cycle peaks, troughs (recessions), financial crisis, and macro-prudential bank supervision; and central bank policy responses have failed consistently over time, due to limitations of their data, models, ideology, epistemology, bureaucracy, and politics.

But one modern response to these limitations has been consistent over time, inject or try to inject massive amounts (trillions of U.S. Dollars, Yen, Euros, Pounds, Yuan, Peso, Rubble, etc.) of liquidity (credit) to back-stop and set a support under asset prices. Since these asset price bubbles and asset price collapse (financial/currency crisis) have become more frequent since 1995 (Peso Crisis, Thai Baht, Russian Default, Y2K/911, Housing Bubble, Financial Crisis, etc.), global central bankers do not have the intellect, culture, knowledge, data, models, tools, resources, balance sheet, etc. to deal with crisis going forward.
Dr. Rasmus recommends limiting the independence (ad hoc decision making) of central banks by instituting a (rules based) Constitutional Amendment defining new functions for the central bank, new monetary targets and tools to modernize and drive global central banks into the 21st century.

Chapter: Problems and Contradictions of Central Banking

Globalization, technologicalization and deregulation/integration has accelerated capital flows and accumulation, and concentration to targeted and non-targeted markets across the world. This process continues at a rapid pace, and depending on the recipient, can be economically, financially and politically (institutionally) destabilizing, destructive and deconstructive. It is not a matter if this will happen, but when, again! Which country? Industry? Company? Demographic? will be affected, disrupted, destroyed, and wrecked.

In response to these economic and financial disruptions, central banks have responded consistently by injecting massive amounts of liquidity into the system, with no limitations due to their misunderstanding of how the economic and financial system really works, and has become, through the use of unorthodox monetary policy tools and targets, in the face of total deregulation and free flow of capital (shadow banking and derivatives trading), is at this point, where they cannot control or manage the system. We are in unchartered territory.
Only to bail it out the private banking system — other strategic affiliated institutions, corporations, businesses and brokerages — again and again, by printing massive amounts of fiat currency (seigniorage), to buy (defective/defaulted) securities product (derivatives), accumulate more sovereign-corporate-personal debt, with even more crowding out effects, has had no real eventual long-term impacts on real economic growth, wages, and productivity; and social welfare or standards of living. Only asset prices bubbles and a massive redistribution and concentration of wealth.

It is estimated, between the U.S Federal Reserve Bank, Bank of England, and European Central Bank, $15 trillion direct liquidity injections, loans, guarantees, tax reductions, direct subsidies, etc. have been used. If you add in China and Japan, the total gets to as high as $25 trillion, and if you add in other emerging country (Asian, Latin America, and Middle-East) central banks, the total gets as high $40 trillion.

This is only the present value (cost basis), if you project the total cost (interest and principal payments) out over a 30-to-40 year period, the estimate total cost is as high as $80-to-$100 trillion. Thereby, making the global financial and economic system eventually insolvent and bankrupt, and central banking ineffective and perpetually in a liquidity trap, as the velocity of money has collapsed. There is not money going into real long-term (capital budgets) assets, only short-term financial assets.

This is the contradiction of Central Banking: liquidity-debt-insolvency nexus, the moral (immoral) hazard of perpetual bail-outs, growing concentration of wealth at the extremes, growing perception that Negative/Zero Interest Rate Policy (N/ZIRP) can fix under-investment in capital (human/physical) and deflationary (disinflationary) trends, and that bank regulation-supervision is bad for the economy, financial services (institutions) industry, and for institutional and retail investors (savers) in the long run.

Chapter: A Brief History of Central Banking

A Brief History of Central Banking, walks us through the origins of central banking, from the Bank of England (1694) as the lender of last resort for private banks, and its monopoly position in issuing government bank notes and currency (1844/1870s), and bailing out the banking system due to crashes and development of new types of currencies (paper, gold, notes, etc.).

An uncontrolled growth in the money supply in the U.S. led to financial speculation in gold and bonds (1830), and depression (1837-43). No central bank was established, not even after banking crashes (1870/1890s/1907-08), but only by 1914 as the U.S. entered WWI, and needed to decouple its currency from gold, raise tax revenues, and be able to monetize its sovereign debt through the use of a fractional reserve banking system, did the government then decide that they needed a central bank.

The role of the central banks were to maintain monopoly control over the production of money, act a lender of last resort and fund raising agents, provide a clearing-payment services system between banks, and supervise bank behavior.
The goal, was price stability, supply of money growth targets, full employment, interest rate and currency exchange rate determination. They were to do this though the use of tools (rules): reserve requirements, discount rates, and Open Market Operations (OMO); and now, Quantitative Easing (QE)/Tightening (QT) and special auctions and re-purchase agreements.

The U.S. Federal Reserve Bank(s) was also given this monopoly position, along with tools and independence. This has led to some toxic legacies (credibility issues).

Chapter: The U.S. Federal Reserve Bank: Origins and Toxic Legacies

The U.S. Federal Reserve Bank system was originated from a consortium of private banks looking to centralize the Federal Reserve System: JP Morgan, Kuhn, Loeb, Chase, Bankers Trust, First National, etc. Particularly after financial instability (illiquidity/capital/reserves), bank crashes (lack of supervision) – 1890s/1907, and the rise of the U.S. as a global economic power.

Congress passed the Federal Reserve Act on December 13th 1913: twelve district banks and national board located in Washington D.C. The real power resided in the member banks that owned their respective districts. They could issue their own currency and notes, exchange for gold and foreign currency, invest in agricultural and industrial loans, and received dividends from earnings.

After the Great Depression and bank reform acts (1933/1935), the Federal Reserve Board of Governors and the Open Market Committee became the two powerful institutions within the Federal Reserve System.

However, the Fed experienced two decades of failure (1913-1933) due to lack of supervision, stock market and loan speculation, asset price bubbles/crashes, depressions, bank closures and bailouts, excessive extension of liquidity (margin), protection of government finance and wealthy investors, hyperinflation (deflation/disinflation), false targets (gold peg/production/employment), inaction and incompetence (discount rate/open market operations), institutional narcissism and egotism, power and elitism, bureaucratic control, etc.

Bank acts were put in place by Roosevelt, and other regulation and operations were put in place through the 1970s and 1980s: Glass-Stegall, 1935 Bank Act, Reg U, tax reform, policy, Treasury-Fed Accord, Operation Twist, Bretton Woods, Humphrey-Hawkins/Resolution 133, fighting hyperinflation-stagflation-recessions, Reg D, Plaza Accords, state and shadow bank regulatory efforts, international banking (currency/note) issues, liquidity escalations, and eventually the Greenspan typhon.

From 1913 to 1933, the two decades of failure after the Federal Reserve was created; it continued into the 1940s-1950s, 1960s-1970s, 1980s-1990s, 1990s-2000s, it continued and continues to this day, and looks like it will continue into the future.

Chapter: Greenspan’s Bank: The Typhon Monster Released

Greenspan, influenced by Ian Rand — liberal-post-modern philosophy – set in motion an un-orthodoxy in Federal Reserve, Monetary Policy, and Macro/Political Economic rationalization, a stark contrast to the Volker era. Greenspan believed in markets, and lase fair-free hand economic ideology (deregulation); and did not believe in limits to the Market and Technology-Labor Productivity, limits to the Federal Reserve’s power to dictate markets and the economy, and limits — in the end – to the ability to inject massive amounts of liquidity into the financial system to drive (support) asset price bubbles. This believe, or lack of, lead to multiple crisis and bailouts of the system.

The continual mismanagement, ideological mistakes, and lack of understanding of how the real world works, was witnessed again under Bernanke, now Yellen, and who knows who is next.

Chapter: Bernanke’s Bank: Greenspan’s Put on Steroids

Bernanke was minted from the same Greenspan mold, a true believer that excessive liquidity injections cold solve massive capital market and economic failures with little cost. It was the financial crisis and the coordinated efforts between the Federal Reserve and the Treasury (and other hidden interests), that was the test case in the Federal Reserve ability to manage severe man-made financial-economic crisis. The result, a new nationalization-corporatist-financial oligopoly industrial model, leveraged through Zero Interest Rate Policy (ZIRP)/Negative Real Interest Rate Policy (NRIRP), Quantitative Easing (QE), and Credit Enhancements/Liquidity Injections.

However, the outcomes from these efforts were disastrous:

1. Political Populism (Political-Economic Institutional Deconstruction/Destruction)
2. Massive Capital-Labor Substitution (Productivity Lag)
3. Massive Concentrations of Wealth (Inter-Generational Wealth Transfer)
4. Flat-Declining Real Wages (Social Welfare/Standards of Living/Poverty)
5. Unfunded Pension Liabilities (Crisis)
6. Recession(s) Twice as Deep/Twice as Long (Structural)
7. Rising Un-Funded Pension Liabilities
8. Collapse in Labor Participation Rates (High Under-Employment)
9. Collapse in Velocity of Money (Currency Turnover)
10. Rise of Shadow (Unregulated) Banking System (Disintermediation)
11. Massive Use-Trading of Un-Collateralized (Over-The-Counter/OTC) Derivative Trading
Excessive Use of Financial Engineering to Support Asset Prices
12. Global Economic-Political Instability (Global Cyber-Cold War)
13. Global Hyper-Inflation/Banking Crisis/Credit Defaults (Sovereign)
14. Massive Over-Leveraging of Government, Corporate and Personal Balance Sheets
15. Over Accommodative Monetary/Fiscal Policy (Negative Nominal/Real Interest Rates/Change Accounting Rules/Low Effective Tax Rates)
16. Global Tax Evasion (Avoidance)
17. Ballooning of the Federal Reserve Balance Sheet (Bonds/Reserves)
• Ballooning of the Federal Budget Deficit and Debt ($500-800 Billion Per Year/+$20 Trillion)
• Continuous Belief in Supply Side Economics (Trickle Down Theory/Deregulation)
• Continuous Belief in Monetary System/Real Economy Aggregates (Inflation/Interest)
• Continuous Bail-Outs of Financial/Economic System (Insolvency/Bankruptcy)
• Etc. Etc. Etc.

All of these beliefs, techniques and tools have been used by other Global Central Governments and Banks (BOJ/ECB/BOE/PBOC), with similar, disastrous, and disappointing outcomes. A focus is on saving the financial institutional system in the short-run, using extreme and un-orthodox monetary policies (tools), with a lack of concern or understanding of long-run economic, social, cultural, and political consequences and outcomes.

A perfect example, are policy responses of the Bank of Japan (BOJ).

Chapter: The Bank of Japan (BOJ): Harbinger of Things That Came

Over the last 17 years (1990 – 2017) the BOJ has implemented an aggressive form of unorthodox monetary policy (Negative – Nominal/Real — Interest Rate Policy/Quantitative Easing): printing massive amounts of money, buying massive amounts of sovereign-corporate (infrastructure) bonds, driving bonds yields negative, and driving domestic investors/savers and financial institutions literally crazy.

With no real effect on the Real Business Cycle (RBC), resulting in perpetual recessions and disinflation/deflation. These unorthodox monetary policies (mistakes/failures) have had the effect of causing asset price bubbles/busts (banking crisis), negative effects on standards of living, and negative effects on financial (dis)intermediation and fiscal policy (mistakes).

The BOJ has responded to these failures by introducing more accommodative (QE) policies, along with over accommodative fiscal policies (sovereign debt levels at historical levels) with no real positive effects. Fiscal policy mistakes (tax increases in a recession), have only exacerbated economic outcomes.

Japan will be the ultimate experiment in monetary-fiscal policy mistakes, as they will have to resort to even more extreme measures to try to get themselves out of their existential structural crisis. The ultimate fiscal-monetary response could be, with unintended political-economic-cultural consequences, associate with a massive and coordinated debt forgiveness, by both fiscal/monetary authorities.
At some point they will not have the tax revenues to service the sovereign debt payments, and will theoretically fall into default, and will ask for forgiveness, not from bond holders, but from the BOJ, that owns the majority of the debt.

Monkey see, monkey do. The BOJ has set the (bad) model for other central banks to follow, not only the U.S., but also the European Central Bank (ECB).

Chapter: The European Central Bank (ECB) under German Hegemony

Years after the financial crisis, the ECB finally started the process of cleaning up its banking system, and started and aggressive process of Quantitative Easing (QE), introduction of other unorthodox policies (Refinance Options/Covered Bond Purchase/Securities Markets, etc.), and drove nominal interest rates as far out as 10 year maturities, negative; with a limited effect of driving down the value of the Euro to stimulate exports, economic growth, and hit inflation and unemployment targets.

The actual ECB structure (dominated by Germany – Bundesbank) was a major impediment its ability to respond to the crisis: fiscal austerity, inability to devalue the Euro, fear of hyper-inflationary trends, and misspecification of monetary policy targets: inflation, productivity, employment, wages, and exchange rates.
Poor performance (contagion), bank crisis (runs on banks), social unrest (populism), massive debt issuance, and deflation (liquidity trap/collapse of money velocity) was the costly (stagnation) result of these policy mistakes. This — along with their lack and hesitant response to bank runs in Spain-Greece-other EU countries — has had a negative impact on the central bank’s independence and credibility, in regards to their ability to respond to future financial and economic crisis.

When the ECB was dealing with the aftermath of the financial crisis, the Bank of England (BOE) across the pond, was trying to immunize itself from the global crisis and its aftermath, only to vote itself into another existential crisis of national identity (BREXIT from the European Union), with long-term economic consequences, testing the limitation of the BOE.

Chapter: The Bank of England’s (BOE) Last Hurrah: From QE to BREXIT

The Bank of England (BOE) was founded in 1694, the first central bank, and in 1844 under the Bank Charter Act, was given independent monopoly control over bank notes and currency, money supply, bank supervision, lending of last resort, and fiscal government bond-placement agency. By the 1990s, monetarism took hold and the main target was inflation (price stability), and the Monetary Policy Committee was established to conduct open market operations, set interest rates, and reserve requirements.

Globalization, and having London as the center of money center global trading — currency, credit and interest rate derivatives and floating rate Euro notes and bonds – created excessive liquidity/credit and asset price bubbles, particularly in the U.S. commercial property markets from 2004-2007, eventually led and met with an asset price (housing/mortgage/RMBS/CMBS/equity) bubble and banking collapse (insolvency/QE, nationalization, etc.), similar to the other industrialized economies.

The total cost of these QE (negative real and nominal interest rates) programs, in addition to other credit facility programs, is well over a trillion pounds, with no real ability to achieve their inflation, Gross Domestic Product (GDP), or employment/labor participation targets. The global push toward deregulation (giving Wall Street back its ability to lever up and take down the system, again) and BREXIT, is certainly making the BOE’s job of conducting monetary policy problematic, leading to policy ineffectiveness (failure), lack of credibility and jeopardizing its independence.

These events, have contributed to the significant devaluation of the pound; yes, making U.K. exports cheaper, stimulating export growth as a contribution to GDP; but has caused political-populous parliamentary uncertainty and economic stagnation (high deficits/debt levels); and import price inflation, pushing down consumer purchasing power, standards of living and social welfare in the short and long run.

The big worry, not only for the BOE, but also for the Fed, ECB, BOJ, etc., is the coordinated unwinding of the bank balance sheets (sovereign and MBS bond portfolios), one mistake, could shift and invert global yield curves, pop asset price bubbles in stocks, bonds and real estate, and send us all into a global recession-depression.

Similar policy responses to the global economic-banking crisis, is also being witnessed in Asia. Yes, we already talked about the BOJ being the first mover in applications of unorthodox monetary and fiscal policy, with no real outcomes on wages, growth or inflation, other than fiscal debt levels and continued stagnation, the other, is the People’s Bank of China (PBOC).

The real difference between the PBC and the rest of the global central banks, is total lack of transparency (opaque) into the balance sheets of the government, financial institutions, government (State-Owned Enterprises – SOEs) owned corporations, public and private Multinational Corporations (MNC), and state and local finance.

Chapter: The People’s Bank of China (PBOC) Chases Its Shadows

The modern era of the PBOC started in the early 1980s – as a fiscal agent (under Ministry of Finance), public-private bank, clearing foreign currency exchange transactions, etc. in coordination with the China Construction Bank, Industrial and Commercial Bank of China, and Agricultural Bank of China.

Opening up the economy to massive (speculative) extension of credit and Foreign Direct Investment (FDI), under a neo-liberal model, resulted in speculative asset price (real estate, equity and debt) bubbles and busts (defaults) in the 1980s and 1990s, resulting in government intervention and deflation.
The Asian Contagion of the late 1990s required massive bank and corporate bailouts (recapitalizations). The 2000s, have seen a modernization of the PBOC as a central banking institution through banking reforms, conversion of SOEs to private-public firms (privatization toward a more Japanese Keiretsu system), push for more export oriented policies (higher-value commodities-services), and large government sponsored infrastructure projects (commercial-residential-dams-roads-power plants, etc.),

Prior to the Financial Crisis (FC), the PBOJ was moving to a modern rules-tools oriented application of monetary policy: interest rate and price targeting, constant growth in the money supply, and use of open market operations. Low borrowing costs spurred massive amounts of lending and borrowing (money supply growth) by both fiscal institutions, government and state-private owned enterprises, leading to asset price bubbles.

Which also lead to over-capacity, miss-allocation of resources, inflation, environmental degradation, political-economic corruption, currency manipulation (peg), etc. Since the China economy was still at this time decoupled from the Western global financial system, it was able to avoid most of the damage caused before the Financial Crisis.

But after the Financial Crisis, the PBOC had to accelerate the move toward liberal monetary finance, driving interest rates extremely low (real interest rates negative) to keep government and corporate (personal) borrowing costs low, to stimulate the economy/consumption/investment, to keep it from falling into a severe recession (depression/deflation), and had to deal with Non-Performing bank Loan (NPL) portfolios to avert a banking crisis. Rapid growth helped to mask these problems, but these were only land mines, waiting to be found and dealt with at a future date.

Banks and asset management companies had to be bailed out, dissolved, liquidated, etc. Trillions and trillions monetary liquidity and fiscal stimulus had to be injected to the economy, targeted toward housing, infrastructure and manufacturing, causing asset prices again to inflate. By 2014, only to deflate again by 2016. These injections of fiscal and monetary stimulus exacerbated asset price volatility (real estate/equities/bonds).

The next financial crisis in China will come from the excessive extension of credit from both fiscal and monetary authorities, and will come from government and corporate bond market defaults, as the system is severely over-leveraged. China is using more and more debt to fix bad debt problems, and the simulative multiplier-accelerator effect on the economy is deteriorating (decelerating) quickly.

Global central banks have been coordinating their monetary policy efforts over the past 10 years, and the U.S. Federal Reserve Bank has become the de facto Central Bank of Central Banks (CBCB). Based on new disclosures, we have found out that the U.S. Federal Reserve conducted global QE by buying other foreign sovereign debt during the financial crisis, and provided credit-liquidity facilities to global banks.

Chapter: Yellen’s Bank: From Taper Tantrums to Trump Trade

There was Paul Volker, then there was Alan Greenspan, then Ben Bernanke, now Janet Yellen, and who knows who is next (Jerome Powell). All of these Fed presidents dealt with extraordinary conditions (some self-inflicted), wars, financial crisis, recessions, asset price bubbles/bursts, etc.

It was not till Alan Greenspan, that the Federal Reserve decided excessive accommodation and liquidity was the solution to all crisis, and asset price bubbles were not a concern if they were real, and not a monetary illusion. However, he now admits that he was wrong in the way he understood how the world really works, which means he made policy errors and mistakes.
Bernanke was a protégé of Greenspan, and responded to the Financial Crisis with the largest monetary response (QE Infinity) in modern monetary history combined; and Yellen, continued his legacy of over accommodation, to escort us into one of the biggest debt-asset price bubbles in modern Fed history.

And if history is any indicator of the future, once the Fed(s) decide to conduct a coordinated unwind of their balance sheets, the popping of asset price bubbles will be like balloons at New Year’s Eve party in Time’s Square, only everyone will walk away from the party with the worst hangover of their life, and no one will be able to sober up fast enough to drive to the next party.

In the end, the Fed accumulated over $4.5 trillion in bank reserves/balance sheet (bonds), made up mostly of mortgage backed securities and U.S. government Treasury notes and bonds, the average size of the balance sheet prior to the financial crisis was $500-to-$800 billion. This is the largest subsidization, and theoretically (and really) the largest nationalization (Fed implemented) process, of the financial system and the economy in modern post-WWI history.

This could also be considered Fascist Finance (FF), as it involves the largest global money center banks, multinational corporations, and governments in the world — now a Global Corporatist System — operating under unorthodox monetary policy, outside pluralistic-democratic institutional oversight. As we can now see, again, the systematic dismantling, deconstruction and destruction of financial institutional governmental regulatory oversight, is in place.

Since these were mainly reserves creation, and an addition to the monetary base, and not really the money supply, the policy effects (QE/(Zero-Negative Real Interest Rate policy) have been mute.

The Fed has not been able to hit its inflation or GDP targets for the past 10 years (well below potential), there is secular and cyclical productivity declines, extremely low labor participation rates (high under employment rates), real wages are stagnant and still declining, and we are in a disinflationary/deflationary secular trend.

The cause is a collapse in the velocity of money, driven by alternative forms of money creation and flows across the globe (cryptic-digital currencies-shadow banking, etc.); the lack of fiscal labor market policy to lower under-employment and raise labor market participation rates; and other social, cultural, political and economic disruptions. Making it now impossible to conduct monetary policy.
The real risk going forward will be from a series of financial deregulation, coming from the Trump Administration and the Republican controlled House and Senate; along with a coordinated effort to unwind (Quantitative Tightening – QT) the Feds (and other global central banks) balance sheet, and a race toward interest rate normalization, sucking liquidity out of the system, only to lead to a stock, bond and real estate bubble burst.

With the Fiscal Debt totaling over $20 trillion, the Feds Balance Sheet totaling $4.5 trillion, the potential for continued -perpetual war (defense spending) and entitlement expenditures, and political and policy uncertainty (next Federal Reserve President) there is little room for monetary and fiscal solutions to fight the next financial and economic crisis. Leading to the conclusion of continued stagnation, crisis, recession, wars and depression.

It is now obvious why Central Banks fail.

Chapter: Why Central Banks Fail

After reading Dr. Jack Rasmus book, “Central Bankers at the End of Their Rope?” and if you read his book, “Systematic Fragility in the Global Economy,” along with other books and interviews surrounding this literature, it has been clear, and it is now crystal clear, why central banks fail, they:

• Are a creature of the global capitalist system;
• Support, promote and protect financial institutions and companies;
• Use myopic (static) intellectual and epistemological frames (models) to analyze economic data, markets, and institutions to develop and implement monetary policy;
• Are influenced by political (executive/legislative) parties and lobby when making and communicating policy;
• Are expected to support (moral hazard) and coordinate national fiscal policies (debt) and priorities (compromising their independence and credibility);
• And be the lender, portfolio manager, and market maker of last resort to mitigate capital market (economic) failures;

Their failures emanate from the fact that they are given (have been given over) the monopoly power and authority (independence) to control the money supply, clearing system, exchange rates, interest rates, supervision, etc. However, we are finding out, that they are not as in control as we think, and are not looking out for our best interest.

There is a mythology surrounding the Fed, and illusion of omnipotence, and control, this is evident when measured by its balance sheet, lack of understanding how the world really works, and inability to hit monetary and real economic targets: inflation, labor participation rates, real wage growth, and higher broad based social welfare and standards of living.

We are finding that our Keynesian (Keynes) and Monetarist (Fisher/Friedman) economic ideologies are not correct, and are not working, deregulation and printing of massive amounts of money to bail out and subsidize inefficient and corrupt financial institutions (lobby), after every man-made and self-inflicted crisis, is not working, and we are at the end of our rope.

We now, cannot keep doing this, we are out of money. However, with Crypto-currencies, and other unproven systems of monetary accounting, could set the stage for monetary collapse, if this experiment turns out wrong.

The solution to the existential crisis in global central banking is not a technological solution, but a democratic-pluralistic political solution. Based on moral philosophy and ethical outcomes.

Chapter: Revolutionizing Central Banking in the Public Interest: Embedding Change Via Constitutional Amendment

What is needed is a revolution in central bank thinking.

There are many excuses for monetary (central bank) failures:

• Too much discretion (money supply growth/credit expansion/asset price bubbles), and not enough adherence to monetary policy rules (money growth targets);
• Conflicting fiscal (expenditures/spending) vs. monetary (inflation/interest rate) policy;
• Asymmetric information (capital) flows (bottleneck) through banking system (adverse selection/moral hazard/principal agent problem);
• Wrong monetary targets (inflation); dual mandates (production/employment/inflation/wage trade-off);
• Global savings glut (uncontrollable off shore capital inflow);
• Need for new monetary tools (open market operations/QE/QT/discount rates/reserve requirements, etc.);
• Executive/legislative intrusion in monetary policy functioning;
• Etc.
However, the real reason why central banks fail are:
• Mismanagement of money supply (credit) growth and allowing banks, and other near- bank institutions, to access Federal Reserve credit/liquidity facilities;
• Fragmented, failed and non-existent systemic and macro-micro prudential systemic bank supervision (Dodd-Frank);
• Inability to achieve (real-nominal wage) inflation (labor participation) rates;
• Failure to address, mitigate and/or control run-away asset (real estate/equity/bond/commodity) price inflation (bubbles/bust);
• Deterioration, decomposition, and failure in the elasticity of (zero-negative) interest rates (liquidity trap/technology) to stimulate real economic growth (employment/wages);
• Re-direction of investment capital away from higher yielding real (long-term) capital investments to lower yielding-speculative monetary (short-term) financial investments (derivatives/floating-rate notes);
• Ineffectiveness of traditional monetary policy tools (federal funds rate/discount window/reserve requirements), and reliance on non-traditional un-orthodox (QE/credit-liquidity facilities) monetary policy tools with unintended negative consequences (deflation/asset price bubbles);
• Myopic political-economic monetary policy ideologies and errors in epistemological thinking (Taylor Rules/Philips Curve/Zero-Negative Interest Rate Policy/unlimited balance sheet expansion).
• Etc.

What is needed is a revolution in central bank thinking.

Chapter: CONCLUSIONS

A revolution is needed, in main-stream ideological thought, in regards to Global Central Banking. A revolution in accepted institutional norms and beliefs of how central banking actually works. There needs to be a dialectical shift from the established and accepted thesis of central banking authority. If there is not, there will be a revolution against central banks, and a battle will occur to wrestle authority, control and independence from central banks. And this battle will no doubt be destructive and deconstructive, leading to economic and financial crisis, and eventually lead to some anti-thesis (executive or legislative branch control) over the central bank(s) for the next 30-to-60 years.

Currently, the Federal Reserve is

• Controlled by private sector banker interests,
• Control of the Federal Reserve Bank of New York (Open Market Operations),
• Private sector banker selected leadership of Federal Open Market Committee,
• Private sector bank access to insider information on monetary policy,
• Iron-Triangles between Fed staff and private banking sector and lobby,
• Circularity between Fed private sector banks,
• Influence of private sector bank lobby in Fed Chair selection,
• Record campaign finance contributions to congressional committee members,
• Revolving door between the Fed, bank supervisors, Treasury, and banks,
• Etc.

Regulatory and legislative proposals have been brought, only to be blocked and abandoned, due to pressure from Wall Street lobby. And those policies that have been enacted (Dodd-Frank), the bank lobby has systematically reversed and repealed oversight other the years, or implemented bank friendly legislation. This legislation, and lack of supervisory regulatory oversight, has been passed through (and ignored by) executive and congressional initiatives, and the public administrative bureaucracy.

The solution, is the democratization of the central bank, bringing it into pluralistic (public) oversight, with a focus on real, not financial, economic outcomes.

Chapter: Proposed Constitutional Amendment

The solution, a proposed constitutional amendment to require the democratic election of the national Fed governors by U.S. citizens, serving six years; and the Treasury secretary shall decide monetary policy in the public interest; and be proactive in achieving stability for labor, households, businesses, local governments, and financial institutions and industry, etc.

Dr. Rasmus, recommends a constitutional amendment enabling legislation through five sections, and 20 articles:

SECTION #1: Democratic Restructuring

Article #1: Replace 12 Fed districts with four, presidents elected at large.
Article #2: FOMC replaced by National Fed Council (NFC), members limited to six-year terms, and 10 year limit on returning to private banking sector.
Article #3: Fed districts to not be corporation, and issue stock, pay dividends, retain no profits. Taxes to be levied on Fed transactions to pay for operating costs.
Article #4: No additions to Fed districts by legislative or executive orders, or appointments.

SECTION #2: Decision Making Authority

Article #5: NFC and Treasury Secretary to determine monetary policy (tools).
Article #6: QE to be used to invest in real assets.
Article #7: NFC purchase of private sector stocks and bonds, and derivatives, prohibited.
Article #8: No Fed bank supervision, a new consolidated banking institution created.

SECTION III: Banking Supervision

Article #9: Same as Article #8.
Article #10: Separate supervisory departments by banking and financial services industry segments.
Article #11: Separate legislation by depository from non-depository institutions.
Article #12: Supervision includes all markets and companies in derivative industry.
Article #13: Conduct regular stress tests on banks and non-banks.
SECTION IV: Mandates and Targets
Article #14: Replace current Fed targets with those targeting real wage growth.
Article #15: Expand authority of NFC to lend directly to businesses and households.
SECTION V: Expand Lender of Last Resort Authority
Article #16: Expanded to include non-banks businesses, local-state governments, etc.
Article #17: Non-bailout of Non-U.S. domiciled banks and financial institutions.
Article #18: Create a Public Investment Bank (PIB) as lender of last resort to provide liquidity to households and non-banks.
Article #19: Create a National Public Bank (NPB) for direct lending to households and non-banks.
Article #20: Bain-ins thresholds and limits protect depository diluted from bail-outs.

FINAL COMMENTS

In the post-World War II (WWII) era the economy and financial markets and institutions have gone through nine cycles. Over time the amplitude and volatility of these cycles have narrowed as our cultural, social, political and economic institutions developed. However, the most recent business, financial institution and credit cycle experienced a significant drop – and volatility — in aggregate demand and asset prices, not seen since 1949, a point in history when our central banking and financial institutions were developing.

The reality is we have witnessed the systematic deconstruction of pluralistic, democratic and capitalistic institutions — through the political process — by private interest in society and economy, creating perverse redistribution of wealth and resources, to the point of massive social and cultural, and economic and capital market failures.

It is believed by most neo-post Keynesian economists, that the current economic, institutional, and capital market failures could have been avoided through centrist political, monetary and fiscal policies, and that the recent financial crisis could have been averted through the separation of investment and commercial banking activities, and enforcement of public and private property rights through effective enforcement.

The long-term goal of effective formulation and administration of public, monetary and fiscal policies is efficient allocation of capital and resources, higher risk-adjusted returns, social and economic stability, and high and rising standards of living and social welfare.

Dr. Jack Rasmus’s book, Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression, enables us to understand historical and recent economic and capital market crisis, and how to recognize and understand the development, administration and deconstruction of financial institutions and markets.

Institutions were built on pluralistic political and capitalistic economic ideologies, and when these ideologies are confronted, come under attack by private interests, policy outcomes are distorted or destroyed.

The process of pluralistic, democratic and capitalistic institutional construction and development has taken 80 years; however, it took 30 years, and particularly the last ten years, to deconstruct these institutions to the point of systematic failure.

The process associated with institutional destruction, deconstruction and distortion, manifests in the extreme redistribution of political power, social benefits and economic wealth, and can reach the point where redistributions become so extreme, they cause systematic social, economic and market failure.

These failures are reflected in increased volatility in social and economic indicators, capital market pricing and investment risk, and resulting reductions risk-adjusted returns, inefficient allocation investment capital and resources, and falling employment and real income growth rates, standards of living and overall social welfare.”

Dr. Larry Souza
European Financial Review
December 15, 2017

posted December 17, 2017
A Theory of System Fragility (Chapter 16 of ‘Systemic Fragility in the Global Economy’, Clarity Press, 2016

One of the central themes of this book is that the global economic crisis that erupted in 2007-08 did not end in 2009. It simply shifted in 2010, both in geographic location and form: from the USA and UK to the Eurozone and its periphery and to Japan. The crisis began to shift again, a second time, in late 2013, to Emerging Market Economies and then China. That most recent phase continues to unfold and intensify in mid-2015. In terms of ‘form’, the shift has been from mortgage bonds, derivatives, and equity markets in 2007-09, to sovereign debt markets in 2010-12, and, since 2014, increasingly to forms of private corporate debt, commodities and oil futures, Chinese and emerging markets equities, and currency exchange markets.

The Historical Context

In 2007-09 virtually the entire global economy was affected by the financial crash and then experienced a subsequent deep contraction of the real economy on a global scale as well. Certainly the financial crash of 2007-09 at minimum precipitated the deep real economic contraction that followed, sometimes known as the ‘Great Recession’. It obviously enabled that contraction in a host of ways. And it was most likely also fundamental to the contraction in important ways as well. This generalized financial and real crisis of 2007-09 was clearly the first such event since the late 1920s-early 1930s in which financial cycles and real cycles clearly converged and then mutually amplified each other in various negative ways. It will not be the last.

Financial crises and recessions from the 1960s up to 2007 have been localized geographically and/or limited to specific financial asset markets. There was little convergence and amplification. During that period real economic contractions—i.e. recessions—were localized and were the outcome in most cases of supply or demand ‘shocks’, or else were conscious government policy-induced recessions, rather than financial crisis precipitated contractions. They were what might be called ‘normal’ recessions. They were therefore relatively short and shallow in terms of their contraction, and were thus relatively responsive to traditional fiscal-monetary recovery policies introduced by governments and central banks. Such normal recessions are almost never precipitated by major financial instability events, although moderate financial instability may have followed the real contractions. But financial instability was almost always limited and contained to a particular financial market, type of financial security, or an occasional financial institution default.

This localized financial instability and short and shallow recessions began to change in the 1990s, however. The first notable case was Japan’s financial crash and subsequent ‘epic’ real recession that followed, a combined financial-real event from which its economy still has not fully recovered a quarter century later.

However, even Japan’s recession in the early 1990s was not yet a generalized global financial crash or a consequent global real contraction event. That kind of generalized, combined financial and real crisis would not come until 2007-09. The 2007-09 event would prove not only quantitatively more severe than prior financial and real crises, but qualitatively different as well. So too would the trajectory of the global economy post-2009—i.e. a faltering global recovery that proved both quantitatively and qualitatively different from prior recoveries from normal recessions.

Like the 2007-09 crash and the ‘great’ (epic) recession itself, the post-2009 period thus represents something quite new. If the 2007-09 crash and deep contraction was an event diverting the global economy in a new direction, then the 2010-13 period represents the initial stage or phase—itself giving way to a subsequent second phase that has been emerging since late 2013.

In the 2010-13 first phase of global ‘recovery’ following the crash of 2007-09, the core Advanced Economies (AEs)—the USA and United Kingdom—were able to stabilize their banking systems with massive liquidity injections by their central banks. This achieved, however, only a partial and a historically weak recovery of their real economies. The other two major sectors of the AEs—Europe and Japan—neither restored financial stability quickly nor were able to achieve sustainable real economic growth. The Japanese and European real economies stagnated at best and fell into double-dip recessions once again while experiencing renewed financial instability in certain sectors and/or regions of their financial systems. In sharp contrast to the AE experience, during the same 2010-13 period China and the Emerging Market Economies (EMEs) experienced a rapid recovery in both financial and real economic terms. Both Chinese and EME economies boomed during this initial 2010-13 phase, China’s growing at a rate of 10%-12% and other key EMEs nearly as fast. Money capital from the AEs flowed in at record rates and financial and commodity markets rose to record levels.

What then explains this dramatic difference between the AEs and China-EMEs during the first recovery phase of 2010-13? Real economic conditions? Financial conditions? Major differences in policy choices compared to the AEs? Indeed, what explains the notable differences within the AE regions during this period—US and UK stabilizing (albeit partially and incompletely) while Europe-Japan regressed economically and financially again? Was it just a matter of policy responses or something more fundamental?
This unbalanced global scenario of AEs compared to China-EMEs, during the first 2010-13 recovery phase, began to change by late 2013. The uneven and unbalanced conditions between AEs vs. China-EMEs did not correct; they simply shifted: The rapid real growth in China and the EMEs, which characterized the 2010-13 period, began to slow significantly starting 2013. By late 2015 China’s real growth rate was reduced by half, and a growing number of key EME economies had slipped into recession by 2014. Global oil and other commodity markets began to deflate rapidly beginning mid-2014. Financial bubbles and instability began to emerge, especially in China. The global money capital flows into China-EMEs began to reverse, this time away from China-EMEs toward the AEs. Currency volatility rose worldwide. To forestall renewed financial market instability, both Japan and Europe introduced quantitative easing (QE) policies and accelerated their central bank money-liquidity injections—while the US and UK discontinued theirs. Both central bank and fiscal austerity policies became more congruent across all the AE regions, as the US and UK followed Europe and Japan in the direction of fiscal austerity starting 2011 and as Japan and Europe followed US and UK central bank quantitative easing policies, starting in 2013 in Japan and 2015 in Europe. What were thus previously divergences in monetary and fiscal policies between the AE core regions and the Europe-Japan regions now began to converge by 2013-14.

AEs as a group thus settled into slow to stagnant real growth by 2015, just as both real growth slowed rapidly and financial instability rose in China-EMEs. The US economy experienced repeated, single quarter negative GDP relapses in 2014 and 2015 and the UK’s induced property investment brief recovery of 2013-14 came to an end by 2015 and it stagnated once again. Japanese and European growth stagnated as well, in the 0%-1% annual range.

Although the second phase of 2013-2015 is still evolving, a comparison of it and the preceding first phase, 2010-13, shows the following main characteristics:

The AEs stabilized their banking systems in the first phase but failed to generate sustained recovery in their real economies during that period. Never having really recovered in real terms since 2009, both Japan and Europe continue to stagnate by mid-2015, as the US and UK economies also show growing signs of renewed weakness in their real economies as well. More than six years after the officially declared end of the recession in mid-2009, the AE economies appear weaker in real terms today despite having stabilized their banking systems. China and the EMEs, moreover, appear decidedly weaker in 2015 than in 2010—both in terms of financial instability and real economic performance. In both AEs and China-EMEs, total debt—business, financial, household, government, central bank—has continued to rise as real income sources are undergoing growing pressure. Should financial and real economic events occur that produce a significant contraction of real incomes in one or several of these sectors—even if temporary—systemic fragility could easily and quickly deteriorate further as the feedback effects between financial, consumption, and government balance sheet fragility exacerbate each other. Coming off a much weaker economy today compared to 2007, another financial instability event and a potentially worse ‘great recession’, will find both central bank and government policymakers even less prepared or able to confront the next crisis. All sectors—households, corporate-financial, and government are more fragile—except for the big banks and big multinational corporations, and the top 10% wealthiest consumer households, who have been able to reduce their fragility as a consequence of record recent income gains. But the vast majority of businesses, households, and local and regional governments have not been able to build a liquid income cushion. And even for those narrow sectors with sufficient income cushion, in the event of another financial implosion, and subsequent real economic contraction, those income gains will be quickly offset by the collapse of financial asset wealth—thus leaving the excessive debt levels to be serviced from insufficient income and on unattractive debt refinancing terms.

In other words, systemic fragility on a global scale is worse, not better, after more than six years of so-called ‘recovery’ from the official ending of the previous financial crash and severe economic contraction in mid-2009.

Some Queries from History

The preceding short scenario raises important theoretical questions: why was the crisis that erupted in 2007-08 on a global scale a generalized event? Why was it clearly precipitated by a financial crash? How did the financial crisis enable the extraordinary deep and rapid contraction of the real economy, and prevent a normal recovery of it for more than six years? How are financial conditions and variables ‘fundamental’ to the general crisis? In other words, how does one distinguish causes that were merely precipitating and enabling from causes more fundamental—both real and financial? Were the financial forces and conditions that have been responsible for growing fragility fundamental to the ‘great recession’ and weak global recovery that followed—or just precipitating and perhaps enabling? How do financial conditions and events drive real economic contractions—i.e. ‘great recession’ or worse, depressions? Why are financial instability events over the last four decades apparently becoming more frequent and severe, and what is happening in the real economy that may be making it more sensitive to the growing frequency and severity of financial instability events in recent decades?

These queries lead to another set of related critical questions: why have government policies since 2009—i.e. more than $20 trillion in central bank liquidity injections, trillions more in business-investor tax cuts, and still hundreds of billions more in direct and indirect non-bank business subsidies and bailouts—proven largely ineffective in generating a sustained global recovery and been unable to prevent a return of financial asset bubbles that continue to grow and expand and have now begun to unravel again?
Not least, what are the fundamental changes in the 21st century global capitalist economy that are responsible for the new, more intense interactions between the financial and real sectors of the economy? Or, put another way, how and why are financial cycles exerting a relatively greater effect on real cycles today than in the past? And why will they continue to do so?

Thus far, contemporary mainstream economic analysis has been unable to convincingly answer these questions. As a major theme of this book argues, that inability is due in large part to its outmoded conceptual framework.

The material origins of systemic fragility were addressed in the 9 major trends addressed in chapters 7 to 15 of this book. They represent the historical markers or forces, i.e. the fundamental determinants that are developing, evolving, and in the process raising global systemic fragility and leading to a generalized financial instability once again, as in 2007-09. The 9 trends were described separately in chapters 7-15. But what’s needed for analysis is an explanation of their interactions and how they combine to contribute to the development of systemic fragility.

What follows in the remainder of this chapter is a literary summary of the main ideas associated with systemic fragility. For data and evidence in support of the ideas, the reader is encouraged to reference back to chapters 7-15.

posted December 12, 2017
Is the Bitcoin Bubble the New ‘Subprime Mortgage Bomb’?

Is Bitcoin the new ‘Subprime Mortgage Bond?’ Just as subprimes precipitated a crash in the derivative, Credit Default Swaps (CDS), at the giant insurance company, AIG, in September 2008, setting off the global financial crash that year—will the Bitcoin and crypto-currency bubble precipitate a collapse in the new derivative, Exchange Traded Funds (ETFs) in stock and bond markets in 2018-19, ushering in yet another general financial crisis?

The U.S and global economy are approached the latter stages in the credit cycle, during which financial asset bubbles begin to appear and the real economy appears to be at peak performance (the calm before the storm). This scenario was explained in my 2016 book, ‘Systemic Fragility in the Global Economy.’ And in my follow-on, just published August 2017 book, ‘Central Bankers at the End of Their Ropes’, I predict should the Federal Reserve raise short term U.S. interest rates another 1 percent in 2018, as it has announced, that will set off a credit crash leading to Bitcoin, stock, and bond asset price bubbles bursting. How likely is such a scenario?

Is Bitcoin a Bona Fide ‘Bubble’?

What’s a financial asset bubble? Few agree. But few would argue that Bitcoins and other crypto currencies are today clearly in a global financial asset bubble. Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.
One can debate what constitutes a financial bubble—i.e. how much prices must rise short term or how much above long term average rates of increase—but there’s no doubt that Bitcoin price appreciation in 2017 is a bubble by any definition. At less than US$1000 per coin in January, Bitcoin prices surged past US$11,000 this past November. It then corrected back to US$9,000, only to surge again by early December to more than US$15,000. Given the forces behind Bitcoin, that scenario is likely to continue into 2018 before the bubble bursts. Some predict the price for a Bitcoin will escalate to US$142,000, now that Bitcoin trading has gone mainstream on the CME and CBOE, and offshore, commodity futures exchanges.

Bitcoin and other crypto currencies are the speculative investing canary in the global financial asset coalmine.

The question of the moment is what might be the contagion effects on other markets?

What’s Driving the Bitcoin Bubble?

If Blockchain and software tech company ICOs are driving Bitcoin and other crypto pricing, what’s additionally creating the bubble?…..Who is buying Bitcoin and cryptos, driving up prices, apart from early investors in the companies? ……the absence of government regulation and potential taxation of speculative profits from price appreciation has served as another important driver of the Bitcoin bubble bringing in still more investors and demand and therefore price appreciation. No regulation, no taxation has also led to price manipulation by ‘pumping and dumping’ by well positioned investors….. Another factor driving price is that Bitcoin has become a substitute product for Gold and Gold futures……But what’s really driving Bitcoin pricing in recent months well into bubble territory is its emerging legitimation by traditional financial institutions………futures and derivatives trading on Bitcoin just launched in December 2017 in official commodity futures clearing houses, like CME and CBOE…..Bitcoin ETFs derivatives trading are likely not far behind……….big U.S. hedge funds are also poised to go ‘all in’ once CME options and futures trading is established…… Declarations of support for Bitcoin has also come lately from some sovereign countries………While CEOs of big traditional commercial banks, like JPM Chase’s Jamie Dimon, have called Bitcoin “a fraud,” they simultaneously have declared plans to facilitate trading in the Bitcoin-Crypto market.

Bitcoin as ‘Digital Tulips

Bitcoin demand and price appreciation may also be understood as the consequence of the historic levels of excess liquidity in financial markets today. Like technology forces, that liquidity is the second fundamental force behind its bubble. To explain the fundamental role of excess liquidity driving the bubble, one should understand Bitcoin as ‘digital tulips’, to employ a metaphor.
The Bitcoin bubble is not much different from the 17th century Dutch tulip bulb mania. Tulips had no intrinsic use value but did have a ‘store of value’ simply because Dutch society of financial speculators assigned and accepted it as having such. Once the price of tulips collapsed, however, it no longer had any form of value, save for horticultural enthusiasts.

What fundamentally drove the tulip bubble was the massive inflow of money capital to Holland that came from its colonial trade in spices and other commodities in Asia. The excess liquidity generated could not be fully re-invested in real projects in Holland. When that happens, holders of the excess liquidity create new financial markets in which to invest the liquidity—not unlike what’s happened in recent decades with the rise of unregulated global shadow banking, financial engineering of new securities, proliferating liquid markets in which securities are exchanged, and a new layer of professional financial elite as ‘agents’ behind the proliferating new markets for the new securities.

Bitcoin Potential Contagion Effects to Other Markets

A subject of current debate is whether Bitcoin and other cryptos can destabilize other financial asset markets and therefore the banking system in turn, in effect provoking a 2008-09 like financial crisis………….Deniers of the prospect point to the fact that Cryptos constitute only about US$400 billion in market capitalization today. That is dwarfed by the US$55 Trillion equities and US$94 trillion bond markets. The ‘tail’ cannot wag the dog, it is argued. But quantitative measures are irrelevant. What matters is investor psychology. ……For example, should cryptos develop their own ETFs, a collapse of crypto ETFs might very easily spill over to stock and bond ETFs—which are a source themselves of inherent instability today in the equities market. A related contagion effect may occur within the Clearing Houses themselves. If trading in Bitcoin and cryptos as a commodity becomes particularly large, and then the price collapses deeply and at a rapid rate, it might well raise issues of Clearing House liquidity available for non-crypto commodities trading. A bitcoin-crypto crash could thus have a contagion effect on other commodity prices; or on ETFs in general and thus stock and bond ETF prices.”

Jack Rasmus is author of the just published, ‘Central Bankers at the End of Their Ropes?:Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the prequel, ‘Systemic Fragility in the Global Economy, Clarity Press, January 2016.He blogs at jackrasmus.com and tweets @drjackrasmus.com. His website is http://kyklosproductions.com.

posted December 5, 2017
The Real Causes of US Deficits and US Debt

With the Senate and House all but assured to pass the US$4.5 trillion in tax cuts for businesses, investors, and the wealthiest 1 percent households by the end of this week, phases two and three of the Trump-Republican fiscal strategy have begun quickly to take shape.

Phase two is to maneuver the inept Democrats in Congress into passing a temporary budget deficit-debt extension in order to allow the tax cuts to be implemented quickly. That’s already a ‘done deal’.

Phase three is the drumbeat growing to attack social security, Medicare, food stamps, Medicaid, and other ‘safety net’ laws, in order to pay for the deficit created by cutting taxes on the rich. To justify the attack, a whole new set of lies are resurrected and being peddled by the media and pro-business pundits and politicians.

Deficits and Debt: Resurrecting Old Lies and Misrepresentations

Nonsense like social security and Medicare will be insolvent by 2030. When in fact social security retirement fund has created a multi-trillion dollar surplus since 1986, which the U.S. government has annually ‘borrowed’, exchanging the real money in the fund created by the payroll tax and its indexed threshold, for Treasury bonds deposited in the fund. The government then uses the social security surplus to pay for decades of tax cuts for the rich and corporations and to fund endless war in the middle east.

As for Medicare, the real culprit undermining the Medicare part A and B funds has been the decades-long escalating of prices charged by insurance companies, for-profit hospital chains (financed by Wall St.), medical devices companies, and doctor partnerships investing in real estate and other speculative markets and raising their prices to pay for it.

As for Part D, prescription drugs for Medicare, the big Pharma price gouging is even more rampant, driving up the cost of the Part D fund. By the way, the prescription drug provision, Part D, passed in 2005, was intentionally never funded by Congress and George Bush. It became law without any dedicated tax, payroll or other, to fund it. Its US$50 billion plus a year costs were thus designed from the outset to be paid by means of the deficit and not funded with any tax.

Social Security Disability, SSI, has risen in costs, as a million more have joined its numbers since the 2008 crisis. That rise coincides with Congress and Obama cutting unemployment insurance benefits. A million workers today, who would otherwise be unemployed (and raising the unemployment rate by a million) went on SSI instead of risking cuts in unemployment benefits. So Congress’s reducing the cost of unemployment benefits in effect raised the cost of SSI. And now conservatives like Congressman Paul Ryan, the would be social security ‘hatchet man’ for the rich, want to slash SSI as well as social security retirement, Medicare benefits for grandma and grandpa, Medicaid for single moms and the disabled (the largest group by far on Medicaid), as well as for food stamps.

Food stamp costs have also risen sharply since 2008. But that’s because real wages have stagnated or fallen for tens of millions of workers, making them eligible under Congress’s own rules for food stamp distribution. Now Ryan and his friends want to literally take food out of the mouths of the poorest by changing eligibility rules.

They want to cut and end benefits and take an already shredded social safety net completely apart–while giving US$4.5 trillion to their rich friends (who are their election campaign contributors). The rich and their businesses are getting $4.5 trillion in tax cuts in Trump’s tax proposal—not the $1.4 trillion referenced in the corporate press. The $1.4 million is after they raise $3 million in tax hikes on the middle class.

Whatever financing issues exist for Social Security retirement, Medicare, Medicaid, disability insurance, food stamps, etc., they can be simply and easily adjusted, and without cutting any benefits and making average households pay for the tax cuts for the rich in Trump’s tax cut bill.

Social security retirement, still in surplus, can be kept in surplus by simply one measure: raise the ‘cap’ on social security to cover all earned wage income. Today the ‘cap’, at roughly US$118,000 a year, exempts almost 20 percent of the highest paid wage earners. Once their annual salary exceeds that amount, they no longer pay any payroll tax. They get a nice tax cut of 6.2 percent for the rest of the year. (Businesses also get to keep 6.2% more). Furthermore, if capital income earners (interest, rent, dividends, etc.) were to pay the same 6.2% it would permit social security retirement benefits to be paid at two thirds one’s prior earned wages, and starting with age 62. The retirement age could thus be lowered by five years, instead of raised as Ryan and others propose.

As for Medicare Parts A and B, raising the ridiculously low 1.45 percent tax just another 0.25 percent would end all financial stress in the A & B Medicare funds for decades to come.

For SSI, if Congress would restore the real value of unemployment benefits back to what it was in the 1960s, maybe millions more would return to work. (It’s also one of the reasons why the labor force participation rate in the U.S. has collapsed the past decade). But then Congress would have to admit the real unemployment rate is not 4.2 percent but several percentages higher. (Actually, it’s still over 10 percent, once other forms of ‘hidden unemployment’ and underemployment are accurately accounted for).

As for food stamps’ rising costs, if there were a decent minimum wage (at least US$15 an hour), then millions would no longer be eligible for food stamps and those on it would significantly decline.

In other words, the U.S. Congress and Republican-Democrat administrations have caused the Medicare, Part D, SSI, and food stamp cost problems. They also permitted Wall St. to get its claws into the health insurance, prescription drugs, and hospital industries–financing mergers and acquisitions activity and demanding in exchange for lending to companies in those industries that the companies raise their prices to generate excess profits to repay Wall St. for the loans for the M&A activity.

The Real Causes of Deficits and the Debt

So if social security, Medicare-Medicaid, SSI, food stamps, and other social safety net programs are not the cause of the deficits, what then are the causes?

In the year 2000, the U.S. federal government debt was about US$4 trillion. By 2008 under George Bush it had risen to nearly US$9 trillion. The rise was due to the US$3.4 trillion in Bush tax cuts, 80 percent of which went to investors and businesses, plus another US$300 billion to U.S. multinational corporations due to Bush’s offshore repatriation tax cut. Multinationals were allowed to bring US$320 billion of their US$750 billion offshore cash hoard back to the U.S. and pay only a 5.25 percent tax rate instead of the normal 35 percent. (By the way, they accumulated the US$750 billion hoard was a result of Bill Clinton in 1997 allowing them to keep profits offshore untaxed if not brought back to the U.S. Thus the Democrats originally created the problem of refusing to pay taxes on offshore profits, and then George Bush, Obama, and now Trump simply used it as an excuse to propose lower tax rates for repatriated the offshore profits cash hoard of US multinational companies. From $750 billion in 2004, it’s now $2.8 trillion).

So the Bush tax cuts whacked the U.S. deficit and debt. The Bush wars in the middle east did as well. By 2008 an additional US$2 to US$3 trillion was spent on the wars. Then Bush policies of financial deregulation precipitated the 2007-09 crash and recession. That reduced federal tax revenue collection due to collapse economic growth further. Then there was Bush’s 2008 futile $180 billion tax cut to stem the crisis, which it didn’t. And let’s not forget Bush’s 2005 prescription drug plan–a boondoggle for big pharmaceutical companies–that added US$50 billion a year more. As did a new Homeland Security $50 billion a year and rising budget costs.

There’s your additional US$5 trillion added by Bush to the budget deficit and U.S. debt–from largely wars, defense spending, tax cuts, and windfalls for various sectors of the healthcare industry.

Obama would go beyond Bush. First, there was the US$300 billion tax cuts in his 2009 so-called ‘recovery act’, mostly again to businesses and investors. (The Democrat Congress in 2009 wanted an additional US$120 billion in consumer tax cuts but Obama, on advice of Larry Summers, rejected that). What followed 2009 was the weakest recovery from recession in the post-1945 period, as Obama policies failed to implement a serious fiscal stimulus. Slow recovery meant lower federal tax revenues for years thereafter.
Studies show that at least 60 percent of the deficit and debt since 2000 is attributable to insufficient taxation, due both to tax cutting and slow economic growth below historical rates.

Obama then extended the Bush-era tax cuts another US$803 billion at year-end 2010 and then agreed to extend them another decade in January 2013, at a cost of US$5 trillion. The middle east war spending continued as well to the tune of another $3 trillion at minimum. Continuing the prescription drug subsidy to big Pharma and Homeland Security costs added another $500 billion.
In short, Bush added US$5 trillion to the US debt and Obama another US$10 trillion. That’s how we get from US$4 trillion in 2000 to US$19 trillion at the end of 2016. (US$20 trillion today, about to rise another US$10 trillion by 2027 once again with the Trump tax cuts fast-tracking through Congress today).

To sum up, the problem with chronic U.S. federal deficits and escalating Debt is not social security, Medicare, or any of the other social programs. The causes of the deficits and debt are directly the consequence of financing wars in the middle east without raising taxes to pay for them (the first time in U.S. history of war financing), rising homeland security and other non-war defense costs, massive tax cuts for businesses and investors since 2001, economic growth at two thirds of normal the past decade (generating less tax revenues), government health program costs escalation due to healthcare sector price gouging, and no real wage growth for the 80 percent of the labor force resulting in rising costs for food stamps, SSI, and other benefits.

Notwithstanding all these facts, what we’ll hear increasingly from the Paul Ryans and other paid-for politicians of the rich is that the victims (retirees, single moms, disabled, underemployed, jobless, etc.) are the cause of the deficits and debt. Therefore they must pay for it.

But what they’re really paying for will be more tax cuts for the wealthy, more war spending (in various forms), and more subsidization of price-gouging big pharmaceuticals, health insurance companies, and for-profit hospitals which now front for, and are indirectly run by, Wall St.

Jack Rasmus is the author of the recently published book, “Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression.” He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

posted November 16, 2017
Review of ‘Systemic Fragility in the Global Economy’, by Dr. Jack Rasmus, Clarity Press, 2016

BOOK REVIEW of: Dr. Jack Rasmus, Systemic Fragility in the Global Economy
(Atlanta, GA: Clarity Press, 2016), ISBN: 978- 0-986769-4-7, 490 pp., $29.95

“Advanced economies are in a rut of slow growth, the new normal (El-Erian), or is it the end of normal (Galbraith, 2014)? Growth was slim before the 2008 crisis and recovery after the crisis has been sluggish as well, with growth around 2 percent in the United States (2.2 percent in 2017, by International Monetary Fund estimates), 1.5 percent in the European Union (EU) (2017), 0.9 percent in Japan (2017). An ordinary period headline is, “U.S. in weakest recovery since ‘49” (Morath, 2016).

Emerging economies and developing countries face a “middle-income trap” and “premature deindustrialization”; energy exporters see oil prices collapse from above $100 per barrel to below $50 (2014) and advanced economies are in a “stagnation trap.”

Explanations of the conundrum are perplexingly meager. Many accounts
are merely descriptive, such as secular stagnation (Summers, 2013) and the “new mediocre” (IMF, Harding, 2016) —noted, but why? (Secular stagnation derives from Alvin Hansen’s 1938 adaptation of Marx’s tendency of the rate of profit to decline, hence real interest rates decline, therefore policy interest must decline, notes Sinn [2016].)Or, uncertainty—which is odd because policies have not changed for years. Or, corporate hoarding—corporations, particularly in the United States, are sitting on mounds of cash, buy back their own stock, buy other companies and reshuffle, but are not investing—noted, but why? Or, a general account is that advanced economies are on a technological plateau, broadly since the 1970s (Cowen, 2011; Gordon, 2016). With the rise of the knowledge economy and the digital economy (along with the gig economy as in Uber, Airbnb, and freelance telework), contributions of Silicon Valley (Apple, Google, etc.), innovations in pharma and military industries, also in emerging economies, and the “fourth industrial revolution,” innovations abound. However, as Martin Wolf (2016) notes, “today’s innovations are narrower in effect than those of the past.” Besides, the shift to services in postindustrial societies means a shift toward sectors (such as health care, education, and personal care) where it is hard to raise productivity. If we consider policies, the picture gets worse because (a) implemented year after year, they clearly do not work, and (b) indications are that they make things worse.

Fiscal policy is generally ruled out because of fear of deficits. The policy instrument that remains is monetary—low interest rates and quantitative easing (QE), implemented in the United States, United Kingdom (UK), (EU), and Japan. Other standard policies are, in the EU, austerity—which may cut deficits but obviously does not generate growth (and, by depressing tax revenues over time, worsens deficits)—and structural reform. Besides privatization, the main component of reform is labor market flexibilization, in other words depressing wages and incomes. This has been implemented in the United States since the 1970s and 1980s, in the UK in the 1990s, in Germany and South Korea in the 2000s, and is now on the scaffolds in Japan, France, and Spain (and possibly Italy). The objective is to boost international competitiveness by depressing wages and benefits, which (a) ceases to have an effect when every country is doing the same, (b) assumes the key problem is cheap supply, whereas supply is actually abundant and what is lacking is demand, and © by depressing wage incomes, it further reduces domestic demand. No wonder these policies make matters worse. Thus, explanations of slow growth fall short and policies have been counterproductive. This is where Jack Rasmus’s book comes in. It offers the most pertinent analysis of the stagnation trap I have seen.

There are many steps to the analysis but it boils down to his theory of systemic fragility. I review the main points of his approach, for brevity’s sake in bullet form.

• Taking finance seriously, not just as an intermediary between stations of the “real economy” (as in most mainstream economics) but with feedback loops and transmission mechanisms that affect the real economy of goods directly and indirectly.

• A three-price analysis—beyond the single price of neoclassical economics (the price of goods), the two-price theory of Keynes and Minsky (goods prices and capital assets prices), Rasmus adds financial assets and securities prices.

• The long-term, secular slowdown of investment in the real economy (chapter 7) and the shift to investment in financial assets (chapter 11). This has been occurring because financial asset prices rise faster than the prices of goods; their production cost is lower; their supply can be increased at will; the markets are highly liquid so entry and exit are rapid; new institutional and agent structures are available; financial securities are taxed lower than goods; in sum, they yield easier and higher profits. Financial asset investment has been on the increase for decades, has expanded rapidly since 2000, and “from less than $100 trillion in 2007 to more than $200 in just the past 8 years” (p. 212).

• In government policy there has been a shift from fiscal policy to monetary policy. “Central banks in the advanced economies have kept interest rates at near zero for more than five years, providing tens of trillions of dollars to traditional banks almost cost free” (p. 220). Low interest rates and zero interest rate policies (ZIRP) benefit governments (by lowering their debt and interest payments) and banks (by affording easy money) while they lower household income (by lowering return on savings and lower value of pensions), so in effect households subsidize banks (p. 471).

• Quantitative easing policies, massive injections of money capital by the US ($4 trillion), UK ($1 trillion), EU ($1.4 trillion), and Japan ($1.7 trillion) since 2008, or “about $9 trillion in just five years” (pp. 185, 262). Add China ($1–4 trillion) and add government bank bailouts over time and, according to Rasmus, the total global liquidity injected by states and central banks is on the order of $25 trillion (p. 263). The injections of liquidity into the system allegedly aim to stimulate investment in the real economy (by raising stock and bond prices), which raises several problems: a) Investment in the real economy is not determined by liquidity but by expectations of profit. b) Funds that are invested in the goods economy leak overseas via multinational corporations (MNCs) investing in economically more developed countries (EMDC), where returns are higher (and more volatile). c) Most additional liquidity goes into financial assets, boosting commodities, stocks, and real estate, and leading to price bubbles (p. 177). “The sea of liquid capital awash in the global economy sloshes around from one highly liquid financial market to another, driving up asset prices as a tsunami of investor demand rushes in, taking profit as the price surge is about to ebb, leaving a field of economic destruction of the real economy in its wake” (p. 473).

• The post-crisis attempts at bank regulation overlook the shadow banks, even though the 2007–8 crisis originated in the shadow banks rather than the banks. (Shadow banks include hedge funds, private equity firms, investment banks, broker-dealers, pension funds, insurance companies, mortgage companies, venture capitalists, mutual funds, sovereign wealth funds, peer-to-peer lending groups, the financial departments of corporations, and so on; a typology is on p. 224.) The integration of commercial and shadow banks is a further variable. Shadow banks control on the order of $100 trillion in liquid or near liquid investible assets (2016, p. 446).

• Add up these trends and policies and they contribute to several forms of fragility, which is the culmination of Rasmus’s argument. Rasmus distinguishes fundamental, enabling, and precipitating trends that contribute to fragility (p. 457).

• The explosion of excess liquidity goes back to the 1970s and has taken many forms since then. QE policies amplify this liquidity and have led to financial sector fragility, which has been passed on to government balance sheet fragility (via bank bailouts, low interest rates, and QE), which have been passed on to household debt and fragility (via austerity policies). “Austerity tax policy amounts to a transfer of debt/income and fragility from banks and nonbanks to households and consumers, through the medium of government” (p. 472). This in turn leads to growing overall system fragility.

While Rasmus aims to provide a theory of system fragility, in the process
his analysis gives an incisive account of the stagnation trap. Many elements are not new. Note work on austerity and finance (Blyth, 2013, Goetzmann, 2016) and note, for instance: “The world has turned into Japan,” according to the head of a Hong Kong-based hedge fund.“When rates are this low, returns are low. There is too much money and too few opportunities” (Sender, 2016). However, by providing an organized and systemic focus on finance and liquidity, Rasmus makes clear that the policies that aim to remedy stagnation (low interest rates, QE, competitive devaluation, and bank bailouts) and provide stability are destabilizing, act as a break on growth, and worsen the problem. According to Karl Kraus, psychoanalysis is a symptom of the diseasethat it claims to be the remedy for, and the same holds for the central bank policies of crisis management.

This does not mean that the usual arguments for stimulating growth (spend on infrastructure, green innovation, etc.) are wrong, but they look in the wrong direction. For one thing, the money is not there. Courtesy of central banks, the money has gone by billions and trillions to banks, shadow banks, and thus to financial elites and the 1 percent. Surprise at corporations not investing is also beside the point when government policies at the same time are undercutting household income and consumer demand, reproducing an environment of low expectations. Criticism of QE has been mounting, even in bank circles (“it’s the real economy, stupid”). Yet the role of finance remains generally underestimated. Rasmus’s analysis of central bank policies overlaps with that of El-Erian (2016), but his critique of economics is more fundamental and his theory of fragility and its policy implications are more radical. A turnaround would require fundamentally different policies and, in turn, different economic analytics.

Let me note some reservations about Rasmus’s approach. One concerns the unit of analysis—the global economy. His analysis overlooks or underestimates the extent to which East Asian countries stand apart from general financial fragility. Asian countries have been less dependent on western finance than Latin America and Africa and having learned from the Asian crisis of 1997, have built buffer funds against financial turbulence, stand apart from general financial fragility, and tend to ring-fence their economies from Wall Street operations. Of course, this remains work in progress.

Second, Rasmus adds China’s stimulus spending to the liquidity injections of western central banks. However, the bulk of China’s stimulus funding has been invested in the real economy of infrastructure, productive assets, and urbanization, which has led to overinvestment, but has next led to major initiatives of externalizing investment-led growth in new Silk Road projects in Asia and far beyond (One Belt, One Road, Maritime Silk Road, Asian Infrastructure Investment Bank, Silk Road Fund, etc.; Nederveen Pieterse, 2017). Even so, China also faces a huge debt overhang (Pettis, 2013, 2014).

It may be appropriate to add notes about the trend break of the Trump administration. First, a general ongoing shift from monetary to fiscal policies and the shift toward protectionism in advanced economies have been in motion regardless of the election of Trump. In the case of the United States, this includes rejection of the Trans-Pacific Partnership (TPP) as well as the Transatlantic Trade and Investment Partnership (TTIP). The Trump administration represents “a bonfire of certainties,” yet in macroeconomic policy in many respects the likely scenario is back to the old normal of supply-side economics and trickle down, the Reagan-era package. Deregulation now goes into overdrive. What institutional buffers there are to rein in banks, shadow banks, and corporations will shrink further. Those who advocate dismantling government agencies are appointed to head the agencies (such as labor, education, energy, environment, housing, and justice) to better implement deregulation from the inside. Corporate tax cuts come with attempts to bring back funds from overseas. American corporations are hoarding cash already and corporate tax cuts adding more will boost stock buybacks and chief executive officer stock options, but investment? The American middle class is shrinking, malls are closing, and department stores are downsizing. The Trump cabinet of billionaires, a return to the Gilded Age with generals for muscle, is an entrepreneurial state, not in an ordinary sense but the entrepreneurialism of plutocracy, the state apparatus placed in the service of capitalism with a big C. A no-pretense version of the anti-government ethos adopted since the Reagan administration (“get government off our backs”), anti-government government, gloves off. Pundits have sternly criticized emerging economies for disrupting the liberal international order, but now an American government changes the rules by sliding to transactional deal making. If the old problem was double standards, the new problem is no standards.

This is part of a slow deterioration of institutions that has been in motion since the Reagan era. A cover headline of the Economist is “The debasing of American politics” (2016), but it is the debasing of institutions that matters more. If market incentives lead and everything is for profit—health care, utilities, prisons, media, education, and warfare—institutions gradually decline, such is the logic of liberal market economies bereft of countervailing powers. Corporate media are a major factor in the decline of the public sphere. Part of the profile of emerging economies and developing countries is rickety institutions. Investigations and trials for corruption in several emerging economies indicate that norms and standards have been rising during recent years, while in the United States, the reverse is happening and the country may be slipping to emerging economy status. Several emerging economies no longer tolerate Big Boss behavior (e.g., South Korea, South Africa) while in the United States it becomes the new normal. Meanwhile, Rasmus has made a signal contribution to contemporary economics and provided a vitally important X-ray of the political economy of stagnation.

References

Blyth, M. Austerity: The History of a Dangerous Idea. New York, NY: Oxford University Press, 2013.

Cowen, T. The Great Stagnation. New York, NY: Dutton, 2011.

The Economist. “The Debasing of American Politics.” October 15–21, 2016.

El-Erian, M.A. The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. New York, NY: Random House, 2016.

Galbraith, J.K. The End of Normal. New York, NY: Simon and Schuster, 2014.

Goetzmann, W.N. Money Changes Everything. Princeton, NJ: Princeton University Press, 2016.

Gordon, Robert J. 2016 The rise and fall of American growth. Princeton University Press

Harding, R. “Lagarde warns of ‘new mediocre’ era.” Financial Times, October 2, 2014.

Morath, E. “U.S. in Weakest Recovery Since ‘49.” Wall Street Journal, July 30–31, 2016.

Nederveen Pieterse, J.
Multipolar Globalization: Emerging Economies and Development. London, UK: Routledge, 2017.

Pettis, M. Avoiding the Fall: China’s Economic Restructuring. Washington, DC: Carnegie Endowment for International Peace, 2013.

———. The Great Rebalancing. Princeton, NJ: Princeton University Press, 2014.

Sender, H. “Short-term Relief for Hedge Funds Belies Tough Search for Yield.”
Financial Times, July 12, 2016.

Sinn, H.-W. “Secular Stagnation or Self-inflicted Malaise?.” Project Syndicate, September 27, 2016.

Summers, L. “Why Stagnation Might Prove to Be the New Normal.”
Financial Times, December 15, 2013.

Wolf, M. “An End to Facile Optimism About the Future.”
Financial Times, July 13, 2016.

Jan Nederveen Pieterse
University of California, Santa Barbara, Global Studies

posted November 9, 2017
The Trump-Ryan $4.6 Trillion Tax Cut–Who Pays?

“Last month Trump and released his initial proposals for cutting taxes on the rich. The proposals were developed behind closed doors by his key economic policy makers, Steve Mnuchin, Treasury Secretary, and Gary Cohn, director of the Trump Economic Council—both former senior managers of the Goldman Sachs investment bank. (see my prior article this blog, ‘The Trump-Goldman Sachs Tax Cut for the Rich’).

The initial Trump-Goldman Sachs proposal defined only the broad outlines of the Trump tax plan, but still clearly benefiting the wealthy and their businesses. But the proposal said little how the multi-trillion dollar handout would be paid for. This past week the tax plan was further revised and clarified by the Republican run US House of Representatives.

The Trump-Goldman Sachs-Paul Ryan Tax Plan

The Trump-Goldman Sachs proposals have been melded with tax cuts proposed by US House speaker, Paul Ryan, who has led the effort for years to use the tax system to transfer wealth to the rich and their corporations. This past week’s Trump-Ryan proposals now clarify further ‘who pays’—i.e. mostly the middle class and especially working class households earning less than $50,000 annual income.

How exactly are they paying, in this latest iteration of the tax cuts and income transfer for the rich that’s been going on since Reagan in the 1980s, accelerating under both George W. Bush and Barack Obama?

The Trump-Republican latest iteration of the tax handouts will cost about $1.5 trillion, according to the Trump administration. That’s what they say it will cost the federal government budget deficit and thus will add to the federal debt. But the total tax cuts are actually around $4.5 trillion. The $1.5 trillion number is only the estimated final impact of the cuts on federal budget deficits. By Congressional rules, if the Trump-Ryan version can keep the budget impact to $1.5 trillion, it needs only 50% votes (plus one) in Congress to pass; but if the hit to the deficit is more than $1.5 trillion, it takes 60%.

The $2.6 Trillion Corporate-Business Tax Cuts

It’s estimated the corporate tax cut measure in the Trump-Ryan bill alone—cutting the nominal tax rate from current 35% to 20% and the corporate Alternate Minimum Tax–will together reduce tax revenue and raise deficits by $1.5 trillion, according to the Congress Joint Committee on Taxation. But that’s only the beginning of the total tax cuts to businesses. That’s just for corporate businesses, and just one of the several big corporate tax cut windfalls in the plan.

There are tax reductions for non-corporate businesses as well. By reducing the nominal tax rate for non-corporate businesses from 39.6% to 25% (affecting what’s called ‘pass through business income’) the result, according to the Joint Committee on Taxation, is an additional $448 billion tax reduction for businesses that are proprietorships, partnerships, S corporations, and other non-traditional corporations. And this cut goes to the wealthiest, high end of non-corporate companies. Small businesses (mom and pop businesses) whose owners earn less than $260,000 a year would see nothing of this proposed ‘pass through’ reduction. Half of all ‘pass through’ business income is earned by the wealthiest 1% non-corporate businesses.

Back to the corporate tax cutting, then there’s the daddy of all big corporate tax cuts for US multinational corporations. Trump, Ryan and other business interests claim that US multinationals—i.e. Apple, Google, big Pharma companies, global banks, oil companies and their ilk—pay the highest corporate taxes in the world and therefore cannot compete with their offshore counterparts in Europe, Asia and elsewhere. But that’s a lie. Studies have shown that US MNCs pay an effective tax rate (i.e. actual and not just ‘on paper’ nominal rate) of only 12.5%. Add to that 12.5% a mere 2-4% additional tax they pay in offshore countries, and another 2% or so they pay to US States with corporate income tax laws, and the true, total global tax rate is around 17%–not 35%.

US MNC’s currently hoard at least $2.4 trillion in their offshore subsidiaries (what they publicly admit to) that they have been refusing pay taxes on for years. Apple Corp., one of the worst tax avoiders, currently has $268 billion in cash; 95% of that $268 billion is stashed away in its offshore subsidiaries in order to avoid paying US corporate taxes. That’s just the legally admitted number. No one knows how much Apple, other MNCs, and wealthy individual investors sock away in offshore tax havens and shelters in order to avoid even reporting, let alone paying, taxes on.

The Trump-Ryan plan for this $2.4 trillion tax avoided money hoard is to cut the tax rate for cash held offshore from 35% to 12%. But that 12% is really 5%, since the 12% applies only to cash offshore; other forms of corporate ‘liquid’ assets are taxed at only 5%. That means it will be easy for corporations like Apple to ‘game’ the system by temporarily converting cash to liquid assets and then back again after the lower 5% rate is paid. They’ll pay 5%, not the 10%. Another measure calls for a 10% tax on future profits earned, but only on ‘excess offshore profits’ held by subsidiaries. If it’s not ‘excess profits’, then the tax rate is 0%. Just the latter measure, referred to as the ‘territorial tax’, is estimated to reduce MNC’s taxes by $207 billion.

A variation of this very same tax shell game was played previously, in 2005. Under George W. Bush, US multinational corporations were hoarding about $700 billion offshore by 2005. They were given a special ‘one time’ deal of a 5.25% tax rate if they brought the money back to the US and reinvested it in jobs. They brought about half of the $700 billion back—but didn’t reinvest in production. Instead they used it to buy back stock and pay more dividends that didn’t produce any jobs, and finance mergers and acquisitions of their competitors which actually reduced jobs. US MNCs got away with a 35% to 5.25% tax cut in 2005, so they began repeating the practice of shifting US profits to their offshore subsidiaries immediately after once again in order to avoid paying taxes. Now Congress is cutting them a similar deal—i.e. for a second time while calling it once again, as in 2005, a ‘one time’ deal. This so-called ‘repatriation tax’ measure results in is an incentive to shift even more production and operations to offshore subsidiaries, which reduces jobs in the US even further.

All this amounts to a total tax cut windfall for US multinational corporations of at least $500 billion, and likely even hundreds of billions of dollars more over the coming decade.

And there’s still more, however, for corporations in the Trump-Ryan plan. The tax plan’s ‘depreciation’ provision, which is another name for tax cuts for investment, are also liberalized to the tune of $41 billion new tax cuts. Companies can deduct from their tax bill the cost of all the new equipment they buy in the same year. And they can do that for the next five years. As that paragon advocate of economic justice, Larry Summers, former champion of bank deregulation, recently admitted recently in the business daily, Financial Times: “Effective tax rates on new investment is reduced to zero or less, before even considering the corporate rate reduction.” And there’s another roughly $50 billion in miscellaneous business tax cuts involving limits on business expensing and other provisions.

How Trump Personally Benefits

The commercial real estate industry—i.e. where Trump made his billions and continues to do so—gets a particularly sweet deal. It is exempt from any cap the Trump plan places on its deduction of business expenses. Commercial real estate companies are also allowed to continue deferring taxes when they exchange properties. And the industry’s numerous tax loopholes remain unchanged in the Trump-Ryan bill. Yet Trump himself says he will not benefit personally from the tax proposals—even though the tax returns he released for one year back before 2005 show his company realized billions in tax relief from the special loopholes enjoyed by the commercial real estate industry. And Trump himself paid $35 million in the corporate AMT, which is now projected to go away as well.

In summary, there’s at least $2.6 trillion in total corporate-business tax cuts in the Trump-Ryan plan. That’s well above the $1.5 trillion limit mandated by Congressional rules, however. And the $2.6 trillion does not include personal income tax reduction for wealthy households and investors. The corporate-business tax cuts alone amount to almost twice the $1.5 trillion allowed by Congressional rules. But the personal income tax cuts for the wealthy will cost another minimum $2 trillion, just for changes in top personal income tax rates and for limiting, then ending, the Alternative Minimum Tax and the Inheritance Tax. That’s $4.6 trillion and three times the $1.5 trillion!

The Personal Income Tax Cuts for the Wealthy

While personal income taxes will rise for the middle and working classes to cover the tax cuts for business, the hikes will also have to cover simultaneous tax cuts for wealthy individuals, 1% households, and investors. There are three big ways wealthy individuals and investors get tax cuts in their personal income tax in the Trump-Ryan bill: (1) reducing of personal tax brackets and lowering of rates; (2) reducing and then eliminating altogether the Alternative Minimum Tax (AMT); and (3) exempting and then ending the Inheritance (Estate) tax.

The top personal tax rate is currently 39.6%. The cutoff occurs for those earning $466,000 a year or more. They pay the 39.6%. But many more now will not under the bill. The Trump-Ryan bill raises the threshold at which they pay the 39.6% to $1 million. Those now earning between $466,000 and $1 million will now pay a lower rate of 33%. Those previously paying 33% are now reduced to 25%. Those at 25%–i.e. the middle class—stay at 25% and thus get no cut. So the personal tax rate on the middle class rate is not reduced, but the higher income levels are significantly reduced. The total tax cut from lower tax brackets for the wealthy has been estimated at $1.1 trillion, according to the Congress’s Joint Committee on Taxation.

The Inheritance, or Estate, tax is paid by only 0.2% of households. Nonetheless, the exemption will double from the first $5.5 million value of the estate to $11 million per person. And it will be completely repealed by 2024. The gift tax, through which the wealthy pass on much of their estates before dying, will also enjoy a $10 million exemption. That all amounts to a $172 billion tax cut for the 1% wealthiest households.

The other ‘biggie’ tax cut for the rich is the reduction and subsequent elimination of the Alternative Minimum Tax, AMT. This was designed to get the rich to pay something in taxes, after they exploited all their available tax loopholes and/or stashed their money offshore in tax shelters and havens, both legally and illegally. (Note: the just released so-called ‘Paradise Papers’, show how much and where they hide their wealth offshore to avoid taxes—from Queen Elizabeth of Britain to entertainment celebrities like Madonna, Bono, and a long list). 60% of the AMT is paid by individuals earning more than $500,000 a year, and another 20% by those earning adjusted income of more than $200,000. The AMT measures in the Trump-Ryan bill will amount to a $696 billion tax cut for the wealthy, according to estimates by the Joint Committee of Congress last week. And that’s not even counting the changes to the AMT paid by businesses as well.

Just the ‘big 3’ personal income tax cuts amount to nearly $2 trillion in total reductions. Add to that the estimated additional $2.5 trillion in corporate-business tax cuts and the total is $4.5 trillion—not the $1.5 or even $1.75 trillion currently referred to in the business and mainstream media.

How the Middle and Working Classes Pay for it All

• Personal Exemptions and Standard Deductions

The personal exemption for a family of four current reduces taxable income by $16,600 a year. This is ended under Trump-Ryan and replaced with an increase in the Standard Deduction, from current $13,000 a year to $24,400. So the Standard Deduction rises by $11,400 but is less than $16,600. So the net result is an increase in $5,200 in taxable income for a family of four.

The increase is even greater for a family of four that itemizes its deductions. For total itemization of $15,000, they will find their taxable income increasing by $7,200 a year. These gaps will also rise over the 10 year period and result in even higher taxes over time.

Repeal and changes to the Personal exemption and Standard deductions amount to a $1.6 trillion tax hike.

• Elimination of Itemized Deductions

Nearly half of all tax filers with annual income between $50,000 and $75,000—i.e. the core of the middle and working classes—currently itemize deductions to reduce their total taxable income and taxes paid. So it’s not true that only the rich itemize. And here is where the Trump-Ryan tax proposals take their biggest whack at the middle class.

-All State and Local income tax deductions are ended under the Trump plan. That’s a roughly $186 billion tax hike—a measure that will mostly hit ‘blue’ Democratic states where state income taxes exist. Contrary to Trump-Ryan propaganda, only 27% of state-local tax deduction is claimed by the wealthiest 1% households. The majority of the deduction is by the middle class.

-Limits on the property tax deduction will result in a further tens of $billions of tax hikes. Limits on this deduction will also reduce property values and thus have a negative wealth effect on middle class homeowners—especially in the ‘blue’ coastal states where home prices are highest.

-Deductible interest on first mortgages are reduced by half. This will reduce new home construction, and result in an indirect effect of escalating apartment rental costs, reducing middle and working class real incomes.

-Ending the extraordinary medical expenses deduction will hike taxes by $182 billion. These expenses are incurred by families with extraordinary medical expenses, as health insurance coverage pays less and less of such coverage. Previously they could deduct up to 10% of their income. This is now ended.
Expenses formerly deducted for personal casualty losses, un-reimbursed employment expenses for teachers, alimony, moving to a new job expenses, equity home loans interest, are all totally eliminated under the Trump-Ryan plan.

Limits and elimination of deductions are estimated at a tax hike of another $1.3 trillion, according to the Joint Committee on Taxation.

That’s $2.9 trillion to offset the $4.6 trillion in tax cuts for corporations, businesses, and the wealthiest households!

In addition are further miscellaneous tax hikes on the Middle Class in the following ways:

• Alternative Energy Credits

Current credits for installing solar and other alternative energy end, raising taxes by $12.3 billion.

• Adoption Credits

Credits for families adopting children end, raising taxes of $3.8 billion

• Flexible Health Savings Accounts and Elderly Dependents Expenses

Currently, workers may reduce taxes from gross wages by setting aside some income in a flexible health savings account. Business also enjoy a tax deduction for payments they make into health insurance plans and pensions. The total amounts to $540 billion a year. Businesses can continue their tax deduction for health payments, but workers will not. Nor may they deduct expenses for elderly dependents’ care. Their costs also tens of billions of dollars.

• Education Credits

Students and colleges take a big hit under the Trump-Ryan plan. Several education credit programs are ended, leaving one education credit. The result is a cut and tax hike of $17 billion. Student loan interest deductions are also ended, costing $13 billion. Companies that assisted higher education programs for employees with $5,250 tax free tuition aid for employee and company are ended; now they are taxable. May companies will now reduce their tuition assistance programs. Education tuition costs deductions for low income households are ended. So are tax free interest higher education savings bonds and savings accounts. It’s a total tax hike of $65 to $95 billion over the decade.

• New Price Index and Reduced EITC

The Trump-Ryan bill brags that it reduces taxes for the near and working poor who now pay an income tax rate of 15% and 10%, by consolidating the two brackets to a combined 12% rate. The former 10% group will of course get a 2% tax hike. But the increase in the income limit at which taxes are paid, from current $12,000 to $24,000, will offset this hike, according to Trump-Ryan. But the plan’s shift to a new, lower consumer price index will reduce the amount increasingly over time the working poor may claim tax reimbursement under the Earned Income Tax Credit, EITC. And it’s highly likely in any final bill that the $24,000 will be significantly reduced.

The foregoing is just a short list of the many ways the middle and working classes will pay for the Trump-Ryan tax bill. We’re talking about approximately $3.5 trillion in tax hikes in the Trump-Ryan bill negatively affecting mostly middle and working class households.

Closing 3 Big Capital Income Tax Loopholes

If Trump-Ryan really wanted to raise taxes, instead of targeting the middle class, they could have easily raised $2 trillion by ending just two other programs: Eliminating the preferential tax rate for long term capital gains taxation, which would bring in $1.34 trillion by 2024; and ending the practice of foregoing all taxation on stocks transferred at death, for which recipients of the stock pay no taxes whatsoever. That would generate another $644 billion. That’s $2 trillion.

Another at least $2.5 trillion could be raised by ending corporate tax deductions for payments into company pension and health insurance plans. Workers don’t get to deduct their contributions to these plans. Why should employers?

In other words, just three measures alone targeting corporate and capital incomes would raise $4.5 trillion in tax income over the coming decade. The three could pay for all the corporate-business-wealthiest 1% tax cuts in the Trump-Ryan bill, without raising any taxes on the middle and working classes! But that’s targeting capital incomes of the rich and their corporations, and politicians elected and paid for by the same won’t ‘bite the hand that feeds them’, as they say.

Concluding Comments

My prediction is that the Senate version, and final joint House-Senate version, of the bill that will now follow in coming weeks will have to pare down the tax cuts for wealthy individuals and raise some more the tax hikes on the middle class. Cutting the corporate tax rate is the priority for the Trump administration. After that ensuring US Multinational corporations get to shield even more of their profits from taxation. Congress will take it out of the personal income tax provisions which will be scaled back from the current Trump-Ryan proposals. Tax breaks for wealthy individuals will be softened, and new ways to quietly raise taxes on the middle class households may be found.

But the main solution will be to offset the more than $1.5 trillion net tax breaks with more spending cuts on social programs. In 2011 Congress and Obama cut spending by $1 trillion on education, health, transport, etc. Another $500 billion was cut in 2013. They will therefore try to repeat the ‘fiscal austerity’ solution to enable tax cutting for corporations. But that’s not new. The process of spending cuts to finance corporate-wealthy tax cuts has been going on since Ronald Reagan. It’s one of the main causes of the growing income inequality in the US that is the hallmark of Neoliberal policy since the 1980s.

The Trump-Ryan proposals are just the latest iteration of Neoliberal fiscal policy that has been making the rich richer, while destroying the economic and social base of the USA. Neoliberal policies associated with tax and spending programs, free money for bankers and investors provided by the central bank (the Federal Reserve), industrial policy deregulating everything and destroying unions, and trade policy enabling offshoring of production and jobs and free re-entry of US goods produced overseas back to the US (aka free trade) have been together ripping a gaping and ever-growing hole in the social fabric of the country. That has in turn been giving rise to ever more desperate radical right wing politics and solutions—i.e. the political consequences of the Neoliberal economic policies.”

Dr. Jack Rasmus is author of ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and ‘Systemic Fragility in the Global Economy’ and ‘Looting Greece’, also by Clarity Press, 2016. He blogs at jackrasmus.com and his website is http://www.kyklosproductions.com and twitter handle, @drjackrasmus.

posted November 4, 2017
China Shifts Policy, Predicts ‘Minsky Moment’ of Global Financial Instability

The past year the US and global ‘real’ economies have enjoyed a moderate recovery. Much of that has been due to China stimulating its economy to ensure real growth in anticipation of the Communist Party’s convention, which has just ended. China’s president Xi and central bank (Peoples Bank of China) chair, Zhou, have announced, post-convention, that China’s real growth will slow and have warned a global ‘Minsky Moment’ (i.e. financial crisis) may be brewing. China will now try, once again, to tame its shadow bankers and speculators who have been feeding China’s debt and bubbles, and prepare for the global financial instability that is brewing.

The global financial bubbles–in stocks, bonds, currencies (crypto and real), derivatives, real estate, etc.– have been fueled since 2008 by capitalist central banks–led by the US Federal Reserve and followed even more aggressively by the European Central Bank and Bank of Japan. Central bank ‘free’ money has boosted stock and other financial asset prices into bubble territory and produced historic capital gains profits for corporations, professional investors, and the wealthiest 1% households in the US and worldwide. The world’s approximately 1500 billionaires’ wealth now totals more than $6 trillion–and that is only the officially admitted figure. More is not accounted for in the dozens of tax havens worldwide in which they park their money away from public and tax collectors’ view. US and other governments meanwhile are feverishly trying to pass even more tax cuts for billionaires and multi-millionaires, so they can keep even more $ trillions for themselves. Financial speculation has become the primary means by which the super-rich enrich themselves even more–with the help of central bankers and their paid-for Congressional government tax cutters.

Central banks have enabled their wealth acceleration by providing virtually free money for them to invest in financial markets through borrowing (debt) and leverage. Government tax cutters also let them keep more and more of the free money, profits, and their financial capital gains. Financial bubbles are the consequence. More and more financial writers have begun lately to write articles in the mainstream business press forewarning of the growing bubbles that are the engines of the the super-rich wealth acceleration.

The central banks and their policy of free money have created their own contradictions however. They have enriched the rich as never before, but in so doing have enabled and fueled the bubbles that threaten it all. After 8 years of pumping free money into private banks, corporations, and investors, the US central bank has this past year begun a desperate effort to raise interest rates and try to slow the flow of liquidity from the ‘free money firehose’ since 2008 that have produced a tripling of corporate profits, a quadrupling of US stock prices, bitcoin and crypto-currency bubbles, and $6 trillion of corporate bond debt issuance, much of which has been passed on to shareholders in dividend and stock buyback payouts. But the massive money and capital income growth has also produced financial asset bubbles that are now growing alarmingly as well. So the Fed over the past year has tried to raise interest rates a little to slow down the bubbles. It will be too little, however, as I have argued elsewhere that the Fed cannot raise rates much higher without precipitating a financial credit crunch that will generate the next recession. So the Fed talks tough on rates but does very little. The central banks of Europe and Japan do even less. Global banks and investors are addicted to the free money from the central banks and that policy will change little apart from token adjustments and talk.

The Fed’s (and all central banks’) dilemma is that raising rates and selling off its balance sheet (that will also raise rates) will cause the dollar to rise in global markets, cause in turn currency collapse in emerging markets that will sharply reduce US multinational corporations’ profits offshore. The Fed will not jeopardize US multinational corporations’ offshore profits therefore by raising rates too much. Higher rates will also shut down the US construction sector, already weak (new residential housing is declining), and reduce US consumption spending that is also barely growing, as it is based on debt and savings reductions instead of real wage growth. So the Fed is engaged in a charade of raising rates. And whomever Trump reappoints to the Fed chair after Janet Yellen won’t matter. The same free money policies will continue. For the system is addicted to free money and low rates for years to come–and that will continue feeding financial bubbles.

The Fed, like all central banks today, has become an institution whose main task is to continue subsidizing capital and capital incomes. As the Fed raises rates tokenly, other State institutions (Congress, Presidency) are also embarking on massive tax cuts for corporations and investors to offset the moderate hikes in interest rates coming from the Fed. More than $10 trillion in corporate-investor tax cuts occurred under Bush-Obama. Trillions $ more is coming under Trump.

In the 21st century, advanced capitalist economies are increasingly being subsidized by their states–monetarily by their central banks with free money and fiscally by their governments with more and more tax cuts for corporations and investors. Via both central banks and legislatures, the State is increasingly engaged in reducing capital costs and thus subsidizing capital incomes. This is the primary emphasis of ‘neoliberal’ policy in the 21st century capitalist economy.

The weaker capitalist sectors–Europe and Japan–are engaged in even more aggressive central bank free money provisioning. Europe’s central bank has just announced a ‘sleight of hand’, fake change in monetary policy: reducing its monthly free money injection (which has been benefiting mostly going to Germany and France bankers and corporations), while extending the period over which it will continue its program. It will provide less per month but for longer. Just moving the money around, as they say. Not really reducing anything.

The Bank of Japan has been even more generous to its bankers, investors and businesses. The Bank of Japan has refused to engage in a free money/higher rates charade (US) or language manipulation to fake a reduction in the free money flow (Europe). Japan’s central bank has announced it will continue buying and subsidizing corporate bonds, private stocks, and other financial assets, at an historic pace, thus contributing to propping up financial markets with no end in sight. Not suprisingly, Japan stock and financial markets are also on a tear, rising to levels not seen in 20 years. Similarly, financial asset markets have begun to escalate as well in Europe.
As I have indicated in my just released book, Central Bankers at the End of Their Rope, capitalist central banks are the original primary culprits of the free money policies adopted by all advanced capitalist economies–a policy that has been fueling debt and leverage, and stoking financial asset markets now entering bubble territory once again–i.e. creating the ‘Minsky Moment’ of financial instability about which China’s PBOC central bank chair, Zhou, has just forewarned.

Two big decisions will occur in the US in the first week of November: Trump will announce his new nominee for the chair of the US Federal Reserve Bank and the right wing-dominated US House of Representatives will define the Trump corporate-investor tax cuts further.

But whoever leads the Fed, there will be no real change in policy set in motion decades ago by Greenspan, continued by his protege, Ben Bernanke, and extended by Janet Yellen. Free money will continue to flow from the Fed (and even more freely from the central banks of Europe and Japan). Whether Powell, Taylor, Cohn or whoever are appointed, the policy of free money will continue. Rates will not be allowed to rise much. The private bankers and investors want it that way. And their ‘bought and paid for’ politicians will ensure it continues. Meanwhile, the Trump tax cuts will additionally subsidize corporations and investors at an even greater rate with Trump’s multi-trillion tax cuts. The Trump tax cuts (which follow more than $10 trillion under Obama and Bush) will enable US Corporations to continue paying record dividends and stock buybacks to enrich their shareholders. The $6 trillion in dividends and stock buybacks since 2010 will be exceeded by even trillions more. Income inequality trends in the US will therefore continue to accelerate unabated.

It is true the global economy has ‘enjoyed’ a brief and mild growth spurt in 2017, as noted previously. That growth has been driven by China’s stimulus and by US business inventory investing in anticipations of Trump tax and other deregulation (also cost reduction) policy driven changes. But the growth of the summer of 2017 will soon slow significantly. Now China will purposely slow, as policy shifts to rein in its own financial bubbles and in part prepare for a global ‘Minsky Moment’ crisis that is coming.

Meanwhile, the Trump bump in US economic growth will also fade in 2018, driven up until now largely by inventory investing by business that won’t be realized in sales and revenue in 2018. Working-middle class household consumption has been based on debt and savings reduction instead of real wage income recovery this past year. That is not a basis for longer term growth. Household consumption cannot be sustained. US autos and housing are already fading. Simultaneously, escalating costs of healthcare insurance premiums will cut deeply into consumer spending in 2018 as well. And government spending, now stagnant, will also slow, as Congress cuts social programs in order to offset deficits created by the massive tax cuts for corporations and investors.

In Europe, political instability forces will keep a lid on economic recovery there (a ‘hard’ Brexit looking increasingly likely, Catalonia independence uncertainty, new breakaway regions in Italy soon also voting for independence, the rise of right wing governments in eastern europe, etc.). In Japan, business interests will continue to ignore prime minister Abe pleas to raise wages, as they have for years, while Japan gives the green light to become the global financial center for crypto-currency speculative investing.
Consequently, odds are rising there will be a recession in the US, and globally, by late 2018 or early 2019. That will likely be accompanied soon, before or after, by a new ‘Minsky Moment’ of financial instability that will exacerbate the real economic downturn.

Jack Rasmus is author of ‘Central Bankers at the End of Their Ropes: Monetary Policy and Coming Depression’, Clarity Press, August 2017; and ‘Systemic Fragility in the Global Economy’, Clarity Press, January 2016. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

posted October 14, 2017
In Depth Review of the Book ‘Central Bankers at the End of Their Ropes: Monetary Policy and the Coming Depression’, by Dr. Jack Rasmus, Clarity Press, August 2017

Review of ‘Central Bankers at the End of Their Ropes’,
by Dr. Jack Rasmus, Clarity Press, August 2017

By Graham H. Seibert,

An AMAZON TOP 500 REVIEWER,
October 10, 2017

This book does a better job of explaining how central banks work in any of the others I have read. Two mainstream books, Mohamed El-Erian’s The Only Game in Town and Banking on the Future: The Fall and Rise of Central Banking appear to be limited by the obligate blindness that bankers must have to the fact that there is no correct way to do it. The central bank’s goals are too elusive, the tools are too blunt and ineffective, the process is inherently political, and there are demographic and economic variables at play which are beyond the central bankers’ ability to control. Losing Control: The Emerging Threats to Western Prosperity is another book that covers more or less the same ground, though I think Rasmus does it better and with less bias.

Other books such as The Creature from Jekyll Island: A Second Look at the Federal Reserve and The Secrets of the Federal Reserve are conspiratorial. The Jekyll Island does a great job of describing how the Federal Reserve was established, but it ascribes to conspiracy that which can be better explained by mere self-interest. The bankers look out for themselves. The second book edges close to describing a Jewish conspiracy. As Kevin McDonald writes in The Culture of Critique: An Evolutionary Analysis of Jewish Involvement in Twentieth-Century Intellectual and Political Movements, the Jews have evolved to look out for one another, but that does not rise to the level of conspiracy. Murray Rothbard’s 1962 What Has Government Done to Our Money? was a prescient vision of things to come.

The Tyranny of the Federal Reserve, not widely read, is valuable in that it puts the operation of the central bank into a much broader perspective. It addresses an entire range of tyrannies: those of debt, usury, fractional reserve banking, gold, central banks, war, free trade, mass immigration, the media and public education. This Time Is Different: Eight Centuries of Financial Folly is a survey of fiat money regimes going back eight centuries. They all fail, and all for the same reason: politicians cannot control themselves when it comes to printing money. James Rickards makes the same point well in The Death of Money: The Coming Collapse of the International Monetary System.

Rasmus’ book is the most valuable of the group, effectively enumerating and describing the tools, policy objectives and targets of the central banks, and evaluating their effectiveness in light of their own targets and their ability to manage their respective economies.

Rasmus recommends a constitutional amendment to address the problem. The effect of the amendment would be to redress the abuse that he sees in the present system, whereby central banks worldwide are generating a great amount of liquidity most of which flows into financial instruments instead of the real economy, benefiting the rich and starving pensioners and savers.

He recommends democratizing the governance of the Federal Reserve, taking it out of the self-serving hands of the bankers.

This would be a good start. The book does not address larger issues, such as the coming demographic crisis as world populations age.

This is as good a book as one will find describing the problems as they exist and how they came to be. One cannot fault the book for failing to recommend a complete solution. Nobody in the world has found one. For this reason prognosticators are increasingly forecasting a global collapse, a reset that will require something new to rise from the ashes. Only between the lines does Rasmus suggest that that’s where things are headed.

A five-star effort. The best single book I have read on the Federal Reserve and central banks. I am including my (somewhat unedited) reading notes as comments. See my reviews of the books cited in this review for similarly detailed analyses.

EXTENDED COMMENTARY OF THE BOOK, CHAPTER BY CHAPTER,
By Graham Seibert

Chapter 10:
Yellen’s Bank:
From Taper Tantrums to Trump Trade / 257

Yellen has pretty much followed Bernanke’s policies. Although quantitative easing may have ended at some point, the Fed continues to use other tools to inject liquidity into the economy.

Rasmus says very directly that this is a conscious gift to the wealthy financial interests at the cost of everybody else, especially savers and pensioners. The money flows to corporations which pay generous dividends and conduct stock buybacks that favor the financial classes. Interest rates are so low that pension funds cannot make a decent return by buying bonds and by keeping money in banks. They too must reach for yield by buying overpriced stocks. It is unsustainable. The inequalities in wealth have grown insupportable.

Rasmus concludes with Yellen’s five challenges:
“1) how to raise interest rates, should the economy expand in 2017-18, without provoking undue opposition by investors and corporations now addicted to low rates; 2) how to begin selling off its $4.5 trillion balance sheet without spiking rates, slowing the US economy, and sending EMEs into a tailspin; 3) how to conduct bank supervision as Congress dismantles the 2010 Dodd-Frank Banking Regulation Act; 4) how to ensure a ‘monetary policy first’ regime continues despite a re-emergence of fiscal policy in the form of infrastructure spending; and 5) how to develop new tools for lender of last resort purposes in anticipation of the next financial crisis.”

There are not, obviously, clear answers to any of these. The Fed has painted itself into a corner with no apparent exit.

Chapter 11:
Why Central Banks Fail / 287

“But the new function of ensuring financial stability is something of a misnomer. The fundamental means by which central banks today attempt to stabilize the banking system is by permanently subsidizing it.”

Rasmus has earlier said that the quantity theory of money, the idea that increasing the money supply will lead to inflation, has been repeatedly disproven. Others such as Kenneth Rogoff and Carmen Reinhart would say that it is only being held in abeyance and will come back with a vengeance when excessive injection of liquidity finally topples the institutions.

Rasmus writes that” Therefore, if discussions on central banking in the 21st century are to address new functions, this one should be more accurately termed the subsidization of the banking system by virtually free money enabled by central banks’ chronic and massive liquidity provisioning.” Rasmus says that this subsidization function started in the 1970s.

The most important development, per Rasmus, is the capture first by Citibank and then by Goldman Sachs of all of the key appointed positions in the Bush, Obama, and Trump administrations. How else, Rasmus asked, can one explain the fact that the Federal Reserve has continued massive liquidity injections for seven years after this last crisis was wound up in 2010? Only for the benefit of the banks.

Rasmus provides two lists of reasons central banks fail: excuses, and real reasons.

The excuses include
• too much discretion; no monetary rule.
• Fiscal policy and the gates monetary policy. I, the reviewer, add the there is no discussion of the immense government deficits anywhere in this work. That would be a function of fiscal policy.
• Banks become bottlenecks to lending. The monetarist theory is that if you increase the money supply you will get lending. Wrong. The banks may simply sit on the money.
• Wrong targets: 2% growth in what?
• dual mandate: which is it? Prices, inflation, or employment?
• Global savings glut – those damned foreigners
• the need for new tools
• government influence with central-bank independence

Rasmus list of real reasons central banks fail is as follows. Enlisting them, Rasmus is offering the conclusion that the central banks have failed. As he has so elaborately described, they have failed in their assigned missions. But they, and the countries they represent, are still in place. As institutions they have survived. This is therefore our list of reasons why they haven’t been effective in their assigned role.

• Mismanaging money supply and serving as a reactionary lender of last resort
• fragmented and feeling banking supervision
• the inability to achieve 2% price stability. The problem is persistent deflation.
• The failure to address financial asset price inflation
• declining influence of interest rates on real investment
• central-bank policies and the redirection of investment to financial assets
• monetary tools: declining effects and rising contradictions
• victims of their own ideology: Taylor rules, Phillips curves, and NIRP’s. It doesn’t work like the book says. Rasmus: “central bankers may be victims of their own false ideological notions, just as politicians and government bureaucrats may be. The Taylor rule maintains that central banks should not pursue policies that attempt to adapt or respond to economic business cycles.”

Rasmus concludes that central banking has been failing to perform even its own presumed functions, targets and tools. They have not adapted or changed keep up with global developments. Monetary policy is a path to yet more financial and economic stability.

Conclusion:
Revolutionizing Central Banking in the Public Interest:
Embedding Change Via Constitutional Amendment / 323

This final chapter is in the form of a constitutional amendment to democratize the function of the federal reserve. It would give the general public the power to select the leadership. It would require that the Federal Reserve, and its lender of last resort function, ensure that liquidity flowed to the real economy rather than financial assets. It provides for consistent banking supervision by parties not connected to the banks themselves.

The amendment does not address related problems. It makes no mention of fiscal policy, chronic government debts. The federal reserve has the power both to redistribute money within the economy, which Rasmus rightly says that it does, favoring the financial interests. It also has the power to create money that the government needs to offset budget deficits, currently running between $500 million and $1 billion.

The national debt, standing at $20 trillion, requires $400 billion per year just to service. The government debt is about equal to GDP in the United States; unsupportable, but better than Europe, England, China or Japan. None of these would be able to withstand a significant increase in interest rates.

The book does not address the question of demographics. The demographics in the United States are terrible, with the rising generations barely keeping up in numbers with those who are retiring. This is not to even to mention its composition. There is a question of whether the current rising generation, 50% made up of disadvantaged minorities, will have the same productivity as the retirees it replaces.

The demographics in China, Japan, England and Europe are worse. They all have inverted population pyramids. Supporting the promised pension and healthcare benefits will require more tax income from fewer taxpayers. Printing money will not do the trick; at some time the printed money has to be recognized as being increasingly less valuable. Inflation has to kick in and the real economy, just as Rasmus documents that it has in the financial economy.
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Chapter 6:
The Bank of Japan: Harbinger of Things
That Came / 142

Japan overstimulated its economy in the 1980s, culminating with a total stock market valuation of 40% of the world’s stockmarkets, and real estate valuations exceeding that of the United States. From there it was downhill.

The Bank of Japan tried all of the central bank tools, with a notable lack of success. All that worked was lender of last resort, the same as in the United States.

Japan was the first to try quantitative easing. They did it in stages, ultimately unleashing the most powerful quantitative easing of any country to date. One objective was price stability. They wanted to end deflation and achieve zero price growth. The second bout of quantitative easing did it, although a massive cost.

Japan was also among the first to introduce negative interest rates in an attempt to force banks to loan money. The money that they loaned tended to go overseas and into financial investments. It did not help at home.

As things stand, Japan’s debt is 250% of GDP. The situation looks precarious.

It is interesting that Rasmus does not anywhere mention demographics. Japan’s falling birth rate and huge population of elderly has to have an effect on labor demand, fiscal policy to pay pensions, income tax income and other financial parameters.

Chapter 7:
The European Central Bank under German
Hegemony / 165

The European Central Bank was not originally structured as a central bank, and does not yet have all the powers it would need. It is part of the European monetary union (EMU) which assigned price stability as it’s only target. Bank supervision was expressly left to the national central banks. It negotiates money supply in concurrence with the national central banks. It is expressly enjoined from serving as a lender of last resort to sovereign governments, though it could lend to banks and central banks. Alternative organizations to bail out governments did not come into being until 2010 and 2012, at which time many of the European banks were technically insolvent.

The EMU charter required member states to avoid running budget deficits. This meant that fiscal policy could not be used as a tool of central banking. Policy would have to be implemented through monetary action. Rasmus writes that it was created by bankers in the interest of bankers. Financial interests were well taken care of and the crisis of 2009, but the real economy, employment and wages declined.

Germany dominates the ECB. The smaller NCBs are dependent on Germany for exports and capital flows, and therefore tend to support Germany. See the gripping report on this phenomenon in . Germany likewise dominates the European commission (EC) of finance ministers. Germany’s interests are served by the ECB’s original week structure.

The inability to use fiscal stimulus requires austerity, tickly in the peripheral countries but increasingly even in the core, such as France. Fiscal rules have the result of preventing the successful functioning of the central bank.

From 1999 to 2008 the ECB’s primary central banking function was limited to managing the money supply. It launched the euro and converted national currencies to the new one. Germany and the other northern core economies currencies were overvalued. They therefore received an excessive share of euros.

The M1 money supply grew by 104% from 1999 through 2006 as the ECB pumped excessive liquidity into the regional economy in order to jumpstart trade within the zone. This was faster than GDP growth. Exports went from the northern core to the southern and periphery countries. Banks took ECB liquidity and let it out rapidly, from the core to the periphery. The money went into real property and imports of manufactured goods from the German core.

There was a buildup of debt on the periphery, however most of it private. When the crash came, no new capital flowed in, but the debt still had to be paid. New loans were made to pay off the old. The troika imposed austerity to ensure he got repaid.

Interest rate management contributed to the 2008 crisis and the double dip recession in 2010 – 13. As elsewhere, the rate increases were too much, too late. The ECB was late to adapt experimental tools such as quantitative easing. This was inconsistent with its original charter and vision.

The ECB was late to inject liquidity, injected less as a percentage than the United States or Japan, and didn’t have the mechanisms to ensure that the money would go where was needed – into investment and jobs.

According to the Bank of International settlements, the northern banks had an exposure of $1.6 trillion in periphery economy government debt by 2010. In May 2010 they launched the securities markets program (SMP) which involved indirect buying of sovereign bonds and other securities. It totaled €210 billion over the next two years, but was not enough. Thus was established the European financial stability facility (EF SF) which succeeded the ESM in 2012. Funding totaled €440 billion. There was a hitch – they required austerity.

Mario Draghi promised to do “whatever it takes.” He started out right money transactions (OMT) in September 2012 to buy stocks and bonds and thus create liquidity. Estimated to have added €600 billion. However, there was not a corresponding increase in M1 money supply. It rose only from €4.53 trillion to 5.10 trillion. Rasmus writes that the signs are that the liquidity would not be loaned out and getting into the economy at large. I assume he concludes this because the €600 billion did not show any multiplier effect that could have been expected from fractional reserve banking.

ECB injections of liquidity tapered off toward the end of 2013, its balance sheet showing €2.27 trillion in assets, after which there was little new action.

After a Spanish bank went Boston others threatened to, Germany overcame its reluctance to perform bank supervision because it was even more reluctant to bail them out. The ECB established a single supervisory mechanism, SSM, to take effect in November 2014. It worked at the level of single banks, not macro policy. It only applied to the biggest banks. National Bank inspectors had to be involved. It did not involve institutions that did not have retail customers.

Nonperforming loans exceeded €1 trillion when the SSM was established and did not decline measurably for 2 1/2 years. It was only in March 2017 that the ECB issued guidelines on how to address the problem. The Italian bank problems, especially Monte dei Pasche, Are an indication of this. Though they are insolvent, the banks lumber on.

As a lender of last resort, the ECB did manage to keep private banks from going bankrupt. Governments likewise. But did they resolve anything? Were the banks able to resume lending? No.

The ECB’s only target was price stability, inflation of 2%, and despite the injections of l they did not achieve that. their tools did not do the job. In 2014 it looked like the euro economy was headed for another recession. At this point the ECB introduced its own version of quantitative easing, followed by the even more radical negative interest rates (NIRP).

The ECB was buying bonds at the rate of €80 billion per month. This should have vastly reduced the bonds on euro banks balance sheets. But it didn’t. This indicates the bonds must’ve been purchased from non-bank entities and foreign banks. Credit to nonfinancial corporations continued to decline.

Chapter 8:
The Bank of England’s Last Hurrah:
From QE to Brexit / 195

The financial system in Britain is more similar to that of the United States than Europe or Japan. The Bank of England is a genuine central bank, with its own currency. It was relatively late in being given the total independence that is fashionable for central banks to receive in the 1980s and 1990s. Bank supervision functions and monetary policy were theoretically supervised by the chancellor of the Exchequer, although the Bank of England was usually able to do what it wanted.

Like the other banks, the Bank of England went through waves of quantitative easing that injected large amounts of liquidity into the economy. As elsewhere, it did not achieve the desired levels of inflation in the real economy. It did, however, results in asset price inflation, real estate and stocks, just as everywhere.

The Brexit vote depressed the foreign exchange value of the pound. This in turn raised the price of imports, probably the single most significant factor in whatever consumer price inflation was realized.

The Bank of England faces the same problem as the other central banks. It has a swollen balance sheet, including lots of debt that would have otherwise not existed or gone into the private sector. Unwinding this debt will be a real problem, or would be a problem were to be attempted.

Chapter 9:
The People’s Bank of China Chases Its Shadows / 215

The central bank of China has a much more compressed history than those of the Western institutions. Rasmus starts with the period of 1983 through 1998. The People’s Bank of China (PBOC) started out as a part of the government. It handled fiscal matters – collections and disbursements of state owned enterprises. There are three quasi-independent government owned banks servicing different sectors of the economy: industry and commerce, agriculture, and construction.

The banks changed in character as China started to encourage private enterprise. The quarter of a million or so state owned enterprises consolidated. Some accepted outside shareholders. It became possible for entrepreneurs to start businesses. Independent banks were set up.

There were boom and bust cycles as in in the early capitalist system. China was notable only in the compressed timeframe in which it all occurred. There was little banking supervision at first. The government stepped in to sort out some of the mass, setting up government entities to purchase bad loans in order to keep the banks afloat.

The People’s Bank of China took form as a central bank in the early 2000’s, separating itself from the Ministry of finance. It still did not have autonomy with regard to bank supervision. Its primary target was continued growth; interest rates and inflation were secondary concerns.

In the early 2000’s the money supply more than doubled. However, the money more or less had to be invested productively. The channels did not exist to send it overseas in large amounts. There simply were no financial derivatives or other speculative products to absorb it.

The PBOC, unlike other central banks, was able to get most of the nonperforming loans that it had picked up during the Asian financial crisis of the late 90s off of its balance sheet in the early 2000’s. This was possible because the country experienced significant real growth.

“There are only three ways out of a debt crisis:
• expunge private debt by banks, voluntarily or by government action
• grow out of it by means of rising prices generating income with which to repay it; or
• transfer the debt to government established “bad banks” or by some other way to the government balance sheets.

Every central bank named in the book had hoped that option two would work out. China is the only one where it did.

China’s residential housing bubble crested in 2007 – 08, but did not break. The financial system was too simple to have involved layers of derivatives, as it did in the United States. There were no credit default swaps, collateralized debt obligations and instruments of that sort. As a result values resumed their climb after a couple of year pause.

Central bank policy worked because China was mostly a closed society. Liquidity injected in the system did not seep out through foreign investment, shadow banks and other mechanisms.

After the world economic crisis in 2007 – eight, China injected enough liquidity into the system to almost double the money supply. This is more than the United States injected into an economy twice as large. China’s objective was to shield their economy from the world economic crisis. 38% of China’s liquidity was directed at infrastructure – railroads, highways, water projects, ports and the like, and another 30% into housing and commercial property.

The fact that China board money directly into sectors, whereas the United States poured money into the system and left it to the participants in the economy to route it towards investment (or hoard it), China’s investment was much more effective.

China allowed the M2 money supply to grow 20% a year from 2008 through 2011, and 10 to 15% annually through 2017. This is more than was needed to accommodate real expansion. Where did the money go?

Asset prices is one thing. China discouraged housing appreciation by raising down payment requirements, forbidding ownership of more than two houses, and raising mortgage interest rates.

There was a tsunami of excess liquidity provided by all of this. Credit and debt grew to about $30 trillion. A lot of the money flowed overseas, but a lot of it also went into asset markets. Stock market, bond markets, and new securities like wealth management products. China’s shadow banking system blossomed.

All of this has resulted in China’s development of the same problems that afflict the West. There asset bubbles in real estate, stock, and financial assets. Real GDP growth has slowed to about 4% annually.

According to the Bank of International settlements, China’s total debt as of the end of 2016 exceeded 250% of GDP, twice the ratio in 2008. Two thirds of it is corporate and business debts, with most of that concentrated in the state owned entities and local government financing vehicles. Nonperforming loans are again a problem, of a scale much larger than in 1999. With growth slower, it is an open question whether they can grow out of it this time.

Of the $30 trillion debt, bank loans account for just over half as of the end of 2016. To this should be added about $7.7 trillion in Chinese shadow banking. Determining the level of nonperforming loans is a guesstimate, but $5 trillion seems reasonable. This is 16 times the amount that they “grew out of” after 1999. That does not seem like a likely solution. China does have $4 trillion of foreign reserves in cash… depending on how well the value of foreign assets holds up in a global crisis.

As an aside from the reviewer – gold bugs estimate that China has been actively accumulating gold, now possessing 20,000 tons worth close to $1 trillion at today’s valuation. If the value of gold increases significantly, as many speculate is likely in an impending global crisis, China’s reserves could be significantly greater than $4 trillion.

China at one point tried to force the excess liquidity and the buying stocks. There was a stock market surge in 2015 caused by allowing margin buying, foreign participation in markets, and other such devices. They tried to dampen that, causing a stock market contraction and downward pressure on the renminbi. They tried to reverse that by throwing money at it.

China faces the same dilemma as the West. “In 2008, every dollar of credit and debt produced a dollar of real growth; in 2017 it takes four dollars to produce one dollar of growth. The rest diverts into financial markets producing price bubbles and requiring still more debt to rollover and refinance the rising levels of old debt.”
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Chapter 5:
Bernanke’s Bank:
Greenspan’s ‘Put’ On Steroids / 106

The Fed was very data-driven, but myopic in that they were driven only by the data that they collected. The Bureau of Labor Statistics and other federal agencies gathered data on the real economy. It largely ignored what was going on in the financial economy. Rasmus contends that between the depression and 1965 the two were largely disjoint. However, from the Carter administration onward they greatly influenced one another. Not to pay attention to what was going on in the financial markets – bubbles and housing, bonds, the stock market and foreign currencies – was to be willfully blind.

Greenspan allowed himself to be blind. The “Great Moderation” was a fiction that was only sustainable by ignoring the financial sector of the economy.

Bernanke was Greenspan’s protégé from the time he joined the Fed in 2002. He came from Princeton, where he had headed the economics department. He briefly left the Fed to join the Bush administration, but returned and was elevated to the chairmanship in 2006. Like Greenspan, he was a monetarist, a student of Milton Friedman, and a believer in deregulation. A monetarist believes that you manage an economy by managing the money supply; a Keynesian believes that you do it through government fiscal policy. He was also friendly with the banks.

“When the banking and financial crash finally came in 2008, he would adopt Greenspan same solutions to imploding financial bubbles and financial crises i.e. throw another wall of liquidity at it. But massive liquidity injections over decades were the fundamental originating cause of the financial instability, leading to exploding debt, inordinate leveraging, it excess demand for financial securities and financial asset bubbles. Now they would be considered the solution to the problem they had created.” This reviewer notes that it is the same all over again in 2017. They learned nothing.

Long-term interest rates theoretically should to some degree track short-term interest rates. Greenspan’s “conundrum” was that the two became increasingly disconnected. Although Greenspan brought short-term rates down to 1% after the 2001 “tech wreck,” long-term rates fell only very slowly. Rasmus’ explanation is that this worldwide flood of liquidity represents an enormous source of demand to purchase US bonds, government and corporate. It represents a constant downward pressure on bond interest rates.

There was a productivity conundrum. Goods inflation slowed at the same time as productivity decreases. Less productivity should make products more costly. But it didn’t work that way. Factors Rasmus identifies are globalization, destruction of labor unions, lower minimum rage, capital replacing labor, offshoring, privatizing pensions, and the shift from manufacturing to a service economy.

Bernanke blamed a “savings glut” caused by persistent US trade deficits allowing dollars to accumulate overseas. Those dollars sought to be invested in the US, lowering long-term interest rates. But “savings” was a misnomer, the foreigners were not responsible, and it had begun long before 1996. Central banks worldwide had pumped liquidity in the system at every excuse.

Bernanke held a noninterventionist view, the idea that it was not the Fed’s job to pop bubbles, up until the time he retired from the Fed. The case that Rasmus does not make is what happens when the Fed does attempt to contain asset prices. One must assume that it causes dislocations elsewhere in the economy as excess liquidity will not stand still in banks, losing value. This reviewer asks the question as to whether the Fed could contain all asset prices – stocks, bonds, real estate, precious metals and works of art – at the same time. If they did, where would the money go? Conversely, is there any federal reserve policy that would soak up the excess liquidity without causing dislocations? These are questions I hope will be answered later in the book.

Rasmus contends that the Fed abandoned its money supply and credit regulation function to carry out its lender of last resort function. The Fed’s traditional tools were inadequate, leaving it to invent quantitative easing and the zero interest rate policy (QE and ZIRP).

The housing bust of 2007 also involve credit markets like asset-backed commercial paper (ABCP) and repo agreements. As the value of housing started to fall, the value of securitized loans and other financial assets collapsed quickly. Injections of 62 billion by the New York Fed and 214 billion by the European Central Bank were quickly swallowed up. The crisis originated in the shadow banks which could not borrow at the Fed’s discount window. Ultimately it took tens of trillions of dollars.

Hedge funds and private equity funds began feeling. The Fed said it would buy not only T-bills but mortgage-backed securities from the big five shadow banks in New York: Goldman Sachs, Morgan Stanley, Merrill, Lehman, and Bear Stearns. Bear was crashing. Bernanke in the Fed arranged $25 billion Fed loan to J.P. Morgan to buy Bear Stearns. Chase wound up paying only 236 million. NB: Morgan and Chase are the same entity.

Bernanke played political games to get the deal through with only 4/7 Fed governors voting. The Fed’s rule said they needed five.

The Fed did allow Lehman Brothers to collapse in September 2008. They did nothing to save it. This called the solvency of the other banks into question, and the New York Fed had to put another 70 billion in two quell the panic. They threw in another $85 billion to cover AIG, which was massively hemorrhaging due to credit default swaps. The Fed played favorites – money that went to AIG flowed through to Goldman Sachs.

Congress voted 700 billion for the Troubled Asset Relief Program (TARP) to be administered by the Treasury Department. Rasmus lists another six programs which together amount to another almost $2 trillion.

This money was used (I the reviewer conclude) to buy troubled assets from the troubled banks. Take the assets off of the bank books and put them onto Federal Reserve’s books or some other. This was supposedly done at fair value, but of course in a financial crisis – fair value is impossible to know. Without a doubt the bankers knew it better than the government or the Fed did. The bankers were at a minimum bailed out, and in some cases given an enormous gifts. Citigroup and Bank of America became technically insolvent. They too were given loans and guarantees.

Quantitative easing was launched in March 2009 With the purchase of $600 billion worth of mortgage securities and another hundred billion dollars worth of Fannie Mae – Freddie Mac’s own debt. The Fed was buying the toxic assets that had collapsed in price for private investors. QE1 total $1.75 trillion.

QE2 was launched in mid-2010. Altogether the Fed liquidity programs resulted in a federal reserve balance sheet of $4.5 trillion, still in place as of March 2017.

These actions resulted in a huge increase in money supply. The cash monetary base – currency in your currency – rose from 853 billion to $3.7 trillion at the end of 2013. Him too, the broader measure, went from $7.3 trillion to $11.2 trillion. These figures do not take in all credit growth – the total is larger, but hard to estimate.

The judgment is that the Federal Reserve succeeded at only one objective, as a lender of last resort, and did so at huge cost. The process was highly political, with government officials quite openly helping friends in high places. It absolutely failed in its supervisory capacity. It was unable to manage interest rates – the disparity between short and long term was hard to remedy.

Price stability was a failure as well. The Fed’s target is called the Personal Consumption Expenditure, or PCE. It is a measure of goods and services prices. Asset prices are not part of the equation. They could not push prices up to the targeted 2% by 2016, but stock and other asset prices skyrocketed. The Fed’s Inflation targets failed.

The chapter concludes with an assessment of the tools that Bernanke introduced: quantitative easing, ZIRP and the other tools to support bank liquidity, and the relaxation of mark to market and other supervisory metrics. The conclusion is that the negative effects will be felt for decades to come. They represent a massive injection of liquidity, exceeding even the specific bailout programs of 2008 – 09. Rasmus does not mention moral hazard as such, but they apparently establish a precedent that may be impossible to replicate next time.
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Chapter 3:
The US Federal Reserve Bank:
Origins & Toxic Legacies / 48

Rasmus gives a short version of the fairly well-known history of the founding of the Federal Reserve. The best known account, , is a little bit conspiratorial. Rasmus disagrees in part. He says that the negotiations were done in the public eye, in Congress, over a period of several years culminating in 1914. It is no doubt the product of the New York banks, and it was crafted to respect their interests. Rasmus writes that it did solve real problems. The boom and bust cycle had put a damper on expansion during significant portions of the prior three decades.

The Federal Reserve is owned by the banking community itself, which in turn is dominated by the big New York banks. The bankers got most of what they wanted. To sell the plan politically, it was constructed as a decentralized group of regional Federal Reserve Banks. In fact, the New York Fed dominated from the beginning. The decentralization was only a fig leaf to get the legislation through Congress. It had bipartisan support, although the Democrats could not afford to show too much enthusiasm because they were known as the anti-banking party.

Rasmus provides a history of the first two decades of the Federal Reserve’s existence. They had gotten essentially everything that they asked for from Congress, claiming that they needed the power to be able to control booms and busts and supervise banks. It did not work out in any of the central banks three primary functions.

In its supervisory role, the Federal Reserve stood idly by as the banks allowed the money supply to grow three times faster than production, creating a bubble. Much of the money went into margin loans that fueled the stock market bubble. A great many banks were still outside the Federal Reserve system, and those that were in it received very little discipline. The Federal Reserve had to balance two objectives, keeping interest rates low enough the gold didn’t flow from England to the United States and throw England off the gold standard, and yet control speculation in the United States. It failed.

As a lender of last resort the Fed also failed. The discount rate was kept abnormally high, discouraging banks in trouble from borrowing. Banks failed in the brief, severe recession of 1920 – 21. There were three strong waves of bank failures in 1930 – 31, 1932, and the third and early 1933. The rate of failure was more than it had been in the decades before the Federal Reserve. To fulfill a commitment to stay the gold standard, it actually raised interest rates going into the depression. This protected wealthy investors at the expense of farmers, small businesses and workers.

The Federal Reserve was supposed to ensure a stable money and credit supply. The single currency replaced the thousands of state bank banknotes. I, the reviewer, note that since we had a single currency, the US dollar, all of the banknotes must have been denominated in dollars at the then prevailing rate of $20 per ounce of gold. Though there may have been many banknotes, they must all have purported to represent the same amount of value. Although the most conservative measures of money, currency in circulation and bank deposits, were held in check, other lending such as margin lending on stock accounts was not. The bottom line, Rasmus says is “And the Fed had totally lost control of credit creation by the end of the decade.”

In its fourth role as government funding in fiscal agent, Rasmus contends that the Federal Reserve did adequately. It was able to raise the money to fund the First World War. He credits this primarily to the Department of the Treasury itself, which kept interest rates low to maximize government war borrowing.

In its fifth objective, price stability, the Fed did not do very well. Prices rose 11% to 19% during the war, after which there was a major deflation. Financial assets again surged in the bubble of the late 20s, after which all prices – goods, services, food, commodity, and financial assets – collapse together. Currency exchange rates also fluctuated wildly.

In its sixth objective, maintaining the gold standard, it absolutely failed. Although unemployment was not a stated target, it was also a disaster. By 1933, 30% of the entire workforce were unemployed, compared to 2.9% in 1929. Real output fell by 29%. Rasmus notes that in 1929, just as in 2017, the Fed’s policy was not to intervene and attempt to pick a financial asset bubble, but to try to pick up the mess after his bursts. By 1927 more than 1/3 of all bank loans went into buying stock, not into improving productivity.

The Fed did not use its tools, the discount rate and open market operations, to cool the speculative bubble in 1928 and 29. It ignored the effects of the shadow banks and other players.

Rasmus concludes that although it made a number of tactical errors, the most fundamental error was that the bank operated in the interests of the banks, not the country.

Chapter 4:
Greenspan’s Bank:
The ‘Typhon Monster’ Released / 71

The Federal Reserve was considerably chastened by the great depression. The flurry of legislation designed to control the banks left them on the sidelines. Rasmus gives Roosevelt most of the credit for the recovery – other economists would write the history differently – and says that the Federal Reserve did not regain power until March 1951 with a new record between the Fed and the treasury. Rasmus notes that the to decades without the Fed were the high point of economic and employment growth in the United States. While this is true, one must recognize that 1933 represented the absolute nadir of economic activity, and that productivity toward the end of this period was stimulated by two wars. Rasmus concludes that central-bank independence may not be the best for economic stability and growth.

The Treasury Department allowed the feds to increase reserve requirements in 1937 to offset golden flows from Europe. That slowed the economy, resulting in a short but deep double dip in the Depression.

Rasmus writes that after 1945 there was continued reliance on fiscal policy (presumably, rather than monetary policy). Here is how the Internet defines the difference:
• Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.
• Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

The bankers carried the day in March 1951. Truman needed the cooperation of the private banks to buy government bonds to fund the Korean War. Moreover, it was argued that the Fed needed to raise interest rates to bring inflation under control. Marriner Eccles, a strong advocate of government control, resigned as Fed chairman and was replaced by William McChesney Martin, a banker.

For the next two decades (through the early 70s) the FOMC (Federal open market committee) handled most of the regulation through buying and selling of government bonds and setting the level of reserves for the districts of the Fed.

“In the 1960s fiscal policy primacy continued but began to ran into trouble.” In other words, the government did not balance its books. It could not have guns and butter during the Vietnam War.

A number of financial innovations by the private banks circumvented Fed controls. Among them were certificates of deposit. Penn Central failed as did Franklin National Bank. This represented a failure of the Fed to supervise. Credit cards were introduced in this era – and consumer credit grew rapidly. Banks competed with savings and loans in the home mortgage business. The growth of new financial instruments left the Fed far behind.

Dollars flowed overseas first with foreign aid, US troops stationed overseas, and capital investment by US corporations. There were thus dollars in Europe to be loaned – EuroDollars – outside of the control of the federal reserve. This, combined with taking the dollar off the gold standard and the digitization of financial transactions and the related creation of new financial instruments meant that there was more money available, less subject to control by the Fed. Money velocity would’ve also increased, applying a multiplier effect of the monetary supply.

Continued deficit spending – as a result of fiscal policy – increase the amount of money in circulation. It cost inflation, which in turn raised the price of US exports and decreased US competitiveness. It led to an accumulation of dollars overseas and a lack of faith by our trade partners, who increasingly redeemed dollars for gold at the official rate of $35 per ounce. Under chair Arthur Burns, Nixon halted convertibility in 1971 as part of his New Economic Plan (NEP).

The end of the gold standard meant that the dollar was the reserve currency, which increased the demand for dollars as other countries would buy and sell the currency to stabilize their own currencies. Other central banks also injected liquidity, rarely taking it back.

In 1977 Congress gave the Fed the responsibility for targeting unemployment. Throughout the late 70s the Fed continued to allow liquidity to grow. It was ineffective at meeting any of its targets, which continue to change in any case: interest rates, money supply, discount rate, unemployment – they were all elusive. The Fed, under chair William Miller, tried all its tools, to no real effect. Carter replaced him with Paul Volcker in 1979.

Volcker’s top priority was to curb inflation. He put a halt to the money supply growth and paid no attention to the resultant interest rates and unemployment. Inflation continued for a while, but eventually abated as the economy crashed. Volcker bailed out financial interests, including the Hunt brothers who had failed in their attempt to corner the silver market. Rasmus notes that this indicates who the Fed is designed to protect – the banks.

Rasmus reports that Volcker was no more consistent than Miller had been, expanding and then contracting the money supply rather abruptly in the first years of the Reagan administration and allowing inflation to whipsaw.

Rasmus reports that Volcker was not successful even in controlling inflation. Prices of goods and services were indeed moderated, but financial prices grew considerably. There was a stock market bubble and in Boston 1987, a junk-bond bubble, and a second housing bubble.

US corporate “offshoring” in the 1980s required the relaxation of transborder monetary transactions. This was in the interests of business, escaping high costs of production in the United States, and supported by the Reagan administration. Deregulation, both domestic and international, enhanced liquidity by making money move more easily.

Reagan saw Volcker as not sufficiently onboard with the government’s objectives of improving investment and decreasing unemployment. He was replaced by Alan Greenspan, who was to serve for 20 years from 1987 until 2007. Rasmus says that Greenspan unloosed the “Typhon monster” of Greek mythology by creating excess liquidity. “Why is liquidity a monster? Because it’s excess beyond available opportunities for real asset investment overflows into financial asset investment and financial market speculation.” It results in bubble, which pop.

Rasmus next couple of paragraphs, although written about the 1980s, perfectly capture what is happening in 2017:

“Enabled by ever-expanding liquidity, financial asset investing becomes more profitable than real asset investing—i.e. credit expands into financial investment markets and even slows the flow of credit that might have gone into investing in real assets like structures, equipment, and other real assets that create more jobs and incomes than financial asset investment. With slowing real asset investment, productivity eventually slows as well, thus producing even fewer jobs and further reducing real earned incomes for most households. The flip side of excess liquidity is excess debt accumulation, as the expansion of that debt increasingly funds financial asset investment and financial speculation.

“The rising ratio of debt to real income has additional negative impacts on the real economy apart from diverting capital that might have financed real assets, jobs, and incomes. As real asset investment growth slows, and earned incomes grow more slowly, so does productivity slow. The growth of debt that excess liquidity creates also reduces multiplier effects from government fiscal policy that attempts to stimulate growth by means of spending increases and/or tax reductions. Debt also negatively affects monetary policy stimulus. Excess liquidity drives down interest rates. Businesses and investors then increase borrowing but divert the funds borrowed into financial asset investing as well. Financial markets expand abnormally and result in asset bubbles, with the same consequences noted above.”

Rasmus concludes that Greenspan was no genius – he simply bailed the banks out every time his policies failed, seven or more times in the course of his 20 years. He did nothing about financial asset bubbles. He noted that in 1996 the stock market valuation was 120% of GDP, up from 60% in 1990. Nota bene: it is 136% as I write).

Greenspan had advocated increasing financial deregulation, such as the end of the Glass-Steagall act which had prevented banks from combining retail lending with investment banking activity. The Fed also largely abandoned its supervisory function.

The stock market crashed – NASDAQ down 86%. But the biggest bubble of all, subprime lending for housing, continued. In a quid pro quo, Greenspan kept interest rates around 1% to finance George Bush’s war in Iraq, and he was reappointed. This gave new legs to and already extended, stale housing market by allowing marginal homebuyers into the market.
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Chapter 2:
A Brief History of Central Banking / 30

Merchant banks emerged in the late Middle Ages, first in Italy and then spreading north. See Fritz Rorig for a history. The oldest of central bank acknowledged as such is the Bank of England, which assumed that role about the beginning of the 19th century.

In the absence of a central bank, local banks issued their own currency. This led to frequent bank runs and financial crises. The United States had national banks in the early part of the 19th century. A legacy was not a happy one, and the United States was slow to establish a central bank. The Bank of England got a monopoly on issuing currency in 1844.

As continental central banks evolved, fractional reserve lending came into practice. Rasmus covers it briefly. The idea is that the bank loans out more money than it has deposits on the theory that not everybody will want their money back immediately. Loaned money goes into the construction of long-term assets which will enable the borrowers to pay the banks back. The long versus short problem inevitably led to liquidity crises. The banks assets might exceed its liabilities, but it would not have money on hand. Central banks handled this by limiting the amount of currency in circulation and acting as the lender of last resort.

By 1870 – 90 nearly all European states has adopted central banks. The Federal Reserve was created only in 1914, and Latin American and other central banks were founded in the early 20th century. Countries with central banks rose from 18 in 1900 up to almost 200 by the year 2000.

The three primary functions of central banks are:
• acting as a lender of last resort to bail out banks in a crisis
• regulating the supply of money in the domestic economy
• supervising the private banking system
Modern central banks perform other functions:
• raising money for governments
• issuing new paper currency
• precious metals and currency conversion
• clearinghouse services for interbank transactions
• managing government payments
• economic research

The ultimate goal of government and central banks is stable long-term growth, increasing the wealth of the society and the well-being of the citizens. To achieve that ultimate goal, central banks set targets for measurable economic statistics. Among the statistics that they target include:
• price level
• supply of money (cash, demand deposits, and other types of credit)
• currency exchange rates
• interest rates
• full employment (or conversely, an acceptable level of unemployment)

All of these targets are inter-related. Given that the tools used to achieve the objectives are also interrelated, central banks lack, and have always lacked the ability to attack any particular target in isolation.

The tools of central banking are:
• The reserve requirement: the percentage of money that must be held in the bank to back up loans made on the fractional reserve principle. The higher the reserve, the less likely the bank will suffer from a bank run, but the less profit they can make from interest on loans.
• The discount rate charged by the central bank to private banks.
• The market interest rate that banks charge one another for loans.
• Open market operations: buying and selling bonds, usually T-bills, which has the effect of injecting cash into the system or absorbing it out of the system as it is tied up in interest-bearing instruments.
• Quantitative Easing: buying bonds from private investors as well as banks and other financial institutions to provide them with liquidity. In Japan this includes buying corporate stock.
• Special Auctions: actors in the banking sector submit bids indicating the prices and amounts at which they are willing to borrow.
• Reverse Repo Agreements

All of these tools recognize that banking is a question of supply and demand: the supply of money available to be lent and the demand for borrowing. Reduce the supply of money by increasing the reserve requirement and the interest on loans goes up. Inject liquidity into the market by buying bonds, placing cash in the bank’s coffers, and they find it easier to lend. The same with quantitative easing. Adjusting the discount rate directly affects demand: the more expensive it is to borrow, the lower the demand. Therefore, in the final analysis, every central bank tool manipulates the same parameters: supply and demand. The objective is to achieve a level of lending such that the money can be put to use productively, increasing human productivity and gross domestic product, and not squandered, hoarded, or stolen. The borrower should be able to put the money to use in such a way that the earnings allow the loan to be repaid with interest in the borrower to make a profit.

In a global world central bankers have less and less control over the parameters they seek to manage. Money is really a global commodity. Productivity growth is a function of technology, something certainly beyond the control of central banks. Employment levels are a function of human capital: education, experience, and ultimately personal traits such as intelligence and personality. The thesis of this book is that the traditional tools named above are in adequate to achieve the named targets, and that the name targets themselves may be badly chosen. The era of the central bank may be coming to an end.

posted October 3, 2017
The Trump-Goldman Sachs Tax Cut for the Rich

This past week Trump introduced his long awaited Tax Cut, estimated between $2.0 to $2.4 trillion. Like so many other distortions of the truth, Trump claimed his plan would benefit the middle class, not the rich—the latest in a long litany of lies by this president.

Contradicting Trump, the independent Tax Policy Center has estimated in just the first year half of the $2 trillion plus Trump cuts will go to the wealthiest 1% households that annually earn more than $730,000. That’s an immediate income windfall to the wealthiest 1% households of 8.5%, according to the Tax Policy Center. But that’s only in the first of ten years the cuts will be in effect. It gets worse over time.

According to the Tax Policy Center, “Taxpayers in the top one percent (incomes above $730,000), would receive about 50 percent of the total tax benefit [in 2018]”. However, “By 2027, the top one percent would get 80 percent of the plan’s tax cuts while the share for middle-income households would drop to about five percent.” By the last year of the cuts, 2027, on average the wealthiest 1% household would realize $207,000, and the even wealthier 0.1% would realize an income gain of $1,022,000.

When confronted with these facts on national TV this past Sunday, Trump’s Treasury Secretary, Steve Mnuchin, quickly backtracked and admitted he could not guarantee every middle class family would see a tax cut. Right. That’s because 15-17 million (12%) of US taxpaying households in the US will face a tax hike in the first year of the cuts. In the tenth and last year, “one in four middle class families would end up with higher taxes”.

The US Economic ‘Troika’

The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump’s economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump’s economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. Together with the other key office determining US economic policy, the US central bank, held by yet another ex-Goldman Sachs senior exec, Bill Dudley, president of the New York Federal Reserve bank, the Goldman-Sachs trio of Mnuchin-Cohn-Dudley constitute what might be called the ‘US Troika’ for domestic economic policy.

The Trump tax proposal is therefore really a big bankers tax plan—authored by bankers, in the interest of bankers and financial investors (like Trump himself), and overwhelmingly favoring the wealthiest 1%.

Given that economic policy under Trump is being driven by bankers, it’s not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. And that’s just the nominal corporate rate cut proposed by Trump. With loopholes, it’s no doubt more.

The Trump-Troika’s Triple Tax-Cut Trifecta for the 1%

The Trump Troika has indicated it hopes to package up and deliver the trillions of $ to their 1% friends by Christmas 2017. Their gift will consist of three major tax cuts for the rich and their businesses. A Trump-Troika Tax Cut ‘Trifecta’ of $ trillions.

1.The Corporate Tax Cuts

The first of the three main elements is a big cut in the corporate income tax nominal rate, from current 35% to 20%. In addition, there’s the elimination of what is called the ‘territorial tax’ system, which is just a fancy phrase for ending the fiction of the foreign profits tax. Currently, US multinational corporations hoard a minimum of $2.6 trillion of profits offshore and refuse to pay US taxes on those profits. In other words, Congress and presidents for decades have refused to enforce the foreign profits tax. Now that fiction will be ended by officially eliminating taxes on their profits. They’ll only pay taxes on US profits, which will create an even greater incentive for them to shift operations and profits to their offshore subsidiaries. But there’s more for the big corporations.

The Trump plan also simultaneously proposes what it calls a ‘repatriation tax cut’. If the big tech, pharma, banks, and energy companies bring back some of their reported $2.6 trillion (an official number which is actually more than that), Congress will require they pay only a 10% tax rate—not the current 35% rate or even Trump’s proposed 20%–on that repatriated profits. No doubt the repatriation will be tied to some kind of agreement to invest the money in the US economy. That’s how they’ll sell it to the American public. But that shell game was played before, in 2004-05, under George W. Bush. The same ‘repatriation’ deal was then legislated, to return the $700 billion then stuffed away in corporate offshore subsidiaries. About half the $700 billion was brought back, but US corporations did not invest it in jobs in the US as they were supposed to. They used the repatriated profits to buy up their competitors (mergers and acquisitions), to pay out dividends to stockholders, and to buy back their stock to drive equity prices and the stock market to new heights in 2005-07. The current Trump ‘territorial tax repeal/repatriation’ boondoggle will turn out just the same as it did in 2005.

2. Non-Incorporate Business Tax Cuts

The second big business class tax windfall in the Trump-Goldman Sachs tax giveaway for the rich is the proposal to reduce the top nominal tax rate for non-corporate businesses, like proprietorships and partnerships, whose business income (aka profits) is treated like personal income. This is called the ‘pass through business income’ provision.

That’s a Trump tax cut for unincorporated businesses—like doctors, law firms, real estate investment partnerships, etc. 40% of non-corporate income is currently taxed at 39.6% (the top personal income tax rate). Trump proposes to reduce that nominal rate to 25%. So non-incorporate businesses too will get an immediately 14.6% cut, nearly matching the 15% rate cut for corporate businesses.
In the case of both corporate and non-corporate companies we’re talking about ‘nominal’ tax rate cuts of 14.6% and 15%. The ‘effective’ tax rate is what they actually pay in taxes—i.e. after loopholes, after their high paid tax lawyers take a whack at their tax bill, after they cleverly divert their income to their offshore subsidiaries and refuse to pay the foreign profits tax, and after they stuff away whatever they can in offshore tax havens in the Cayman Islands, Switzerland, and a dozen other island nations worldwide.

For example, Apple Corporation alone is hoarding $260 billion in cash at present—95% of which it keeps offshore to avoid paying Uncle Sam taxes. Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today—not the 35% nominal rate.

Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft’s effective global tax rate last year was only 12%. IBM’s even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they’ll pay even less, likely in the single digits, if that.

Corporations and non-corporate businesses are the institutional conduit for passing income to their capitalist owners and managers. The Trump corporate and business taxes means companies immediately get to keep at least 15% more of their income for themselves—and more in ‘effective’ rate terms. That means they get to distribute to their executives and big stockholders and partners even more than they have in recent years. And in recent years that has been no small sum. For example, just corporate dividend payouts and stock buybacks have totaled more than $1 trillion on average for six years since 2010! A total of more than $6 trillion.

But all that’s only the business tax cut side of the Trump plan. There’s a third major tax cut component of the Trump plan—i.e. major cuts in the Personal Income Tax that accrue overwhelmingly to the richest 1% households.

3. Personal Income Tax Cuts for the 1%

There are multiple measures in the Trump-Troika proposal that benefits the 1% in the form of personal income tax reductions. Corporations and businesses get to keep more income from the business tax cuts, to pass on to their shareholders, investors, and senior managers. The latter then get to keep more of what’s passed through and distributed to them as a result of the personal income tax cuts.

The first personal tax cut boondoggle for the 1% wealthiest households is the Trump proposal to reduce the ‘tax income brackets’ from seven to three. The new brackets would be 35%, 25%, and 12%.

Whenever brackets are reduced, the wealthiest always benefit. The current top bracket, affecting households with a minimum of $418,000 annual income, would be reduced from the current 39.6% to 35%. In the next bracket, those with incomes of 191,000 to 418,000 would see their tax rate (nominal again) cut from 28% to 25%. However, the 25% third bracket would apply to annual incomes as low as $38,000. That’s the middle and working class. So households with $38,000 annual incomes would pay the same rate as those with more than $400,000. Tax cuts for the middle class, did Trump say? Only tax rate reductions beginning with those with $191,000 incomes and the real cuts for those over $418,000!

But the cuts in the nominal tax rate for the top 1% to 5% households are only part of the personal income tax windfall for the rich under the Trump plan. The really big tax cuts for the 1% come in the form of the repeal of the Inheritance Tax and the Alternative Minimum Tax, as well as Trump’s allowing the ‘carried interest’ tax loophole for financial speculators like hedge fund managers and private equity CEOs to continue.

The current Inheritance Tax applies only to those with estates of $11 million or more, about 0.2 of all the taxpaying households. So its repeal is clearly a windfall for the super rich. The Alternative Minimum Tax is designed to ensure the super rich pay something, after they manipulate the tax loopholes, shelter their income offshore in tax havens, or simply engage in tax fraud by various other means. Now that’s gone as well under the Trump plan. ‘Carried interest’, a loophole, allows big finance speculators, like hedge fund managers, to avoid paying the corporate tax rate altogether, and pay a maximum of 20% on their hundreds of millions and sometimes billions of dollars of income every year.

Who Pays?

As previously noted, folks with $91,000 a year annual income get no tax rate cuts. They still will pay the 25%. And since that is what’s called ‘earned’ (wage and salary) income, they don’t get the loopholes to manipulate, like those with ‘capital incomes’ (dividends, capital gains, rents, interest, etc.). What they get is called deductions. But under the Trump plan, the deductions for state and local taxes, for state sales taxes, and apparently for excess medical costs will all disappear. The cost of that to middle and working class households is estimated at $1 trillion over the decade.

Trump claims the standard deduction will be doubled, and that will benefit the middle class. But estimates reveal that a middle class family with two kids will see their standard deduction reduced from $28,900 to $24,000. But I guess that’s just ‘Trump math’.
The general US taxpayer will also pay for the trillions of dollars that will be redistributed to the 1% and their companies. It’s estimated the federal government deficit will increase by $2.4 trillion over the decade as a result of the Trump plan. Republicans in Congress have railed over the deficits and federal debt, now at $20 trillion, for years. But they are conspicuously quiet now about adding $2.4 trillion more—so long as it the result of tax giveaways to themselves, their 1% friends, and their rich corporate election campaign contributors.

And both wings of the Corporate Party of America—aka Republicans and Democrats—never mention the economic fact that since 2001, 60% of US federal government deficits, and therefore the US debt of $20 trillion, are attributable to tax cuts by George W. Bush and Barack Obama: more than $3.5 trillion under Bush and more than $7 trillion under Obama. (The remaining $10 trillion of the US debt due to war and defense spending, price gouging by the medical industry and big pharma driving up government costs for Medicare, Medicaid, and other government insurance, bailouts of the big banks in 2008-09, and interest payments on the debt).

The Neoliberal Tax Offensive

Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the ‘fiscal cliff’ settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps.

Neoliberal tax cutting in the US has also been characterized by the ‘tax cut shell game’. The shell game is played several ways.
In the course of major tax cut legislation, the elites and their lobbyists alternate their focus on cutting rates and on correcting tax loopholes. They raise rates but expand loopholes. When the public becomes aware of the outrageous loopholes, they then eliminate some loopholes but simultaneously reduce the tax rates on the rich. When the public complains of too low tax rates for the rich, they raise the rates but quietly expand the loopholes. They play this shell game so the outcome is always a net gain for corporations and the rich.

Since Reagan and the advent of neoliberal tax policy, the corporate income tax share of total US government revenues has fallen from more than 20% to single digits well below 10%. Conversely, the payroll tax has doubled from 22% to more than 40%. A similar shift within the personal income tax, steadily around 40% of government revenues, has also occurred. The wealthy pay less a share of the total and the middle class pays more. Along the way, token concessions to the very low end of working poor are introduced, to give the appearance of fairness. But the middle class, the $38 to $91,000 nearly 100 million taxpaying households foot the bill for both the 1% and the bottom. This pattern was set in motion under Reagan. His proposed $752 billion in tax cuts in 1981-82 were adjusted in 1986, but the net outcome was more for the rich and their corporations. That pattern has continued under Clinton, Bush, Obama and now proposed under Trump.

To cover the shell game, an overlay of ideology covers up what’s going on. There’s the false argument that ‘tax cuts create jobs’, for which there’s no empirical evidence. There’s the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There’s the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes.

All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan—which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. US multinational corporations will begin again to divert profits, and investment, offshore; profits brought back untaxed will result in mergers and acquisitions, dividend payouts, and financial markets investment. No real jobs will be created in the US. The wealthy will continue to pump their savings into financial asset markets, causing further bubbles in stocks, exchange traded funds, bonds, derivatives and the like. The US economy will continue to slow and become more unstable financially. And there will be another financial crash and great recession—or worse. Only this time, the vast majority of US households—i.e. the middle and working classes—will be even worse off and more unable to weather the next economic storm.

Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting ‘shell games’, and is allowed to continue to foment its ideological cover up.

Dr. Jack Rasmus, October 2, 2017

Dr. Rasmus is author of the just published book, ‘Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depression’, Clarity Press, August 2017, and the previously published ‘Looting Greece: A New Financial Imperialism Emerges’, October 2016, and ‘Systemic Fragility in the Global Economy’, January 2016, also by Clarity press. More information is available at Claritypress.com/Rasmus. For more analyses on the Trump and neoliberal taxation, listen to Dr. Rasmus’s, September 29, 2017 radio show, Alternative Visions, on the Progressive Radio Network at http://alternativevisions.podbean.com. He blogs at jackrasmus.com and his website is http://kyklosproductions.com.

posted September 26, 2017
Will Central Banks Survive to Mid-21st Century?

By Jack Rasmus

The global economy has its eyes on the gathering of central bankers at Jackson Hole, Wyoming. In this article, Dr. Jack Rasmus comprehensively elaborates on the central banks’ nine-year experiment, its inevitable transformation, and ultimately, its survival during the 21st century.

After nearly nine years of a radical experiment injecting tens of trillions of dollars and dollar equivalent currency into their economies, the major central banks of the advanced economies – the Federal Reserve (Fed), Bank of England (BoE), European Central Bank (ECB), Bank of Japan (BoJ), and the People’s Bank of China (PBOC) – appear headed toward reversing the policy of massive liquidity injection they launched in 2008. The next phase of the process will likely become more apparent once central bankers gather for their annual meeting at Jackson Hole, Wyoming, on August 24-25, 2017.

Led by the US central bank, the Federal Reserve, central bankers have begun, or are about to begin, reducing their bloated balance sheets and raising benchmark interest rates. A fundamental shift in the global availability of credit is thus on the horizon. Whether the central banks can succeed in raising rates and reducing balance sheets without precipitating a major credit crunch – or even another historic credit crash as in 2008 that sends the global economy into another recession tailspin – is the prime question for the global economy in 2018 and beyond.1

Fundamental forces in recent decades associated with globalisation, rapidly changing financial structures worldwide, and accelerating technological change significantly reduced central banks’ ability to generate real investment and productivity gains – and therefore economic growth – after nine years of near zero and negative benchmark rates. The same changes and conditions may threaten a quicker than anticipated negative impact on investment and growth should rates rise much in the near term. In the increasingly globalised, financialised, and rapid technological change world of the 21st century, central bank interest rate policies are becoming less effective – and with that central banks policies less relevant.

The $25 Trillion Radical Experiment

For the past nine years the major central banks have embarked on an unprecedented experiment, injecting tens of trillions of dollars of liquidity into their banking systems and economies – by means of programmes of quantitative easing (QE), zero interest rates (ZIRP) and even negative rates (NIRP), among other more traditional means. The consequence has been the ballooning of their own balance sheets.

Officially, the balance sheets of the five major central banks today total conservatively $20 trillion. The Fed’s contribution is $4.5 trillion. The ECB’s just short of $4.9 trillion, but still rising as it continues its quantitative easing, QE, programme purchasing both government and private bonds. The BoJ’s is more than $5 trillion, while it too continues even more aggressively buying not only government and corporate bonds but private equities and other non-bond securities as well. The BoE’s total is heading toward $1 trillion, as it re-introduced another QE programme in the wake of the Brexit vote in June 2016. And the PBOC’s is estimated somewhere between $5 and $7 trillion – the result of liquidity injections supporting its state policy banks and entrusted loans to industries and local government construction projects.

Add in important “tier 2” central banks – like the Swiss National Bank, the Bank of Sweden, and central banks of India, Brazil, Russia and others – that in recent years have also significantly increased their balance sheets, global balance sheet totals easily exceed the $20 trillion of the five majors.

This historically unprecedented $25 trillion global liquidity injection by central banks worldwide has occurred within the context of a simultaneous general retreat from fiscal policy as well – at least in the form of government direct investment and spending.

The $20 trillion itself is actually an under-estimation of cumulative liquidity injections that have occurred since 2008. Although the Fed officially ended its QE3 programme at the end of 2013 when its total reached $4.5 trillion, it continued re-buying securities thereafter as some of its earlier bond purchases matured and “rolled off”. The repurchases kept its balance sheet level at $4.5 trillion. Bloomberg Research has estimated the Fed has purchased 2008 more than $7 trillion since 2008 when its repurchases are considered. Similar reinvestments by the other four major central banks would likely add even more “cumulative trillions” of liquidity injections since 2008 to their official $20 trillion balance sheet totals. The actual liquidity injected is therefore likely closer to $25 trillion.

Some argue the reinvestments shouldn’t be counted, since the maturing of bonds represent liquidity removed from the general economy. But that view disregards any money multiplier effects on private debt and debt leveraging. Even after maturing, the bonds leave a residue of debt-generation in the economy regardless whether the bonds are repaid. The liquidity might be removed from the economy, but its multiple of residue of debt and leverage remain.

This historically unprecedented $25 trillion global liquidity injection by central banks worldwide has occurred within the context of a simultaneous general retreat from fiscal policy as well – at least in the form of government direct investment and spending. With the exception of China perhaps, it has meant almost total reliance in the advanced economies on central bank monetary policy. Since 2008 central bank monetary policy of massive liquidity injection, generating super-low (and even negative) interest rates, has been the “only game in town”, as others have aptly described.2 Talk of renewed government investment and spending in the form of infrastructure investment has to date been only talk. Elites and policy makers in 2008 chose central bank monetary policy as the primary, and even sole, engine of economic recovery. And it has proven an engine running on low octane fuel, and now running out of gas.

Has the Nine-Year Experiment Failed?

In retrospect, monetary policy has not been very effective – whether considered in terms of generating real economic growth, achieving targets of price stability and employment, or even in terms of ensuring central banks’ primary functions of lender of last resort, money supply management, and banking system supervision.

If measured in terms of central banks’ primary functions, avowed targets, and monetary tools’ effectiveness, the past nine years of “monetary policy first and foremost” (with fiscal spending frozen or contracting) may reasonably be argued to have failed. The $20 trillion central bank monetary experiment was supposed to bail out the banks, generate employment, raise goods and services prices to at least 2% annually, restore financial stability, and return economic growth in GDP terms to pre-2008 crisis averages. But it has done none of the above – despite the $20-$25 trillion massive liquidity injections.

That in turn raises the question: should anyone believe central banks’ pending policy shift – i.e. to sell off and reduce their balance sheets and raise interest rates – will prove any more successful?

Both mainstream and business media generally concur that central banks policies since 2008 saved the global economy from another 1930s-like global depression. But an assessment of central banks’ performance in terms of their primary functions, in achieving their publicly declared targets and objectives, and in the effectiveness of their monetary policy tools suggest the track record of central banks has been far less than successful.

Should anyone believe central banks’ pending policy shift – i.e. to sell off and reduce their balance sheets and raise interest rates – will prove any more successful?

Lender of Last Resort Function. Clearly some of the biggest commercial banks were rescued after 2008. The bailout was enabled by means of a combination of programmes: i.e. central banks providing virtually zero interest loans and loan guarantees to banks, directly buying bad assets like subprimes from banks and private investors at above market rates, forcing bank consolidations, suspending normal accounting rules, establishing government run so-called “bad banks” to offload bad debt, and by temporary bank nationalisations. But the global banking system today is still over-loaded with a mountain of non-performing bank loans (NPLs) and other forms of private debt and remains therefore still quite fragile. Lender of last resort appears to have been successful in rescuing some large banks, but much of the rest of the banking system has been left mired in a swamp of bad debt.

Official data show NPLs in Europe and Japan officially at levels of $1-$2 trillion each. But much of it is concentrated dangerously in certain periphery economies and industries, which makes their NPLs potentially even more unstable. China’s NPLs are estimated around $6 trillion. NPLs in India are certainly hundreds of billions of dollars and perhaps even more, and are almost certainly officially underestimated. Then there’s Russia, Brazil, South Africa and other oil and commodity producing countries, the NPLs of which – like India’s – have been accelerating particularly rapidly since 2014 as a percent of GDP, according to the World Bank. Moreover, all that’s just official data, which grossly underestimates true totals of bad debt still on banks’ balance sheets, since many NPLs are conveniently reclassified by governments as “unrecognised stressed loans” or “restructured loans” in order to make the magnitude of the problem appear less serious.

In other words, the $25 trillion central bank liquidity experiment has left the global economy with $10 to $15 trillion in global NPLs. And that’s hardly an effective “lender of last resort” performance, notwithstanding the bailout of the highly visible big banks like Citigroup, Bank of America, Lloyds, RBS, and others. What remains is a massive bad bank loan debt global overhang of at least $10 trillion. And when high risk private debt in the form of corporate junk bonds, equity market margin debt, household and local government debt are considered as well, “non-performing” debt totals likely exceed $15 trillion worldwide at minimum. A truly effective lender of last resort function would have cleaned up at least some of this bad debt, but it hasn’t. Beneath the appearance of a successful post-2008 lender of last resort function lies massive evidence of central banks failure in their performance of this function.

The global economy thus remains highly fragile, despite the $25 trillion liquidity injections by central banks since 2008.3 The global banking system is permeated with “dry rot” in many locations. If financial stability is an avowed objective of central bank policy, the magnitude of global NPLs and other forms of non-performing private debt is ample testimony that central banks have failed the past nine years to restore stability of the financial system. Central banks have failed to implement pre-emptive lender of last resort programmes and have been content to respond in reactionary fashion as lender of last resort after crises have erupted.

Money Supply Management Function. The great liquidity experiment is not just a phenomenon of the post-2008 period. It has been underway for decades, beginning with the collapse of the Bretton Woods international monetary system in the 1970s which gave central banks, especially the Fed, the task of stabilising global currency exchange rates, ensuring price stability, and facilitating global trade. Neoliberal economic policies, first in the UK and USA then later elsewhere, further encouraged and justified central bank excess liquidity policies since the 1980s. The removal of restrictions on global money capital flows in the late 1980s helped precipitate financial instability events globally in the 1990s that further encouraged central bank excesses. So did technological change in the 1990s that linked and integrated financial markets and accelerated cross-country money velocities that made banking and financial systems increasingly prone to contagion effects. As financial asset markets’ bailouts grew in frequency and magnitude after 1990 in response to multiple sovereign debt crises, Asian currency instability, bursting tech bubbles, and subprime housing and derivatives credit booms, central banks provided ever more liquidity to the system. At the same time changing global financial structures gave rise to forms of non-money “inside” credit and technology increasingly spawned forms of digital money – over both of which central banks have had little influence as well. The 2008-09 global crash thus only accelerated these developments and trends already underway for decades.

Financialisation, technological change and globalisation thus have all served to reduce central banks’ ability to carry out their money supply function as well. Moreover, central banks themselves have exacerbated the trends and loss of control by embracing policies like QE, ZIRP, and NIRP which, in effect, have thrown more and more liquidity at crises – i.e. crises that were fundamentally created by excess liquidity, runaway debt, and leveraging in the first place. The solution to the last crisis – i.e. liquidity – would become the enabling cause of the next.

Banking Supervision Function. Central banks have been no more successful in performing their third major function of banking supervision. If banks were properly supervised the current volume of NPLs would not have been allowed to grow to excessive levels. Central banks would intervene and check financial asset price bubbles before they build and burst, threatening the entire credit system and collapsing the real economy. Limited initial efforts to expand bank supervision role of central banks following the 2008 crash – such as Dodd-Frank legislation in the US and the Financial Stability Authority in the UK – have been checked and are being dismantled step by step. In Japan, bureaucratic forces have effectively stymied more bank supervision for decades and little more was done after 2008. In Europe, supervision remains largely still with national central banks. Efforts to coordinate bank supervision across central banks with the Basel II and III agreements are moribund. And nowhere have effective regulatory measures been implemented to address the huge shadow banking system, rapidly expanding online banking, or the growing role of global multinational corporations’ financial departments, which have been transforming them into de facto private banks as well.

Even ardent central banker, Stanley Fischer, vice-chair of the Federal Reserve and head of its financial stability committee, has recently declared that efforts in the US to roll back even the limited measures of Dodd-Frank to expand Fed bank supervision as “very, very dangerous”.4

Never totally responsible for bank supervision – and only one institution among several tasked with supervising the private banks – central banks have never been very successful performing bank supervision. And now that function is again weakening across many locations of the global economy.

The Failure to Achieve 2% Price Stability. Failing functions of lender of last resort, money supply and credit control, and banking supervision are not the only indications of central banks’ failure in recent decades, and especially since 2008. No less indicative of failure has been central banks’ inability to achieve their own publicly declared targets.

Failure to achieve their 2% price stability target has been particularly evident. Since 2008 the economies of Europe and Japan in particular have repeatedly flirted with deflation in goods and services prices. When not actually deflating, prices have either stagnated or barely rose above zero. Even the US economy, which analysts herald as performing more robustly than the others, the Fed’s preferred Personal Consumption Expenditures, or PCE, price index has consistently failed the 2% threshold. And over the longer term has steadily drifted toward 1% annual rate or less. And in recent months it has been near zero. China’s prices have performed better, but that has been mostly due to periodic booms in its housing sector and its several fiscal stimulus programmes that have accompanied its central bank’s liquidity injections policy since 2011. Despite the $25 trillion, central banks have clearly failed to achieve anything near their declared 2% price targets.

Unemployment and GDP Growth. While the ECB, BoE, and BoJ limit their targeting to a 2% price stability rule (the PBOC to 3.5%), the US Fed officially maintains that employment and economic growth are also official targets of central bank monetary policy.

But it has been mostly lip-service. Since 2015 the Fed has touted the fact of the US economy’s unemployment rate has fallen to only 4.5%. But 4.5% is not the true US unemployment rate. It is the government’s official U-3 rate, which estimates only full time permanent employment. At least an equivalent percentage of the US labour force remains unemployed in the US economy when part time, temp, and contract work – i.e. underemployment – is considered. That’s the U-6 unemployment rate which the Fed conveniently ignores. The true numbers of jobless are even higher than the U-6, when workers who never entered or drop out of the labour force are considered, or when the millions more who chose permanent disability status in lieu of unemployment are added; or when the poorly estimated growing underground economy and undocumented immigrant labour force are considered. The true US unemployment rate remains over 10%, as it does as well in Europe.

If central banks’ $25 trillion liquidity injection are measured against restoring economic growth rates, the picture fares no better. Despite the Fed’s QE, ZIRP, and related programmes, the US economy has grown since 2008 at an annual rate, in GDP terms, averaging only 60% of its pre-crisis economic average. On three separate occasions since 2010 the US economy collapsed to near zero growth for one quarter. Europe’s GDP performance has been even worse, experiencing a serious double dip recession in 2011-13, and chronic growth rates well below 1% for most of the period that followed. And Japan’s growth has been even worse than Europe’s, experiencing no less than four recessions since 2008. Only China has performed better, but most likely due once again to its significant fiscal stimulus programme of 2008-09 and additional mini-fiscal stimulus thereafter and not due to monetary policy. In 2012 every dollar of liquidity provided by the PBOC generated an equivalent dollar of real GDP growth; today, that ratio is four dollars necessary to generate one dollar of real growth.

Monetary Policy Tools’ Effectiveness. With the 2008-09 global crash, it became almost immediately evident that central banks’ traditional monetary tools, like open market operations bond buying and reserve requirement adjustments, were seriously deficient for both bailing out banks and assisting economic recovery. New, more radical policy tools were introduced – specifically QE, ZIRP and then NIRP. How effective have the new tools been, one might ask?

While they reflated part of the banking system no doubt, the negative costs of the QE-ZIRP-NIRP have risen steadily since 2008. Much of the QE driven liquidity – especially direct buying of investors’ subprimes by the Fed and ECB-BOJ purchases of corporate bonds and equities – have been misdirected into financial asset markets rather than real investment, redistributed to shareholders, diverted offshore, or remain hoarded on corporate balance sheets. Both real productivity and real goods and services prices have stagnated, while financial asset prices have bubbled – especially in equities, high yield corporate bonds, and derivatives like exchange traded funds (ETFs). The nine years of near zero interest rates have devastated fixed income households’ savings. Retirees’ incomes in particular have stagnated and declined, while capital gains incomes of investors and speculators have accelerated. That does not portend well for sustained household consumption.

Central banks’ chronic low rates have been fuelling a new “debt bomb” worldwide, not just in the advanced economies but increasingly in emerging markets as well.

The long term QE-ZIRP has also been distorting various markets. Pension funds and insurance annuities have not recovered due to the chronic low rates of return, and are poorly positioned now for the next recession and crisis. Low rates have encouraged excessive corporate bond debt issuance, which has not flowed into real investment and productivity or wage incomes. In the US alone, corporate debt has exceeded $6 trillion in the past six years. Central banks’ chronic low rates have been fuelling a new “debt bomb” worldwide, not just in the advanced economies but increasingly in emerging markets as well. Not least, the low rate regime for nearly a decade has seriously neutralised interest rates as a potential central bank tool on hand when the next recession occurs within the next few years.

As the world’s primary central bank, the Fed has been desperate to raise rates in order to restore a policy tool cushion before the next crisis. Central banks in Europe and Japan are waiting to follow suit, to raise their rates and sell off their balance sheets, but will not do so until the Fed does more convincingly in the coming months. Due to new forces dominant in the 21st century, however, the Fed and other central banks may not be able to raise rates much higher (or significantly reduce balance sheets that will have the similar effect on rate hikes).

It is this writer’s view that the Fed will not be able to raise its benchmark federal funds rate above 2%, or push the longer term 10 year Treasury bond yield (rate) above 3%, without precipitating another major credit crisis. And if the Fed cannot, the other central banks will not as well. Monetary policy may be already neutralised for the next recession and crisis.

Central Banking’s Inevitable Transformation

Whether based on assessment of central banks’ primary functions, central bank targets, or effectiveness of new monetary tools, it is reasonable to argue that central banks have not been performing very well in recent decades, and especially not well in the post-2008 period. As the Fed and other central banks now consider reversing and reducing the consequence of post-2008 policies by trying to sell of balance sheets and raise rates, that major policy shift will most likely prove no more successful than policies pursued 2008-2017 and perhaps even less so.

Central banks have clearly not evolved apace with the rapid changes in globalisation, financial structures, and technology. The private banking and global financial system is changing far more rapidly than central banks have been able to adjust. Being essentially national institutions, they cannot adapt fast enough to the globalisation and economic and financial integration trends that are accelerating. Manipulation of national interest rates by central banks are thus becoming increasingly ineffective. Expanding, highly liquid and integrated global financial markets, proliferating new financial securities, new forms of digital money and inside credit beyond their influence, virtually unregulated (and perhaps unregulatable) global shadow banking institutions that now control more assets than commercial banks, fast-trading, dark pool investing, and coming artificial intelligence driven passive investing – all represent significant challenges to central banks’ functions, targets, and tools effectiveness. Their response has been simply to thrown more money and ever more liquidity at crises as they multiply and magnify. And in the process they lay the groundwork for still more speculative debt and leverage, more financial asset bubbles, and more subsequent financial instability to follow.

The problem is not only technological or economic. Accompanying the changes has been the rise of a new global finance capital elite – i.e. the human agency driving changes both economically and ensuring those changes are enabled politically.

Moreover, the problem is not only technological or economic. Accompanying the changes has been the rise of a new global finance capital elite – i.e. the human agency driving changes both economically and ensuring those changes are enabled politically. A couple hundred thousand super-wealthy individuals and investors who are transforming not only the global banking-financial system but who are steadily deepening their influence within the state and governments of the advanced economies as well their economies. They have been bending traditional government institutions – legislatures, executive agencies, and even courts – to their collective will. Central banks are being influenced and affected no less so.

US economic policy today is largely determined by members of this financial elite. Despite this elite’s central role in causing and precipitating the last financial crash, none have gone to jail and their representatives now sit firmly in control of US levers of economic policy. The US Treasury, the New York Fed, and the National Economic Council are run by former Goldman Sachers Steve Mnuchin, Bill Dudley, and Gary Cohn. It is almost certain Cohn will replace current Fed chair Janet Yellen when her term expires next February, thus further solidifying that control. President Trump is himself a billionaire real estate speculator and member of this new finance elite, as are most of the private advisors with whom he communicates regularly and who have a swinging door access to the White House.

The various economic developments, global system restructuring, technological changes and political system entrenchment of the new elite thus render it highly likely that central banks will perform even more poorly in the decades to come – whether that performance is measured in terms of functions, targets, tools, or ensuring financial stability. That failure will drive necessary basic changes in central banking in the coming decades. Central banks will have to undergo major structural change, develop new targets and tools, and become more directly accountable to the public interest than ever before if they are to survive by mid-century. There will always be central banking in some form. But central banks as we now know them will certainly no longer exist.

About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes? Monetary Policy and the Next Depression”, Clarity Press, July 2017, and the previously published “Systemic Fragility in the Global Economy”, also by Clarity Press, January 2016. For more information: http://ClarityPress.com/RasmusIII.html. He teaches economics at St. Marys College in Moraga, California, and hosts the radio show, Alternative Visions, on the Progressive Radio Network. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus.

References

1. This is one of several main themes addressed by the author in the just published book: Jack Rasmus, “Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression”, Clarity Press, July 2017
2. See Mohammed El-Erian, “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse”, Random House, 2016.
3. For an assessment of the “system-wide” fragility as of 2015, see Jack Rasmus, “Systemic Fragility in the Global Economy”, Clarity Press, January 2016.
4. Financial Times, August 19, 2017, p.R3.

posted September 19, 2017
Update on the Greek Debt Crisis–Why Syriza Continues to Lose

This past August marked the second anniversary of the Greek debt crisis and the third major piling on of debt on Greece in August 2015 by the Eurozone ‘Troika’ of European Commission, European Central Bank, and the IMF. That 2015 third debt deal added $86 billion to the previous $230 billion imposed on Greece—all to be paid by various austerity measures squeezing Greek workers, taxpayers, retirees, and small businesses demanded by the Troika and their northern Euro bankers sitting behind it.
Studies by German academic institutions showed that more than 95% of the debt repayments by Greece to the Troika have ended up in Euro bankers’ hands.
But the third debt deal of August 2015, which extends another year to August 2018, was not the end. Every time a major multi-billion dollar interest payment from Greece was due to the Troika and their bankers, still more austerity was piled on the $83 billion August 2015 deal. The Troika forced Greece had to introduce even more austerity in the summer of 2016, and again still more this past summer 2017, to pay for the deal.
Last month Syriza and its ‘rump’ leadership—most of its militant elements were purged by Syriza’s leader, Alex Tsipras, following the August 2015 debt deal—hailed as some kind of significant achievement that the private banks and markets were now willing to directly lend money to Greece once again. Instead of borrowing still more from the Troika—the bankers representatives—Greece now was able once again to borrow and owe still more to the private bankers instead. Pile on more private debt instead of Troika debt. What an achievement!
Greece’s 2012 second debt deal borrowed $154 billion from the Troika, which Greece then had to pay, according to the debt terms, to the private bankers, hedge funds and speculators’ which had accumulated over preceding years and the first debt crisis of 2010. So the Troika simply fronted for the bankers and speculators in the 2nd and 3rd debt deals. Greece paid the Troika and it paid the bankers. But now, as of 2017, Syriza and Greece can indebt themselves once again directly to the bankers by borrowing in public markets.
What it shows is that supra-state institutions like the Troika function as debt collectors for the bankers and shadow bankers when the latter cannot collect their payments on their own. This is the essence of the new, 21st century form of financial imperialism. The Supra-State prefers weaker national governments to indebt themselves directly to the banks and squeeze their own populace with Austerity whenever they can to make the payments. But the Supra-State will step in if necessary to play debt collector if and when popular governments get control of their governments and balk at onerous debt repayments.
Syriza came to power in January 2015 as one of those popularly elected governments intent on adjusting the terms of debt repayment. But after a tragic, comedy of errors negotiation effort, capitulated totally to the Troika’s negotiators after only seven months.
The capitulation by Syriza’s leader, Alex Tsipras, in July 2015 was doubly tragic in that he had just put to a vote to the Greek people a week beforehand whether to reject the Troika’s deal and its deeper austerity demands. And the Greek popular vote called for a rejection of the Troika’s terms. But Tsipras and Syriza rejected their own supporters, not the Troika, and capitulated totally to Troika terms.
The August 2015 3rd debt deal quickly thereafter signed by Syriza-Tsipras was so onerous—and the Tsipras-Syriza treachery so odious—that it left opposition and popular resistance temporarily immobilized. That of course was the Troika’s strategic objective. Together with Tsipras they then pushed through their $83 billion deal, while Tsipras simultaneously purged the Syriza party to rid it of elements refusing to accept the deal. Polls showed at that time, in August-September 2015, that 70% of the Greek people opposed the deal and considered it even worse than the former two debt agreements of 2010 and 2012. Other polls showed 79% rejected Tsipras himself.
To remain in power, Tsipras immediately called new Parliamentary elections, blocking with the pro-Troika parties and against former Syriza dissidents, in order to push through the Troika’s $83 billion deal. This week, September 20, 2017 marks the two year anniversary of that purge and election that solidified Troika and Euro banker control over the Syriza party—a party that once dared to challenge it and the Eurozone’s neoliberal policy regime.
The meteoric rise, capitulation, collapse, and aftermath ‘right-shift’ of Syriza raises fundamental questions and lessons still today. strategies by governments and states that make a social-democratic turn in response to popular uprisings, and then attempt to confront more powerful neoliberal capitalist regimes that retain control their currencies, their banking systems, and their budgets as in the case of Greece.
The following is an excerpt from the concluding chapter of this writer’s October 2016 book, ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, which questioned strategies that attempted to resurrect 20th century forms of social-democracy in the 21st century world of supra-State neoliberal regimes. It summarizes Syriza’s ‘fundamental error’—a naïve belief that elements of European social democracy would rally around it and together they—i.e. resurgent social democracy and Syriza Greece—would successfully outmaneuver the German-banker-Troika dominated Euro neoliberal regime that solidified its power with the 1999 Euro currency reforms.
Syriza and Tsipras continue to employ the same error, it appears, hoping to be rescued by other Euro regime leaders instead of relying on the Greek people. Tsipras-Syriza recently invited the new banker-president of France, Emmanuel Macron, who this past month visited Athens. Their meeting suggests Tsipras and the rump Syriza still don’t understand why they were so thoroughly defeated by the Troika in 2015, and have been consistently pushed even further into austerity and retreat over the past two years. But perhaps it no longer matters. Polls show Tsipras and the rump Syriza trailing their political opponents by more than two to one in elections set to occur in 2018.
EXCERPT from ‘Looting Greece’, Chapter 10, ‘Why the Troika Prevailed’.
Syriza’s Fundamental Error

To have succeeded in negotiations with the Troika, Syriza would have had to achieve one or more of the following— expand the space for fiscal spending on its domestic economy, end the dominance and control of the ECB by the German coalition, restore Greece’s central bank independence from the ECB, or end the control of its own Greek private banking system from northern Europe core banks. None of these objectives could have been achieved by Syriza alone. Syriza’s grand error, however, was to think that it could rally the remnants of European social democracy to its side and support and together have achieved these goals—especially the expanding of space for domestic fiscal investment. It was Syriza’s fundamental strategic miscalculation to think it could rally this support and thereby create an effective counter to the German coalition’s dominant influence within the Troika.

Syriza went into the fight with the Troika with a Greek central bank that was the appendage, even agent, of the ECB in Greece, and with a private banking system in Greece that was primarily an extension of Euro banks outside Greece. Syriza struggled to create some space for fiscal stimulus within the Troika imposed debt deal, but it was thoroughly rebuffed by the Troika in that effort. It sought to launch a new policy throughout the Eurozone targeting fiscal investment, from which it might benefit as well. But just as the ECB was thwarted by German-core northern Euro alliance countries, the German coalition also successfully prevented efforts to promote fiscal stimulus by the EC as well. The Troika-German coalition had been, and continues to be, successful in preventing even much stronger members states in France and Italy from exceeding Eurozone fiscal stimulus rules. The dominant Troika German faction was not about to let Greece prevail and restore fiscal stimulus, therefore, when France and Italy were not. Greece was not only blocked from launching a Euro-wide fiscal investment spending policy; it was forced to introduce ‘reverse fiscal spending’ in the form of austerity.

Syriza’s insistence on remaining in the Euro system meant Grexit was never an option. That in turn meant Greece would not have an independent central bank providing liquidity when needed to its banking system. With ECB control over the currency and therefore liquidity, the ECB could reduce or turn on or off the money flow to Greece’s central bank and thus its entire private banking system at will—which it did repeatedly at key moments during the 2015 debt crisis to influence negotiations.

As one member of the Syriza party’s central committee reflected on the weeks leading up to the July 5 capitulation, “The European Central Bank had already begun to carry out its threats, closing down the country’s banking system”.

The ECB had actually begun turning the economic screws on Syriza well before the final weeks preceding the referendum: It refused to release interest on Greek bonds it owed under the old debt agreement to Greece from the outset of negotiations. It refused to accept Greek government bonds as collateral necessary for Greek central bank support of Greece’s private banks. It doled out Emergency Lending Assistance, ELA, funds in amounts just enough to keep Greek banks from imploding from March to June and constantly threatened to withhold those same ELA funds when Troika negotiators periodically demanded more austerity concessions from Greece. And it pressured Greece not to impose meaningful controls on bank withdrawals and capital flight during negotiations, even as those withdrawals and money flowing out of the country was creating a slow motion train wreck of the banking system itself. The ECB, in other words, was engineering a staged collapse of Greece’s banking system, and yet Syriza refused to implement any possible policy or strategy for preventing or impeding it.

For a more detailed analysis of the respective strategies and tactics of Syriza and the Troika in 2015 and after, and the role played by individual leaders and organizations, see the concluding chapter of Jack Rasmus, ‘Looting Greece: A New Financial Imperialism Emerges’, Clarity Press, October 2016, pp. 231-57. Dr. Rasmus is also author of the recently published, ‘Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depression’, Clarity Press, August 2017.

posted September 16, 2017
Review of ‘Central Bankers at the End of Their Ropes?’, Clarity Press, August 2017, by David Baker

Jack Rasmus has written a series of important books about the global economy; the critical question is, important or not, why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky who tells us that we face two existential threats, nuclear holocaust and the environmental collapse called climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing back real democracy from the shadow of the empty political theater which we currently endure; but to bring back real democracy, we need to understand what destroyed it and what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus; his book, Central Bankers on the Ropes, examines the fundamental role of central banks in our new, savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen et al but it accurately describes neoliberalism’s impact on the world; the lower 90% are collateral damage in the service of the 1%. But the central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial industry which in turn have been used to prop up the stock and bond markets world wide; offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are in effect a conduit straight to the one percent; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Jack Rasmus is excellent at peeling away the layers of economic deceit to demonstrate that the rivers of cash pouring out of the central banks does not bring prosperity to the lower 90%; the idea that prosperity is even trickling down is empty ideology. The way in which he peels away the layers of deceit is by examining each of the central banks, in turn, The Fed, The Bank of Japan, the EU Central Bank, and the Central Bank of China, and determines which if any is actually achieving their publicly announced goals. These goals include inflation at 2%; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns, and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are and ultimately after peeling away all the layers of deception, their real goal to help the one per cent, by propping up stocks and bonds, providing capital to offshore jobs as well as gamble in financial assets.

The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals. It has fallen into the chronic subsidization trap of financial institutions.

It is this paradigm shift, the chronic subsidization of financial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.” Historically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the one per cent were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in world wide debt through the extension of credit then the inevitable collapse becomes greater; but if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising oceans of debt [over $20 trillion] and the central banks have no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the US out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend”. For a progressive, you tax based upon ability and spend based upon need; and, during the 1950’s and 1960’s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy.

Monetary policy is economic policy driven by the central banks who in turn serve the one percent. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low or interest free loans as well as direct buys of stocks and bonds and raising and lowering interest rates. What Jack Rasmus provides is the insight that the one percent are not willing to wait for prosperity to “trickle up” from the lower 90%; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90% can wait, apparently forever.

Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the US during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme; they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Jack Rasmus concludes with a proposed US constitutional amendment that would place The Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of The Fed the raising of household disposable incomes. There is a body of scholarly work that demonstrates that the US Constitution was designed to protect investor rights [see e.g. An Economic Interpretation of the US Constitution] so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

David Baker

posted September 16, 2017
Review of ‘Central Bankers at the End of Their Ropes?’, Clarity Press, August 2017, by David Baker

Jack Rasmus has written a series of important books about the global economy; the critical question is, important or not, why would the general reader make the effort required to read any of them? The best answer comes from Noam Chomsky who tells us that we face two existential threats, nuclear holocaust and the environmental collapse called climate change. Those threats to tens of millions of people worldwide can only be mitigated by bringing back real democracy from the shadow of the empty political theater which we currently endure; but to bring back real democracy, we need to understand what destroyed it and what destroyed it is the collection of economic engines called neoliberalism. The most reliable guide to understanding neoliberalism is Jack Rasmus; his book, Central Bankers on the Ropes, examines the fundamental role of central banks in our new, savage global economy.

The word savage would puzzle Volker, Greenspan, Bernake, Yellen et al but it

accurately describes neoliberalism’s impact on the world; the lower 90% are collateral damage in the service of the 1%. But the central banks have always served rulings elites; kings and princes historically have financed their endless wars with the help of the institutional ancestors of central banks; in more modern times, central banks provide trillions of dollars in cash, in various forms, to the financial industry which in turn have been used to prop up the stock and bond markets world wide; offshore jobs, gamble in financial instruments, and pour out dividends. The central banks are in effect a conduit straight to the one percent; as fast as legal tender is electronically printed, it ends up hoarded in their accounts, where it stays.

Jack Rasmus is excellent at peeling away the layers of economic deceit to demonstrate that the rivers of cash pouring out of the central banks does not bring prosperity to the lower 90%; the idea that prosperity is even trickling down is empty ideology. The way in which he peels away the layers of deceit is by examining each of the central banks, in turn, The Fed, The Bank of Japan, the EU Central Bank, and the Central Bank of China, and determines which if any is actually achieving their publicly announced goals. These goals include inflation at 2%; interest rate stabilization; money supply stabilization; bailing out major financial institutions during economic downturns, and increasing GDP.

With the exception of China, each central bank has failed in all of their stated goals. Since their publicly stated goals are not being achieved, we have to examine their actual outcomes to determine what their real goals are and ultimately after peeling away all the layers of deception, their real goal to help the one per cent, by propping up stocks and bonds, providing capital to offshore jobs as well as gamble in financial assets.

The case of China is of particular importance because prior to the 2008 collapse, China pulled out of economic downturns relatively quickly and easily and did achieve its announced goal of significant increases in GDP. What happened after 2008, is that China changed its mix of monetary and fiscal policy, conventional banking, and strict restrictions on capital flows. But because China wanted its currency used as a major trading currency, it was pushed by the rest of the world banking community to open up its economy to capital flows and allow non conventional banking, i.e. shadow banking to operate within in its borders. This was a huge mistake; once China made this shift in policy, it could no longer pull itself out of downturns easily and it is finding it harder and harder to maintain its GDP goals. It has fallen into the chronic subsidization trap of financial institutions.

It is this paradigm shift, the chronic subsidization of financial institutions by central banks world wide that is the key finding; it is why central bankers are “on the ropes.” Historically, one of the major roles of central banks has been to bail out large financial institutions when they fail. Which is exactly what the Fed and others did during the 2008-2009 collapse. But by 2010, the financial institutions were stabilized but the trillions of liquidity injections, quantitative easing and low or no interest loans, continued. Why? Because the banking industry and the one per cent were making so much money from what became chronic subsidization, a subsidization that continues to this day. And here is the problem. The central banks know that a serious downturn is coming; if they continue to generate trillions of dollars in world wide debt through the extension of credit then the inevitable collapse becomes greater; but if they stop, they also risk a huge collapse since the rise in financial assets worldwide has nothing to do with the real economy but is propped up by the central banks.

Rasmus also documents another element of the central banks dilemma; they can’t raise interest rates. The central banks want to raise interest rates, for many reasons but one important reason is because it allows them to lower rates when the inevitable financial bust comes. If they can’t raise rates now, they can’t lower them when the bust comes; likewise, if they can’t stop the cash distributions now, they have nothing left in their monetary weapons to use when the crash comes. Over and over again, throughout history, it was the raising of interest rates by central banks that plunged the world into either recession or depression. So we are truly looking at the abyss since the coming collapse will be more violent, due to the rising oceans of debt [over $20 trillion] and the central banks have no monetary weapons left, either cash or lowering interest rates.

Which brings me to the heart of the debate, what in the austere language of economics is called Fiscal Policy versus Monetary Policy. Progressive fiscal policy is what finally dragged the US out of the Great Depression; it is what Ronald Regan sneered at as “Tax and Spend”. For a progressive, you tax based upon ability and spend based upon need; and, during the 1950’s and 1960’s, the progressive tax and spend policies produced prosperity for all. If you think about it, taxes are the only way to generate capital without falling into the credit/debt trap. Not so with monetary policy.

Monetary policy is economic policy driven by the central banks who in turn serve the one percent. There are many tools that can be used in Monetary Policy, the most well known of which are electronically printing low or interest free loans as well as direct buys of stocks and bonds and raising and lowering interest rates. What Jack Rasmus provides is the insight that the one percent are not willing to wait for prosperity to “trickle up” from the lower 90%; they want instant cash now, as fast as the Fed can electronically print it. Even if it brings down the entire world economy. The lower 90% can wait, apparently forever.

Once again, China did provide an interesting contrast prior to 2008; it had a true fiscal policy, not the fiscal austerity that monetary policy demands. China made and continues to make enormous expenditures on infrastructure, on a scale close to the fiscal policies of the US during WWII. In sharp contrast, none of the other central banks or economies examined engage in this kind of fiscal policy; the case of the EU is quite extreme; they are prohibited by their enabling legislation from engaging in any fiscal policy other than fiscal austerity.

Extraordinary dangers require extraordinary measures. Jack Rasmus concludes with a proposed US constitutional amendment that would place The Fed under strict democratic controls such as nationalizing all banking, prohibiting shadow banking and casino capitalism, placing strict controls on capital flows, and making the explicit goal of The Fed the raising of household disposable incomes. There is a body of scholarly work that demonstrates that the US Constitution was designed to protect investor rights [see e.g. An Economic Interpretation of the US Constitution] so why not amend it and finally give the people control over their economy? One criticism of this proposal is that it really doesn’t go far enough; doesn’t global capitalism require global controls? Thomas Piketty in his groundbreaking work, Capital, proposes just that.

David Baker

posted August 29, 2017
Central Banks as Engines of Income Inequality & Financial Crises

My just published book, ‘Central Bankers at the End of Their Rope?: Monetary Policy and the Coming Depression’, Clarity Press, July 2017, is now available for immediate purchase on Amazon.com, as well as from this blog. (see book icon)

The following article, ‘Central Banks As Engines of Income Inequality and Financial Crisis’, summarizing some of the book’s themes, appeared in Z Magazine, September 1, 2017:

“This September 2017 marks the ninth year since the last major financial crisis erupted in 2008. In that crisis, investment banks Bear Stearns and Lehman Brothers collapsed. So did Fannie Mae and Freddie Mac, the quasi-government mortgage agencies that were then bailed out at the last minute by a $300 billion U.S. Treasury money injection. Washington Mutual and Indymac banks, the brokerage Merrill Lynch, and scores of other banks and shadow banks went under, were forced-merged by the government, or were consolidated or restructured. The finance arms of General Motors and General Electric were also bailed out, as were the auto companies themselves, to the tune of more than $100 billion. Then there was the insurance giant, AIG, that speculated in derivatives and ultimately required more than $200 billion in bailout funds. The “too big too fail” mega banks—Citigroup and Bank of America—were technically bankrupt in 2008 but were bailed out at a cost of more than $300 billion. And all that was only in the U.S. Banks in Europe and elsewhere also imploded or recorded huge losses. The U.S. central bank, the Federal Reserve, helped bail them out as well by providing more than a trillion U.S. dollars in loans and swaps to Europe’s banking system.

Although the crisis at the time was deeply influenced by the crash of residential housing in the U.S., few U.S. homeowners were bailed out. A mere $25 billion was provided to rescue homeowners, and most of that went to bank mortgage servicing companies who were supposed to refinance their mortgages but didn’t. More than $10 trillion, conservatively was provided to financial institutions, banks and shadow banks, and big corporations, and foreign banks by U.S. policy makers in the government and at the U.S. central bank, the Federal Reserve.
The Federal Reserve Bank as Bailout Manager

A common misunderstanding is that the banking system bailouts were managed by Congress passing what was called the Trouble Asset Relief Program, TARP. Introduced in October 2008, TARP provided the U.S. Treasury a $750 billion blank check with which to bail out the banks. But less than half of the $750 billion was actually spent. By early 2009 the remainder was returned to the U.S. Treasury. So Congress didn’t actually bail out the big banks. The bailout was engineered by the U.S. central bank, the Federal Reserve, in coordination with the main European central banks—the Bank of England, European Central Bank, and the Bank of Japan.

The central banks bailed out the big banks. That has always been the primary function of central banks. That’s why they were created in the first place. It’s called the lender of last resort function. Whenever there’s a general banking crisis, which occurs periodically in all capitalist economies, the central bank simply prints the money (electronically today) and injects it free of charge into the failing private banks, to fill up and restore the private banks’ massive losses that occur in the case of banking crashes. Having a central bank, with operations little understood by the general public, is a convenient way for capitalism to rescue its banks without having to have capitalist politicians—i.e. in Congress and the Executive—do so more directly and more publicly.

From Bailouts to Perpetual Bank Subsidization

But central banks since 2008 have evolved toward a new primary function, no longer just bailing out the banks when they get in trouble, but providing a permanent regime of subsidization of the banks even when they’re not in trouble. The latter function has become a permanent feature of capitalist global banking.

With the Fed in the lead, in 2008-09 the central banks of the advanced capitalist economies simply created money—i.e. dollars, pounds, euros and yen—and allowed banks and investors to borrow it virtually free. But free money, in the form of near zero interest, was still not the full picture. The Fed and other central banks as well as other institutional and even private investors, said: “We will also buy up your bad assets that virtually collapsed in price as a result of the 2008-09 crash.” This direct buying of bad mortgage and government bonds—and in Europe and Japan also buying of corporate bonds and even company stocks—was called “quantitative easing,” or QE for short. And what did the central banks pay for the assets they bought from banks and investors, many of which were worth as low as 15 cents on the dollar? No one knows, because the Fed to this day has kept secret how much they overpaid for the bad assets. But the QE and the near zero interest rates have continued for nine years in the U.S. and the UK; and, in 2015 QE was accelerated even faster in Europe; and since 2014 faster still in Japan. And even in China after 2015, when its stock market bubble burst, its central bank began providing trillions to prop up financial markets.

In the course of the past nine years, the private capitalist banking system globally has become addicted to the free money provided by central banks.

Private banks cannot earn profits on their own any longer, it appears. They are increasingly dependent on the virtually free money from their central bankers. This is a fundamental change in the global capitalist economic system in the past decade—a change which is having historic implications for growing income inequality worldwide in the advanced economies as well as for another inevitable global financial crisis that will almost certainly erupt within the next decade.

The $25 Trillion Banking System Bailout

In the U.S., the Fed’s QE officially purchased $4.5 trillion in bad assets between 2009 and 2014. But it was actually more, perhaps as much as $7 trillion, because, as some of the Fed-purchased bonds matured and were paid off, the Fed reinvested the money once again to maintain the $4.5 trillion. The 2008-09 crash was global, so the Fed was not the only central bank player doing this. The European Central Bank, as of 2017, has bailed out European banks to the tune of $4.9 trillion so far. The Bank of England, another $.7 trillion. And the Bank of Japan, as of mid-2017, more than $5 trillion. The People’s Bank of China, PBOC, did not institute formal QE programs, but after 2011 it too started injecting trillions of dollar in equivalent yuan, to prevent its private sector from defaulting on bank loans, to bail out its local governments that over invested in real estate, and to stop the collapse of its stock markets in 2015-16. PBOC bailouts to date amount to around $6 trillion. And the totals today continue to rise for all, as the UK, Europe, Japan, and China continue their central bank engineered bailout binge, with Europe and Japan actually accelerating their QE programs.

Contrary to many critiques of rising debt levels since 2009, it is not the level of debt itself that is the problem and the harbinger of the next financial crash. It is the inability to pay for the debt, the principal and interest on it, when the next recession occurs. As long as economies are growing, businesses and households and even government can finance the debt, i.e. continue to pay the principal and interest some way. But when recessions occur, which they always do under capitalism, that ability to keep paying the debt collapses. Business revenues and profits fall, employment rises and wages decline, and government tax collections slow. So the income with which to pay the principal and interest collapses. Unable to make payments on principal and or interest, defaults on past-incurred debt occur. Prices for financial assets—stocks, bonds, etc.—then collapse even faster and further. Businesses and banks go bankrupt, and the crisis deepens, accelerating on itself in a vicious downward spiral as the financial system collapses and drags the non-financial economy down with it—and as the latter in turn exacerbates the financial crisis even further.

In other words, the private corporate debt at the heart of the last crisis in 2007-08 has not been removed from the global economy. It has only been shifted—from the business sector to the central banks. And this central bank debt has nothing to do with national governments’ total debt. That’s a completely additional amount of government debt. So too is consumer household debt additional, which, in the U.S, is more than $1 trillion each for student loans, auto loans, credit cards, and multi-trillions more for mortgage loans. Moreover, in recent months defaults on student, auto and credit card debt have begun to rise again, already the highest in the last four years in the U.S.

It’s also not quite correct to say that the $25 trillion central banks’ injection of money into the banking system since 2008 has successfully bailed out the private banks globally. Despite the total, there are still more than $10-$15 trillion in what are called non-performing bank loans worldwide. Most is concentrated in Europe and Asia—both of which are likely the locus of the next global financial crisis. And that next crisis is coming.

In the interim, the central banks’ free money and bank subsidization machine is generating a fundamental dual problem within the global economy. It is feeding the trend toward income inequality and it is helping fuel financial asset bubbles worldwide that will eventually converge and then burst, precipitating the next global financial crash.

The Fed as Engine of Income Inequality

In the U.S., the central bank’s $4.5 trillion (really $7 trillion) balance sheet—and the 9 years of free money at 0.1% to 0.25% rates provided to banks by the Fed— have been at the heart of a massive income shift to U.S. investors, businesses, and the wealthiest 1% households.

Where did all this money go? The lie fed to the public by politicians, businesses, and the media was that this massive free money injection was necessary to get the economy going again. The trillions would jump-start real investment that would create jobs, incomes consumption, and consequently, economic growth or GDP. But that’s not where it went, and the U.S. economy experienced the weakest nine-year post-recession recovery on record. Little of the money injection financed real investment—i.e. in equipment, buildings, structures, machinery, inventories, etc. that creates jobs and wage incomes. Instead, investors got QE bailouts and banks borrowed the free money from the Fed and then loaned it out at higher interest rates to U.S. multinational companies who invested it abroad in emerging markets; or they loaned it to shadow bankers and foreign bankers who speculated in financial asset markets like stocks, junk bonds, derivatives, foreign exchange, etc.; or the banks borrowed and invested it themselves in financial securities markets; or they just hoarded the cash on their own bank balance sheets; or the banks borrowed the money at 0.1 and then redeposited it at the central bank, which paid them 0.25%, for a 0.15% profit for doing nothing.

This massive money injection, in other words, was then put to work in financial markets. Behind the 9- year bubbles in stock and bond markets (and derivatives and currency exchange markets as well) is the massive $7 to $10 trillion Federal Reserve bank money injections. And how high have the stock-bond bubbles grown? The Dow Jones U.S. stock market has risen from a low in 2009 of 6,500 to almost 22,000 today. The U.S. Nasdaq tech-heavy market has surpassed the 2001 peak 5,000 before the tech bust, now more than 6,000. The S&P 500 has also more than tripled. Business profits have also tripled, Bond market prices have similarly accelerated. Free money in the trillions $ from the central bank and trillions more in profits from financial speculation. But that’s not all. The 9- year near-zero rates from the Fed have also enabled corporations to issue corporate bonds by more than $5 trillion in just the last 5 years.

So how do these financial asset market bubbles translate into historic levels of income inequality, one might ask? The wealthiest 1%—i.e. the investor class—cash in their stocks and bonds when the bubbles escalate. The corporations that have raised $5 trillion in new bonds and seen their profits triple in value then take that massive $6 to $9 trillion cash hoard to buy back their stocks and to issue record level of dividends to their shareholders. Nearly $6 trillion of the profits-bond raised cash was redistributed in the U.S. alone since 2010 to shareholders in the form of stock buybacks and dividends payouts. The 1% get $6 trillion or more distributed to them and the corporations and banks sit on the rest in the form of retained cash. Or send it offshore into their foreign subsidiaries in order to avoid paying taxes in the US.

Congress and Presidents play a role in the process, as well. Shareholders get to keep more of the $6 trillion plus distributed to them by passing tax cut legislation that sharply cuts capital gains and dividend income. Corporations also gain by keeping more profits after-tax, as a result of corporate tax cuts—which they then distribute to their shareholders via the buybacks and dividends.

The Congress and President sit near the end of the distribution chain, enabling through tax cuts the 1% and shareholders to keep more of their distributed income. But it is the central bank, the Fed, which sits at the beginning of the process. It provides the initial free money that, when borrowed and reinvested in stock markets, becomes the major driver of the stock price bubble. The Fed’s free money also drives down interest rates to near zero, allowing corporations to raise the $5 trillion more from issuing new corporate bonds. Without the Fed and the near zero rates, there would be nowhere near $5 trillion raised from new corporate bonds, to distribute to shareholders as a consequence of buybacks and dividends. Furthermore, without the Fed and QE programs, investors would not have the excess money to invest in stocks and bonds (and derivatives and currencies) that drive up stock and bond prices to bubble levels before investors cash in on those bubble level prices.

The Fed, as well as other central banks, are therefore the originating source of the runaway income inequality that has plagued the U.S. since late 1970s.

Income inequality is a function of two things. On the one hand, accelerating capital incomes of the wealthiest 1% households are largely a result of buybacks and dividend payouts. Such capital gains incomes constitute nearly 100 percent of the wealthiest 1%’s total income. On the other, income inequality is also a consequence of stagnating or declining wage incomes of non-investor households. Inequality may therefore rise if capital gains drive capital incomes higher; or may rise if wage incomes stagnate or decline; or may rise doubly fast if capital incomes rise while wage incomes stagnate or decline. Since 2000 both forces have been in effect: capital incomes of the 1% have escalated while wage incomes for 80 % of households have stagnated or declined.
Mainstream economists tend to focus on the stagnation of wage incomes, which are due to multiple causes like de-unionization, the rise of temp-part-time-contract employment, free trade treaties’ wage depressing effects, failure to adjust minimum wages, high wage manufacturing and tech industries offshoring of investment and jobs, cost shifting of healthcare from employers to workers, reduction in retirement benefits, shifting tax burdens to working and middle classes, etc. But economists don’t adequately explain why capital incomes have been accelerating so fast. Perhaps it is because mainstream economists simply don’t understand financial markets and investment very well; or perhaps some do, and just don’t want to go there and criticize runaway capital incomes.

Central Banks as Source of Financial Instability

As a result of Fed and other central banks’ money injections, underway now for decades, and especially since 2008, there is a mountain of cash—virtually trillions of dollars—sitting on the sidelines globally in the hands of professional investors and their shadow bank institutions. That money is looking for quick, speculative capital gains profit opportunities. That means seeking reinvestment short term in financial asset markets worldwide. The mountain of cash moves in and out of these global financial markets, creating and bursting bubbles as its shifts and moves. Periodically a major bubble bursts—like China’s stock market in 2015. Or a housing speculation bubble here or there. Or junk bonds or consumer debt in the U.S. Or the bubble in U.S. stocks which is nearing its limit.

A new global finance capital elite has arisen in recent decades, having directly benefited from and controlling this mountain of cash. There are about 200,000 of them worldwide, mostly concentrated in the U.S. and UK, some in Europe, but with numbers rising rapidly in Asia as well. They now control more investible assets than all the traditional commercial banks combined. Their preferred institutional investment vehicles are the global shadow banking system and their preferred investment targets are the global system of highly liquid financial asset markets. This system of new finance capitalists, their institutions, and their preferred markets is the real definition of what is meant by the financialization of the global economy. That financialization is generating ever more instability in the global capitalist system as it increasingly diverts trillions of dollars, euros, etc., from investing in job creating real things to investing in financial assets worldwide. That’s why global productivity and growth are progressively slowing, putting even more downward pressure on wage incomes. And central bank policies are a major contributor to this new trend in global capitalism in the 21st century.

Will the Central Banks Retreat?

In 2017, a minority of policymakers in the Fed and other central banks have begun to recognize the fundamental danger to their capitalist system itself from their providing free money and QE bond and stock buying money injections. So, led by the Fed, the central banks of the major economies are together now considering raising interest rates from the zero floor and trying to reverse their QE buying. Western central bankers met in late August 2017 at their annual Jackson Hole, Wyoming gathering, with the main topic of discussion being raising rates and reducing their QE bloated, $15 trillion official balance sheets. (China’s PBOC was absent or the total balance sheets would have amounted to more than $21 trillion.)

As I have argued, however, the Fed and other central banks will fail in both raising rates and selling off their balance sheets in 2017-18 and beyond—just as they failed in generating normal levels of real economic recovery since 2009. For the global capitalist banking system has become addicted and dependent on their central banks’ free money injections and their firehose of central bank bond-stock buying QE programs. Should the central banks attempt to retreat and raise rates or sell off their balance sheets to any meaningful extent, they will precipitate a serious credit contraction and provoke yet another financial and economic crisis. In other words, the global capitalist system has become dependent on the permanent subsidization of the banking system by their central banks after 2008. That is its new fundamental contradiction.

Jack Rasmus is the author of the just published book, Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depressions, Clarity Press, August 2017. For information, see http://claritypress.com/RasmusIII.html. To purchase, go to Amazon.com or click on the book icon on this webpage to purchase through Paypal. Bulk orders available at Clarity Press.

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